Table of Contents

 

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

**(MarkOne)**

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

 

**Forthe quarterly period ended June 30, 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 such shorter period that the registrant wasrequired 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 the 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 August 6, 2009there were 4,733,712 shares of common stock, $0.50 par value per share, issuedand outstanding.

 

 

 

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Table of Contents

 

**TennesseeCommerce Bancorp, Inc.**

 

Table of Contents

 
| Part I  | Financial Information                                                                                                                                           |   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                                                                            |   |
| Item 1.      | Financial Statements                                                                                                                                            |   |
|         |                                                                                                                                                            |   |
|         | Consolidated  Balance Sheets at June 30, 2009 (unaudited) and December 31, 2008                                                                       | 3      |
|         |                                                                                                                                                            |   |
|         | Consolidated  Statements of Income (unaudited) for the Six Months Ended June 30, 2009  and 2008 and for the Three Months Ended June 30, 2009 and 2008 | 4      |
|         |                                                                                                                                                            |   |
|         | Consolidated  Statements of Changes in Shareholders’ Equity (unaudited) for the Six Months  Ended June 30, 2009 and 2008                              | 5      |
|         |                                                                                                                                                            |   |
|         | Consolidated  Statements of Cash Flows (unaudited) for the Six Months Ended June 30,  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                                                                                                     | 24     |
|         |                                                                                                                                                            |   |
| Item 4.      | Controls and  Procedures                                                                                                                                        | 26     |
|         |                                                                                                                                                            |   |
| Part II | Other Information                                                                                                                                               | 26     |
|         |                                                                                                                                                            |   |
| Item 1A.     | Risk Factors                                                                                                                                                    | 26     |
|         |                                                                                                                                                            |   |
| Item 4.      | Submission of  Matters to a Vote of Security Holders                                                                                                            | 26     |
|         |                                                                                                                                                            |   |
| Item 6.      | Exhibits                                                                                                                                                        | 27     |
|         |                                                                                                                                                            |   |
| Signatures   |                                                                                                                                                            | 28     |

 

2

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Table of Contents

 

**PART I: FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS.**

 

TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2009(UNAUDITED) AND DECEMBER 31, 2008

 
| **(Dollars in thousands, except  share data)**                                                                                                                                                                    | ** ** | **June 30,********2009** | ** ** | **December 31,    2008 (1)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                            |       |                          |       |                              |       |
| Cash  and due from financial institutions                                                                                                                                                                                             |       | $                             | 15,900     |                              | $          | 5,260 |   |
| Federal  funds sold                                                                                                                                                                                                                   |       | 5                             |       | 35,538                            |       |
| Cash  and cash equivalents                                                                                                                                                                                                            |       | 15,905                        |       | 40,798                            |       |
|                                                                                                                                                                                                                                  |       |                          |       |                              |       |
| Securities  available for sale                                                                                                                                                                                                        |       | 107,099                       |       | 101,290                           |       |
|                                                                                                                                                                                                                                  |       |                          |       |                              |       |
| Loans                                                                                                                                                                                                                                 |       | 1,147,119                     |       | 1,036,725                         |       |
| Allowance  for loan losses                                                                                                                                                                                                            |       | (18,938                       | )          | (13,454                           | )          |
| Net  loans                                                                                                                                                                                                                            |       | 1,128,181                     |       | 1,023,271                         |       |
|                                                                                                                                                                                                                                  |       |                          |       |                              |       |
| Premises  and equipment, net                                                                                                                                                                                                          |       | 2,152                         |       | 2,330                             |       |
| Accrued  interest receivable                                                                                                                                                                                                          |       | 8,260                         |       | 8,115                             |       |
| Restricted  equity securities                                                                                                                                                                                                         |       | 2,169                         |       | 1,685                             |       |
| Income  tax receivable                                                                                                                                                                                                                |       | 6,964                         |       | 4,430                             |       |
| Other  assets                                                                                                                                                                                                                         |       | 68,809                        |       | 36,165                            |       |
|                                                                                                                                                                                                                                  |       |                          |       |                              |       |
| Total  assets                                                                                                                                                                                                                         |       | $                             | 1,339,539  |                              | $          | 1,218,084 |   |
|                                                                                                                                                                                                                                  |       |                          |       |                              |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                         |       |                          |       |                              |       |
| Liabilities                                                                                                                                                                                                                           |       |                          |       |                              |       |
| Deposits                                                                                                                                                                                                                              |       |                          |       |                              |       |
| Noninterest-bearing                                                                                                                                                                                                                   |       | $                             | 25,220     |                              | $          | 24,217 |   |
| Interest-bearing                                                                                                                                                                                                                      |       | 1,178,461                     |       | 1,044,926                         |       |
| Total  deposits                                                                                                                                                                                                                       |       | 1,203,681                     |       | 1,069,143                         |       |
|                                                                                                                                                                                                                                  |       |                          |       |                              |       |
| Accrued  interest payable                                                                                                                                                                                                             |       | 2,958                         |       | 3,315                             |       |
| Accrued  dividend payable                                                                                                                                                                                                             |       | 187                           |       | —                            |       |
| Short-term  borrowings                                                                                                                                                                                                                |       | 10,000                        |       | 10,000                            |       |
| Accrued  bonuses                                                                                                                                                                                                                      |       | 386                           |       | 917                               |       |
| Deferred  tax liability                                                                                                                                                                                                               |       | 6,875                         |       | 8,695                             |       |
| Other  liabilities                                                                                                                                                                                                                    |       | 1,528                         |       | 1,069                             |       |
| Long-term  subordinated debt                                                                                                                                                                                                          |       | 23,198                        |       | 23,198                            |       |
| Total  liabilities                                                                                                                                                                                                                    |       | 1,248,813                     |       | 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  June 30, 2009 and December 31, 2008                              |       | 15,000                        |       | 15,000                            |       |
| Common  stock, $0.50 par value; 10,000,000 shares authorized at June 30, 2009  and December 31, 2008; 4,733,712 and 4,731,696 shares issued and  outstanding at June 30, 2009 and December 31, 2008, respectively |       | 2,367                         |       | 2,366                             |       |
| Common  stock warrant                                                                                                                                                                                                                 |       | 453                           |       | 453                               |       |
| Additional  paid-in capital                                                                                                                                                                                                           |       | 60,143                        |       | 59,946                            |       |
| Retained  earnings                                                                                                                                                                                                                    |       | 13,619                        |       | 23,180                            |       |
| Accumulated  other comprehensive (loss) income                                                                                                                                                                                        |       | (856                          | )          | 802                               |       |
| Total  shareholders’ equity                                                                                                                                                                                                      |       | 90,726                        |       | 101,747                           |       |
|                                                                                                                                                                                                                                  |       |                          |       |                              |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                                                      |       | $                             | 1,339,539  |                              | $          | 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.

 

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TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

SIX MONTHS ENDEDJUNE 30, 2009 AND 2008

THREE MONTHS ENDEDJUNE 30, 2009 AND 2008

(UNAUDITED)

 
| ** **                                                             | ** ** | **Six Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Dollars in thousands, except share data)** | ** ** | **2009**                                          | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  income                                                       |       |                                              |       |                                                |       |   |   |   |   |
| Loans,  including fees                                                 |       | $                                                 | 36,570     |                                                | $          | 33,597 |   | $ | 18,674 |   | $ | 17,215 |   |
| Securities                                                             |       | 2,788                                             |       | 2,177                                               |       | 1,233 |   | 1,144 |   |
| Federal  funds sold                                                    |       | 5                                                 |       | 141                                                 |       | — |   | 70 |   |
| Total  interest income                                                 |       | 39,363                                            |       | 35,915                                              |       | 19,907 |   | 18,429 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Interest  expense                                                      |       |                                              |       |                                                |       |   |   |   |   |
| Deposits                                                               |       | 18,083                                            |       | 19,438                                              |       | 8,954 |   | 9,694 |   |
| Other                                                                  |       | 989                                               |       | 619                                                 |       | 502 |   | 339 |   |
| Total  interest expense                                                |       | 19,072                                            |       | 20,057                                              |       | 9,456 |   | 10,033 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Net  interest income                                                   |       | 20,291                                            |       | 15,858                                              |       | 10,451 |   | 8,396 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Provision  for loan losses                                             |       | 21,639                                            |       | 3,940                                               |       | 13,125 |   | 2,340 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Net  interest income after provision for loan losses                   |       | (1,348                                            | )          | 11,918                                              |       | (2,674 | ) | 6,056 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Non-interest  income                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Service  charges on deposit accounts                                   |       | 91                                                |       | 49                                                  |       | 48 |   | 25 |   |
| Securities  gains (losses)                                             |       | 338                                               |       | 30                                                  |       | (80 | ) | — |   |
| (Loss)  gain on sale of loans                                          |       | (989                                              | )          | 1,418                                               |       | (629 | ) | 852 |   |
| (Loss)  gain on repossessions                                          |       | (1,368                                            | )          | (267                                                | )          | (1,157 | ) | (147 | ) |
| Other                                                                  |       | 394                                               |       | 100                                                 |       | 257 |   | 73 |   |
| Total  non-interest income                                             |       | (1,534                                            | )          | 1,330                                               |       | (1,561 | ) | 803 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Non-interest  expense                                                  |       |                                              |       |                                                |       |   |   |   |   |
| Salaries  and employee benefits                                        |       | 5,340                                             |       | 4,093                                               |       | 2,991 |   | 1,809 |   |
| Occupancy  and equipment                                               |       | 792                                               |       | 722                                                 |       | 382 |   | 362 |   |
| Data  processing fees                                                  |       | 699                                               |       | 534                                                 |       | 395 |   | 249 |   |
| FDIC  expense                                                          |       | 1,151                                             |       | 316                                                 |       | 674 |   | 159 |   |
| Professional  fees                                                     |       | 988                                               |       | 904                                                 |       | 598 |   | 529 |   |
| Other                                                                  |       | 2,348                                             |       | 1,425                                               |       | 1,345 |   | 742 |   |
| Total  non-interest expense                                            |       | 11,318                                            |       | 7,994                                               |       | 6,385 |   | 3,850 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| (Loss)  income before income taxes                                     |       | (14,200                                           | )          | 5,254                                               |       | (10,620 | ) | 3,009 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Income  tax (benefit) expense                                          |       | (5,435                                            | )          | 2,033                                               |       | (4,071 | ) | 1,163 |   |
| Net  (loss) income                                                     |       | (8,765                                            | )          | 3,221                                               |       | (6,549 | ) | 1,846 |   |
| Preferred  stock dividends and accretion                               |       | (796                                              | )          | —                                              |       | (352 | ) | — |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Net  (loss) income available to common shareholders                    |       | $                                                 | (9,561     | )                                                   | $          | 3,221 |   | $ | (6,901 | ) | $ | 1,846 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Earnings  per share (EPS):                                             |       |                                              |       |                                                |       |   |   |   |   |
| Basic  EPS                                                             |       | $                                                 | (2.02      | )                                                   | $          | 0.68 |   | $ | (1.46 | ) | $ | 0.39 |   |
| Diluted  EPS                                                           |       | (2.02                                             | )          | 0.66                                                |       | (1.46 | ) | 0.38 |   |
|                                                                   |       |                                              |       |                                                |       |   |   |   |   |
| Weighted  average shares outstanding:                                  |       |                                              |       |                                                |       |   |   |   |   |
| Basic                                                                  |       | 4,732,387                                         |       | 4,730,707                                           |       | 4,733,070 |   | 4,731,696 |   |
| Diluted                                                                |       | 4,732,387                                         |       | 4,890,911                                           |       | 4,733,070 |   | 4,891,111 |   |

 

See accompanying notes toconsolidated financial statements.

 

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TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY

SIX MONTHS ENDEDJUNE 30, 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                                                                                 |       | —        |       | —     |       | —              |       | —         |       | 3,221        |       | —                 |       | 3,221                  |       |
| Other  comprehensive income, net of income taxes                                            |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Unrealized  gains on securities available for sale during the period, net of income taxes   |       | —        |       | —     |       | —              |       | —         |       | —       |       | (820                   | )          | (820                   | )          |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Total  comprehensive income                                                                 |       | —        |       | —     |       | —              |       | —         |       | —       |       | —                 |       | 2,401                  |       |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Stock-based  compensation expense                                                           |       |          |       |       |       |                |       | 40             |       |         |       |                   |       | 40                     |       |
| Exercise  of stock options to purchase 7,500 common shares and related tax benefit          |       | —        |       | 4          |       | —              |       | 86             |       | —       |       | —                 |       | 90                     |       |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Balance  at June 30, 2008                                                              |       | —        |       | $          | 2,366      |                | —     |           | $          | 45,150       |       | $                      | 18,647     |                   | $          | (511 | ) | $ | 65,652 |   |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Balance  at December 31, 2008                                                          |       | $             | 15,000     |       | $          | 2,366               |       | $              | 453        |         | $          | 59,946                 |       | $                      | 23,180     |   | $ | 802 |   | $ | 101,747 |   |
| Comprehensive  income                                                                       |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Net  loss                                                                                   |       | —        |       | —     |       | —              |       | —         |       | (8,765       | )          | —                 |       | (8,765                 | )          |
| Unrealized  losses on securities available for sale during the period, net of income  taxes |       | —        |       | —     |       | —              |       | —         |       | —       |       | (1,658                 | )          | (1,658                 | )          |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Common  stock warrant accretion                                                             |       |          |       |       |       |                |       | 38             |       |         |       |                   |       | 38                     |       |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Preferred  stock dividend                                                                   |       | —        |       | —     |       | —              |       | —         |       | (796         | )          | —                 |       | (796                   | )          |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Stock-based  compensation expense                                                           |       | —        |       | —     |       | —              |       | 148            |       | —       |       | —                 |       | 148                    |       |
| Issuance  of 2,016 shares of restricted stock and related tax benefit                       |       | —        |       | 1          |       | —              |       | 11             |       | —       |       | —                 |       | 12                     |       |
|                                                                                        |       |          |       |       |       |                |       |           |       |         |       |                   |       |                   |       |
| Balance  at June 30, 2009                                                              |       | $             | 15,000     |       | $          | 2,367               |       | $              | 453        |         | $          | 60,143                 |       | $                      | 13,619     |   | $ | (856 | ) | $ | 90,726 |   |

 

See accompanying notes toconsolidated financial statements.

 

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TENNESSEE COMMERCEBANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDEDJUNE 30, 2009 AND 2008

(UNAUDITED)

 
| ** **                                                                               | ** ** | **Six Months Ended******** June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(Dollars in thousands)**                                                     | ** ** | **2009**                                                  | ** ** | **2008** | ** ** |
|                                                                                     |       |                                                      |       |   |   |
| **Cash flows from operating activities**                                                 |       |                                                      |       |   |   |
| Net  (loss) income                                                                       |       | $                                                         | (8,765     | ) | $ | 3,221 |   |
| Adjustments  to reconcile net (loss) income to net cash provided by operating activities |       |                                                      |       |   |   |
| Depreciation                                                                             |       | 247                                                       |       | 175 |   |
| Deferred  loan fees                                                                      |       | 62                                                        |       | (242 | ) |
| Provision  for loan losses                                                               |       | 21,639                                                    |       | 3,940 |   |
| Stock  based compensation expense                                                        |       | 148                                                       |       | 40 |   |
| Deferred  income tax                                                                     |       | (1,529                                                    | )          | (71 | ) |
| Net  amortization of investment securities                                               |       | 91                                                        |       | (38 | ) |
| Gain  on sales of securities                                                             |       | (338                                                      | )          | (30 | ) |
| Change  in:                                                                              |       |                                                      |       |   |   |
| Accrued  interest receivable                                                             |       | (145                                                      | )          | (980 | ) |
| Accrued  interest payable                                                                |       | (357                                                      | )          | 690 |   |
| Other  assets                                                                            |       | (9,380                                                    | )          | (6,709 | ) |
| Other  liabilities                                                                       |       | 129                                                       |       | (1,305 | ) |
| Net  cash provided by operating activities                                               |       | 1,802                                                     |       | 1,301 |   |
|                                                                                     |       |                                                      |       |   |   |
| **Cash flows from investing activities**                                                 |       |                                                      |       |   |   |
| Purchases  of securities available for sale                                              |       | (75,893                                                   | )          | (57,300 | ) |
| Proceeds  from sales of securities available for sale                                    |       | 19,428                                                    |       | 12,271 |   |
| Proceeds  from maturities, prepayments and calls of securities available for sale        |       | 48,228                                                    |       | 21,496 |   |
| Net  change in loans                                                                     |       | (126,611                                                  | )          | (146,813 | ) |
| Purchase  of BOLI investment                                                             |       | (25,273                                                   | )          | — |   |
| Purchases  of FHLB Stock                                                                 |       | (484                                                      | )          | (438 | ) |
| Net  purchases of premises and equipment                                                 |       | (69                                                       | )          | (215 | ) |
| Net  cash used by investing activities                                                   |       | (160,674                                                  | )          | (170,999 | ) |
|                                                                                     |       |                                                      |       |   |   |
| **Cash flows from financing activities**                                                 |       |                                                      |       |   |   |
| Net  change in deposits                                                                  |       | 134,538                                                   |       | 140,195 |   |
| Net  change in federal funds purchased and repurchase agreements                         |       | —                                                    |       | 6,300 |   |
| Proceeds  from FHLB advances and other long-term debt                                    |       | —                                                    |       | 14,950 |   |
| Purchases  of capital securities of unconsolidated subsidiary                            |       | —                                                    |       | (450 | ) |
| Preferred  stock dividends expense                                                       |       | (609                                                      | )          | — |   |
| Warrant  accretion expense                                                               |       | 38                                                        |       | — |   |
| Proceeds  from exercise of common stock options                                          |       | —                                                    |       | 38 |   |
| Issuance  of common stock                                                                |       | 12                                                        |       | — |   |
| Excess  tax benefit from option exercises                                                |       | —                                                    |       | 52 |   |
| Net  cash provided by financing activities                                               |       | 133,979                                                   |       | 161,085 |   |
|                                                                                     |       |                                                      |       |   |   |
| **Net change in cash and cash equivalents**                                              |       | (24,893                                                   | )          | (8,613 | ) |
|                                                                                     |       |                                                      |       |   |   |
| Cash  and cash equivalents at beginning of period                                        |       | 40,798                                                    |       | 14,809 |   |
|                                                                                     |       |                                                      |       |   |   |
| **Cash and cash equivalents at end of period**                                           |       | $                                                         | 15,905     |   | $ | 6,196 |   |
|                                                                                     |       |                                                      |       |   |   |
| **Supplemental cash flow information:**                                                  |       |                                                      |       |   |   |
| Cash  paid during period for interest                                                    |       | $                                                         | 19,429     |   | $ | 19,367 |   |
| Cash  paid during period for income taxes                                                |       | 57                                                        |       | 199 |   |
| Loans  charged off                                                                       |       | 16,786                                                    |       | 15,423 |   |
| Loans  foreclosed upon with repossessions, transferred to other real estate              |       | 10,430                                                    |       | — |   |

 

See accompanying notes toconsolidated financial statements.

 

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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 CommerceBancorp, Inc. (the “Corporation”) is the bank holding company forTennessee Commerce Bank (the “Bank”).  In March 2005, the Corporationformed a wholly owned subsidiary, Tennessee Commerce Bank Statutory Trust I(the “Trust I”).  In June 2008, the Corporation formed a wholly ownedsubsidiary, Tennessee Commerce Bank Statutory Trust II (the “Trust II”). In July 2008,the corporation formed a wholly owned subsidiary, TCB Commercial AssetsServices, Inc. As of June 30, 2009, the Bank, the Trust I, the TrustII and TCB Commercial Assets Services were the only subsidiaries of theCorporation. The accompanying consolidated financial statements include theaccounts of the Corporation, the Bank and TCB Commercial Assets Services, Inc.The Trust I and the Trust II are not consolidated in accordance with FinancialAccounting Standards Board (“FASB”) Interpretation No. 46(R) (revisedDecember 2003), “Consolidation of Variable Interest Entities.” Materialintercompany accounts and transactions have been eliminated.

 

The unauditedconsolidated financial statements as of June 30, 2009 and for the six- andthree-month periods ended June 30, 2009 and 2008 have been prepared in accordancewith accounting principles generally accepted in the United States of Americaand 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 six- and three-month periods ended June 30, 2009 are not necessarilyindicative of the results that may be expected for the year ending December 31,2009. For further information, refer to the consolidated financial statementsand notes thereto included in the Corporation’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

Note 2 — Earnings perShare of Common Stock

 

The factors used in theearnings per share computation follow:

 
| ** **                                                                      | ** ** | **Six Months Ended******** June 30,** | ** ** | **Three Months Ended******** June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2009**                                                  | ** ** | **2008**                                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                            |       |                                                      |       |                                                        |       |   |   |   |   |
| Basic                                                                           |       |                                                      |       |                                                        |       |   |   |   |   |
| Net  (loss) income available to common shareholders                             |       | $                                                         | (9,561     | )                                                           | $          | 3,221 |   | $ | (6,901 | ) | $ | 1,846 |   |
|                                                                            |       |                                                      |       |                                                        |       |   |   |   |   |
| Weighted  average common shares outstanding                                     |       | 4,732,387                                                 |       | 4,730,707                                                   |       | 4,835,602 |   | 4,731,696 |   |
|                                                                            |       |                                                      |       |                                                        |       |   |   |   |   |
| Basic  earnings per common share                                                |       | $                                                         | (2.02      | )                                                           | $          | 0.68 |   | $ | (1.46 | ) | $ | 0.39 |   |
|                                                                            |       |                                                      |       |                                                        |       |   |   |   |   |
| Diluted                                                                         |       |                                                      |       |                                                        |       |   |   |   |   |
| Net  (loss) income available to common shareholders                             |       | $                                                         | (9,561     | )                                                           | $          | 3,221 |   | $ | (6,901 | ) | $ | 1,846 |   |
|                                                                            |       |                                                      |       |                                                        |       |   |   |   |   |
| Weighted  average common shares outstanding for basic earnings per common share |       | 4,732,387                                                 |       | 4,730,707                                                   |       | 4,835,602 |   | 4,731,696 |   |
| Add:  Dilutive effects of assumed exercises of stock options (1)                |       | —                                                    |       | 160,204                                                     |       | — |   | 159,415 |   |
|                                                                            |       |                                                      |       |                                                        |       |   |   |   |   |
| Average  shares and dilutive potential common shares                            |       | 4,732,387                                                 |       | 4,890,911                                                   |       | 4,835,602 |   | 4,891,111 |   |
|                                                                            |       |                                                      |       |                                                        |       |   |   |   |   |
| Diluted  earnings per common share                                              |       | $                                                         | (2.02      | )                                                           | $          | 0.66 |   | $ | (1.46 | ) | $ | 0.38 |   |

 

----

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

 

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Note 3 — Stock-BasedCompensation

 

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 Issued toEmployees,” and generally requires that such transactions be accounted forusing a fair-value-based method and recognized as expense in the accompanyingconsolidated statement of income.

 

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 June 30, 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 June 30, 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 six months ended June 30,2009, the Corporation granted options to purchase 200,000 shares of Corporationcommon stock and there were 362,000****non-vestedoptions outstanding at June 30,2009. The Corporation recognized stock-basedexpense of approximately $148 for the six months ended June 30, 2009.

 

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)********(In thousands)** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| Stock-based  awards outstanding at December 31, 2008                  |       | 833,070    |       | $                                                         | 13.49      |                                                                                                |       |                                                                       |       |   |
| Options  granted                                                           |       | 200,000    |       | 6.01                                                      |       |                                                                                                |       |                                                                       |       |
| Options  exercised                                                         |       | —     |       | —                                                    |       |                                                                                                |       |                                                                       |       |
| Options  forfeited or expired                                              |       | (17,250    | )          | 5.80                                                      |       |                                                                                                |       |                                                                       |       |
| Stock-based  awards outstanding at June 30, 2009                      |       | 1,015,820  |       | $                                                         | 12.15      |                                                                                                | 5.68       |                                                                       | $          | (7,507 | ) |
| Stock-based  awards outstanding and expected to vest at June 30, 2009 |       | 1,015,820  |       | $                                                         | 12.15      |                                                                                                | 5.68       |                                                                       | $          | (7,507 | ) |
| Options  exercisable at June 30, 2009                                 |       | 653,820    |       | $                                                         | 11.71      |                                                                                                | 3.83       |                                                                       | $          | (4,544 | ) |

 

----

(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 $4.76 for the outstanding options topurchase 1,015,820 shares of Corporation common stock and exercisable optionsto purchase 653,820 shares of Corporation common stock at June 30, 2009.

 
| ** **                                                                            | ** ** | **Number** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|
| Shares  of restricted stock outstanding at December 31, 2008                     |       | 10,079     |       |
| Restrictions  lapsed and shares released                                              |       | (2,016     | )          |
| Shares  of restricted stock issued                                                    |       | 9,232      |       |
| Options  forfeited or expired                                                         |       | —     |       |
| Restricted  stock-based awards outstanding at June 30, 2009                      |       | 17,295     |       |
|                                                                                  |       |       |       |
| Restricted  stock-based awards outstanding and expected to vest at June 30, 2009 |       | 17,295     |       |
| Restricted  stock exercisable at June 30, 2009                                   |       | —     |       |

 

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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 200,000 shares of Corporation common stock and 9,232 sharesof restricted stock in the first six months of 2009. The options granted in2009 had an estimated weighted average fair value of $2.13. The options grantedin 2008 had an estimated fair value of $4.45.

 

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 its totalassets.

 

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 (five years).The capital securities and debentures are redeemable at any time commencingafter June 2010 at par. The Corporation reports as liabilities thesubordinated 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 interestpublished in*The Wall Street Journal*on the first business day of each distribution period plus 50 basis points (butin no event greater than 8.0% or less than 5.75%). The distributions on thecapital securities are accounted for as interest expense by the Corporation.Interest payments 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

 

SFASNo. 160, “Noncontrolling Interest in Consolidated Financial Statements, anamendment of ARB Statement No. 51,” (“SFAS 160”) amends Accounting Research Bulletin (“ARB”)No. 51, “Consolidated Financial Statements,” to establish accounting andreporting standards for the non-controlling interest in a subsidiary and forthe deconsolidation of a subsidiary. SFAS 160 clarifies that anon-controlling interest in a subsidiary, which is sometimes referred to asminority interest, is an ownership interest in the consolidated entity thatshould be reported as a component of equity in the consolidated financialstatements. Among other requirements, SFAS 160 requires consolidated netincome to be reported at amounts that include the amounts attributable to boththe parent and the non-controlling interest. It also requires disclosure, onthe face of the consolidated income statement, of the amounts of consolidatednet income attributable to the parent and to the non-controlling interest.SFAS 160 became effective for the Corporation on January 1, 2009 anddid not have a significant impact on the Corporation’s financial statements.

 

SFASNo. 165, “Subsequent Events,” (“SFAS 165”) establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or available to be issued.SFAS 165 defines (i) the period 

 

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after the balance sheetdate during which a reporting entity’s management should evaluate events ortransactions that may occur for potential recognition or disclosure in thefinancial statements, (ii) the circumstances under which an entity shouldrecognize events or transactions occurring after the balance sheet date in itsfinancial statements, and (iii) the disclosures an entity should makeabout events or transactions that occurred after the balance sheet date.SFAS 165 became effective for the Corporation’s financial statements forperiods ending after June 15, 2009 and did not have a significant impact onthe Corporation’s financial statements.

 

SFASNo. 166, “Accounting for Transfers of Financial Assets, an Amendment ofFASB Statement No. 140,” (“SFAS 166”) amends SFAS No. 140,  “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities,”  to enhancereporting about transfers of financial assets, including securitizations, andwhere companies have continuing exposure to the risks related to transferredfinancial assets. SFAS 166 eliminates the concept of a “qualifying special-purposeentity” and changes the requirements for derecognizing financial assets.SFAS 166 also requires additional disclosures about all continuinginvolvements with transferred financial assets including information aboutgains and losses resulting from transfers during the period. SFAS 166 will beeffective January 1, 2010 and is not expected to have a significant impacton the Corporation’s financial statements.

 

SFASNo. 167, “Amendments to FASB Interpretation No. 46(R),” (“SFAS 167”) amends FIN 46(Revised December 2003), “Consolidationof Variable Interest Entities,” to change how a company determines when an entity that is insufficientlycapitalized or is not controlled through voting (or similar rights) should beconsolidated. The determination of whether a company is required to consolidatean entity is based on, among other things, an entity’s purpose and design and acompany’s ability to direct the activities of the entity that mostsignificantly impact the entity’s economic performance. SFAS 167 requiresadditional disclosures about the reporting entity’s involvement withvariable-interest entities and any significant changes in risk exposure due tothat involvement as well as its affect on the entity’s financial statements.SFAS 167 will be effective January 1, 2010 and is not expected tohave a significant impact on the Corporation’s financial statements.

 

SFASNo. 168, “The FASB Accounting Standards Codification and the Hierarchy ofGenerally Accepted Accounting Principles, a Replacement of FASB Statement No. 162,” (“SFAS 168”) replaces SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles” and establishes theFASB Accounting Standards Codification (the “Codification”) as the source ofauthoritative accounting principles recognized by the FASB to be applied bynon-governmental entities in the preparation of financial statements inconformity with generally accepted accounting principles. Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative guidance for SEC registrants. All guidancecontained in the Codification carries an equal level of authority. Allnon-grandfathered, non-SEC accounting literature not included in theCodification is superseded and deemed non-authoritative. SFAS 168 will beeffective for the Corporation’s financial statements for periods ending after September 15,2009. SFAS 168 is not expected to have a significant impact on theCorporation’s financial statements.

 

FASBStaff Position FAS No. 107-1 and Accounting Principles Board Opinion(“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (“FSP SFAS 107-1 and APB 28-1”) amendsSFAS No. 107, “Disclosures about Fair Value of Financial Instruments,”(“SFAS 107”) to require an entity to provide disclosures about the fair valueof financial instruments in interim financial information and amends APB No. 28,“Interim Financial Reporting,” to require those disclosures in summarizedfinancial information at interim reporting periods. The new interim disclosuresrequired by FSP SFAS 107-1 and APB 28-1 are included in Note 6 -Fair Value Measurements.

 

Note 6 — Fair ValueMeasurement

 

The Bank has anestablished process for determining fair values, in accordance with SFAS No. 157,“Fair Value Measurements” (“SFAS 157”). Fair value is based upon quoted marketprices, where available. If listed prices or quotes are not available, fairvalue is based upon internally developed models or processes that use primarilymarket-based or independently-sourced market data, including interest rateyield curves, option volatilities and third party information. Valuationadjustments may be made to ensure that financial instruments are recorded atfair value. These adjustments include amounts to reflect counterparty creditquality (for financial assets reflected at fair value), the Bank’screditworthiness (for financial liabilities reflected at fair value), liquidityand other unobservable parameters that are applied consistently over time as follows:

 

·       Credit valuation adjustments are necessary when themarket price (or parameter) is not indicative of the credit quality of thecounterparty.

 

·       Debit valuation adjustments are necessary to reflectthe credit quality of the Bank in the valuation of liabilities measured at fairvalue.

 

·       Liquidity valuation adjustments are necessary when theBank may not be able to observe a recent market price for a financialinstrument that trades in inactive (or less active) markets or to reflect thecost of exiting larger-than-normal market-size risk positions.

 

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·       Unobservable parameter valuation adjustments arenecessary when positions are valued using internally developed models that useas their basis unobservable parameters — that is, parameters that must beestimated and are, therefore, subject to management judgment to substantiatethe model valuation. These financial instruments are normally traded lessactively.

 

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

 

**ValuationHierarchy**

 

SFAS 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 arequoted prices (unadjusted) for identical assets or liabilities in activemarkets.

 

·       Level 2 — inputs to the valuation methodology includequoted prices for similar assets and liabilities in active markets, and inputsthat 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 areunobservable and significant to the fair value measurement.

 

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

 

**Assets**

 

*Federal Funds Sold*- The carrying**valueof federal funds sold approximates fair value and, therefore, these assets areclassified within level 1 of the valuation hierarchy.

 

*SecuritiesAvailable for Sale -*Available-for-sale securities are recorded at fair value on a recurringbasis.  Where quoted prices are available in an active market, securitiesare classified within level 1 of the valuation hierarchy.  Level 1securities include highly liquid government bonds, federal funds sold andcertain other products.  Fair value measurement is based upon quotedprices, if available.  If quoted prices are not available, securitieswould generally be classified within level 2, and fair value would bedetermined by matrix pricing, which is a mathematical technique widely used inthe industry to value debt securities without relying exclusively on quoted pricesfor the specific securities but relying on the securities’ relationship toother benchmark quoted securities. In certain cases where there is limitedactivity or less transparency around inputs to the valuation, securities areclassified within level 3 of the valuation hierarchy. For the six months ended June 30,2009, the entire Bank’s available-for-sale securities were valued using matrixpricing and were classified within level 2 of the valuation hierarchy.  AtJune 30, 2009, the Bank had no available-for-sale securities classifiedwithin level 3.

 

*ServicingAssets -* Allseparately recognized servicing assets and servicing liabilities are initiallymeasured at fair value. Subsequent measurement methods include the amortizationmethod, whereby servicing assets or servicing liabilities are amortized overthe period of estimated net servicing income or net servicing loss, or the fairvalue method, whereby servicing assets or servicing liabilities are measured atfair value at each reporting date and changes in fair value are reported inearnings in the period in which they occur. Because of the unique nature of theBank’s servicing assets, quoted market prices may not be available. If noquoted market prices are available, the amortization method is used. The Bankassesses servicing assets or servicing liabilities for impairment or increasedobligation based on the fair value at each reporting date.  At June 30,2009, the Bank had servicing assets measured at fair value on a recurringbasis classified within level 3 of the valuation hierarchy.

 

*Interest-OnlyStrips -* When theBank sells loans to others, it may hold interest-only strips, which is aninterest that continues to be held by the transferor in the securitizedreceivable. It may also obtain servicing assets or assume servicing liabilitiesthat are initially measured at fair value. Gain or loss on sale of thereceivables depends in part on both (a) the previous carrying amount ofthe financial assets involved in the transfer, allocated between the assetssold and the interests that continue to be held by the transferor based ontheir relative fair value at the date of transfer, and (b) the proceedsreceived. To obtain fair values, quoted market prices are used if available.However, quotes are generally not available for interests that continue to beheld by the transferor, so the Bank generally estimates fair value based on thefuture expected cash flows estimated using management’s best estimates of thekey assumptions — credit losses and discount rates commensurate with the risksinvolved. At June 30, 2009, the Bank had interest-only stripsmeasured at fair value on a recurring basis classified within level 3 of thevaluation hierarchy.

 

*ImpairedLoans —* A loan isconsidered to be impaired when it is probable the Bank will be unable tocollect all principal and interest payments due in accordance with thecontractual terms of the loan agreement. Individually identified impaired loansare measured based on the present value of expected payments using the loan’soriginal effective rate as the discount rate, the loan’s 

 

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observable market price,or the fair value of the collateral if the loan is collateral dependent. If therecorded investment in the impaired loan exceeds the measure of fair value, avaluation allowance may be established as a component of the allowance for loanlosses. At June 30, 2009, the Bank had impaired loans measured on anonrecurring basis classified within level 3 of the valuation hierarchy.

 

*OtherAssets —* Includedin 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 June 30,2009, 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 June 30, 2009, the Bank hadBOLI measured at fair value on a recurring basis classified within level 3 ofthe valuation hierarchy.

 

*Inventory—* Repossessedassets are resold at retail prices as soon as practicable.  If arepossession of the Bank is not resold within the six month holding periodallowed by Tennessee law, it is purchased by a subsidiary of the Corporation.It is held as inventory and carried at fair market value.  The solepurpose of the subsidiary is the resale of assets repossessed by the Bank. At June 30,2009, the subsidiary had inventory measured at fair value on anonrecurring basis classified within level 3 of the valuation hierarchy.

 

**Liabilities**

 

*RecourseObligations* - Themaximum extent of the Bank’s recourse obligations on loans transferred is 10%of the amount transferred adjusted for any early payoffs or terminations, basedon the Bank’s payment history on loans of the type transferred. At June 30,2009, the Bank had recourse obligations measured at fair value on arecurring basis classified within level 3 of the valuation hierarchy.

 

The following tablepresents the financial instruments carried at fair value as of June 30,2009, by caption on the consolidated balance sheets and by SFAS 157 valuationhierarchy (as described above):

 

**Assetsand liabilities measured at fair value on a recurring basis as of June 30,2009**

 
| ** **                          | ** ** | **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)**                                                                                                                              | ** ** |
| Federal  funds sold                 |       | $                                                                                                                              | 5          |                                                                                                                   | $          | 5                                                                                                                                                   |       | $                                                                                                                                               | —     |   | $ | — |   |
| Securities  available for sale      |       | 107,099                                                                                                                        |       | —                                                                                                                 |       | 107,099                                                                                                                                             |       | —                                                                                                                                          |       |
| Servicing  assets                   |       | 167                                                                                                                            |       | —                                                                                                                 |       | —                                                                                                                                              |       | 167                                                                                                                                             |       |
| Interest-only  strips               |       | 3,390                                                                                                                          |       | —                                                                                                                 |       | —                                                                                                                                              |       | 3,390                                                                                                                                           |       |
| Other  Assets                       |       | 25,273                                                                                                                         |       | —                                                                                                                 |       | —                                                                                                                                              |       | 25,273                                                                                                                                          |       |
| **Total assets at fair value**      |       | $                                                                                                                              | 135,929    |                                                                                                                   | $          | —                                                                                                                                              |       | $                                                                                                                                               | 107,099    |   | $ | 28,830 |   |
|                                |       |                                                                                                                           |       |                                                                                                                   |       |                                                                                                                                                |       |                                                                                                                                            |       |
| Recourse  obligations               |       | $                                                                                                                              | 333        |                                                                                                                   | $          | —                                                                                                                                              |       | $                                                                                                                                               | —     |   | $ | 333 |   |
| **Total liabilities at fair value** |       | $                                                                                                                              | 333        |                                                                                                                   | $          | —                                                                                                                                              |       | $                                                                                                                                               | —     |   | $ | 333 |   |

 

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 June 30,2009, by caption on the consolidated balance sheets and by SFAS 157 valuationhierarchy (as described above):

 

**Assetsand liabilities measured at fair value on a nonrecurring basis as of June 30,2009**

 
| ** **                          | ** ** | **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                     |       | $                                                                                                                              | 53,165     |                                                                                                                   | $          | —                                                                                                                                                    |       | $                                                                                                                                                           | —     |   | $ | 53,165 |   |
| Inventory                           |       | 5,945                                                                                                                          |       | —                                                                                                                 |       | —                                                                                                                                                    |       | 5,945                                                                                                                                                       |       |
| Other  Assets                       |       | 22,466                                                                                                                         |       | —                                                                                                                 |       | —                                                                                                                                                    |       | 22,466                                                                                                                                                      |       |
| **Total assets at fair value**      |       | $                                                                                                                              | 81,576     |                                                                                                                   | $          | —                                                                                                                                                    |       | $                                                                                                                                                           | —     |   | $ | 81,576 |   |
|                                |       |                                                                                                                           |       |                                                                                                                   |       |                                                                                                                                                      |       |                                                                                                                                                        |       |
| Liabilities                         |       | $                                                                                                                              | —     |                                                                                                                   | $          | —                                                                                                                                                    |       | $                                                                                                                                                           | —     |   | $ | — |   |
| **Total liabilities at fair value** |       | $                                                                                                                              | —     |                                                                                                                   | $          | —                                                                                                                                                    |       | $                                                                                                                                                           | —     |   | $ | — |   |

 

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**Changesin level 3 fair value measurements**

 

The table below includesa roll-forward of the balance sheet amounts for the first six months 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 thevaluation methodology.

 
| **Six months ended June 30, 2009**                                                                                           | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|
| Fair  value, January 1, 2009                                                                                                                     |       | $          | 5,460      |            | $          | 444 |   |
| Total  realized and unrealized gains/losses included in income                                                                                        |       | (2,259     | )          | 36              |       |
| Purchases,  issuances and settlements, net                                                                                                            |       | 25,629     |       | (147            | )          |
| Transfers  in and/or out of level 3                                                                                                                   |       | —     |       | —          |       |
| Fair  value, June 30, 2009                                                                                                                       |       | $          | 28,830     |            | $          | 333 |   |
| Total  unrealized gains included in income related to financial assets and  liabilities still on the consolidated balance sheet at June 30, 2009 |       | $          | —     |            | $          | — |   |

 

SFAS 107 requiresdisclosure of the fair value of financial assets and financial liabilities,including those financial assets and financial liabilities that are notmeasured and reported at fair value on a recurring basis or nonrecurring basis.A detailed description of the valuation methodologies used in estimating thefair value of financial instruments is set forth in the Corporation’s AnnualReport on Form 10-K for the year ended December 31, 2008.

 

The estimated fair valuesof financial instruments were as follows:

 
| ** **                                        | ** ** | **Six Months Ended********June 30, 2009** | ** ** | **Twelve Months Ended********December 31, 2008** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Carrying******** Amount**                         | ** ** | **Estimated Fair******** Value**                      | ** ** | **Carrying******** Amount** | ** ** | **Estimated Fair******** Value** | ** ** |
| Financial  assets:                                |       |                                                     |       |                                                            |       |   |   |   |   |
| Cash  and cash equivalents                        |       | $                                                        | 15,905     |                                                            | $          | 15,905 |   | $ | 5,260 |   | $ | 5,260 |   |
| Federal  funds sold                               |       | 5                                                        |       | 5                                                               |       | 35,538 |   | 35,538 |   |
| Securities                                        |       | 107,099                                                  |       | 107,099                                                         |       | 101,290 |   | 101,290 |   |
| Loans,  net                                       |       | 1,128,181                                                |       | 1,221,779                                                       |       | 1,023,271 |   | 1,114,151 |   |
| Accrued  interest receivable                      |       | 8,260                                                    |       | 8,260                                                           |       | 8,115 |   | 8,115 |   |
| Income  tax receivable                            |       | 6,964                                                    |       | 6,964                                                           |       | 4,430 |   | 4,430 |   |
| Financial  liabilities:                           |       |                                                     |       |                                                            |       |   |   |   |   |
| Deposits                                          |       | 1,203,681                                                |       | 1,240,405                                                       |       | 1,069,143 |   | 1,106,907 |   |
| Accrued  interest payable                         |       | 2,958                                                    |       | 2,958                                                           |       | 3,315 |   | 3,315 |   |
| Accrued  dividend payable                         |       | 187                                                      |       | 187                                                             |       | — |   | — |   |
| Deferred  tax liability                           |       | 6,875                                                    |       | 6,875                                                           |       | 8,695 |   | 8,695 |   |
| Long-term  subordinated debt and other borrowings |       | 33,198                                                   |       | 36,748                                                          |       | 33,198 |   | 34,897 |   |
|                                                   |            |                                                          |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

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**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,” “should,” “would,” “plan,” “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 for loan losses, business bank strategy,management’s review of the loan portfolio, loan classifications, loancommitments, interest rate risk, economic value of equity model, net interestmargin, net interest income, loan sale transactions, tax rates, non-accrualloans, liquidity, internal control over financial reporting and our futuregrowth and profitability. We caution you not to place undue reliance on theforward-looking statements contained in this report because actual resultscould differ materially from those indicated in such forward-looking statementsas a result of a variety of factors. These factors include, but are not limitedto, changes in economic conditions, competition for loans, mortgages and otherfinancial services and products, changes in interest rates, concentrationswithin our loan portfolio, our ability to maintain credit quality, theeffectiveness of our risk monitoring systems, changes in consumer preferences,the ability of our borrowers to repay loans, the availability of and costsassociated with maintaining and/or obtaining adequate and timely sources ofliquidity, changes in our operating strategy, our ability to meet regulatorycapital adequacy requirements, our ability to collect amounts due under loanagreements and to attract deposits, our ability to attract, train and retainqualified personnel, the geographic concentration of our assets, our ability tooperate and integrate new technology, our ability to provide market competitiveproducts and services, our ability to diversify revenue, our ability to fundgrowth with lower cost liabilities, laws and regulations affecting financialinstitutions in general and other factors detailed from time to time in ourpress releases and filings with the Securities and Exchange Commission. Weundertake no obligation to update these forward-looking statements to reflectthe occurrence of changes or unanticipated events, circumstances or resultsthat occur after the date of this report.

 

**Overview**

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

 

The results ofoperations, before charges for preferred dividends, for the six months ended June 30,2009 compared to the six months ended June 30, 2008 reflected a 396.83%decrease in net income and a 406.06% decrease in diluted earnings per share.The decrease in earnings resulted partially from an increased provision forloan losses as well as additional accrual for a one-time FDIC specialassessment. For the six months ended June 30, 2009, net loss was$9,561, a decrease of $12,782 or 396.83% compared to net income of $3,221 forthe same period in 2008. Diluted earnings per share decreased $2.68 per shareor 400.06% for the six months ended June 30, 2009 compared to the sameperiod in 2008. The six months ended June 30, 2009 reflected acontinuation of our bank’s trend of asset growth, increasing by $121,455 or9.97% from $1,218,084 at December 31, 2008 to $1,339,539 at June 30,2009. Net loans increased by 10.25% or $104,910 from December 31, 2008 to June 30,2009, while total deposits increased by 12.58% or $134,538 during that sameperiod.

 

**CorporationOverview**

 

Tennessee CommerceBancorp, Inc., headquartered in Franklin, Tennessee, is the bank holdingcompany for Tennessee Commerce Bank (the “Bank”).  Organized in January 2000,the Bank has a focused strategy that serves the banking needs of small tomedium-sized businesses, entrepreneurs and professionals in the Nashvillemetropolitan statistical area, or the Nashville MSA, as well as the funding needsof certain national and regional equipment vendors and financial servicescompanies.  We call this strategy our “business bank” strategy. Weprimarily conduct business from a single location in the Cool Springscommercial area of Franklin, Tennessee, 15 miles south of Nashville.  Wealso operate three loan production offices 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.

 

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**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 this opportunity.

 

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 June 30, 2009, we had an earning assetratio of 92.22%.

 

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 $3,685 assets per employee for Tennessee commercialbanks at the end of the first three months of 2009. At June 30, 2009, ourassets per employee were $15,759.

 

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 and Michigan partner with us in financing smaller transactions(generally $150 or less per transaction). Both national market programs providegeographic and collateral diversity for our portfolio.

 

**Comparisonof Operating Results for the Three Months Ended June 30, 2009 and June 30,2008**

 

**NetIncome** - Netloss for the three months ended June 30, 2009 was $6,901, a decrease of$8,747 or 473.84% compared to net income of $1,846 for the three months ended June 30,2008.  The decrease is attributable to a 294.40% decrease in non-interestincome from $803 for the three months ended June 30, 2008 to a loss of$1,561 for the same period in 2009, as well as an increase in the provision forloan losses of 460.90% from $2,340 for the three months ended June 30,2008 to $13,125 for the same period in 2009.  We experienced an increaseof $2,535 in operating expense which was the result of our overall growth,including a $65 increase in FDIC assessment at June 30, 2009 compared tothe same date in 2008, as well as an additional accrual expense for the FDICone-time assessment fee of $450 to be paid in the third quarter of 2009.Further, during the quarter ended June 30, 2009, we made a dividendpayment to the U.S. Department of Treasury in an amount equal to $375 withrespect to shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A.

 
| ** **                                          | ** ** | **Three Months Ended********June 30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2009**                                              | ** ** | **2008**   | ** ** | **% Change** | ** ** |
|                                                |       |                                                  |       |       |       |   |   |
| Interest  income                                    |       | $                                                     | 19,907     |       | $          | 18,429 |   | 8.02 | % |
| Interest  expense                                   |       | 9,456                                                 |       | 10,033     |       | (5.75 | ) |
| Net  interest income                                |       | 10,451                                                |       | 8,396      |       | 24.48 |   |
| Provision  for loan losses                          |       | 13,125                                                |       | 2,340      |       | 460.90 |   |
| Net  interest after provision for loan losses       |       | (2,674                                                | )          | 6,056      |       | (144.15 | ) |
| Non-interest  (loss) income                         |       | (1,561                                                | )          | 803        |       | (294.40 | ) |
| Non-interest  expense                               |       | 6,385                                                 |       | 3,850      |       | 65.84 |   |
| Net  (loss) income before taxes                     |       | (10,620                                               | )          | 3,009      |       | (452.94 | ) |
| Income  tax (benefit) expense                       |       | (4,071                                                | )          | 1,163      |       | (450.04 | ) |
| Net  (loss) income                                  |       | (6,549                                                | )          | 1,846      |       | (454.77 | ) |
| Preferred  dividends                                |       | (352                                                  | )          | —     |       | 100.00 |   |
| Net  (loss) income available to common shareholders |       | $                                                     | (6,901     | )          | $          | 1,846 |   | (473.84 | )% |

 

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**Provisionfor Loan Losses**- The provision for loan losses for the three months ended June 30, 2009was $13,125, an increase of $10,785, or 460.90%, above the provision of$2,340 expensed in the same period in 2008.  This increase was primarily aresult of normal charge-offs and a charge-off of $3,500 on a $8,500 loaninvolving apparent fraud. We have additionally reserved $1,500 for this loanand****we are in the process of recovering the balance through corporate andpersonal bankruptcy proceedings. We do not have sufficient information at thistime to quantify the amount of potential recovery for this loan. At June 30,2009, the loan loss reserve of $18,938 was 1.65% of gross loans of $1,147,119,compared with a loan loss reserve of $11,520 at June 30, 2008, which was1.23% of gross loans of $940,484.

 

**Non-interestIncome** -Non-interest income decreased by 294.40%, or $2,364, from $803 in the quarterended June 30, 2008 to a $1,561 loss for the same period in 2009. Thedecrease was primarily a result of losses on loan sales and losses ondispositions of assets not secured by real estate.  The gain on loan saleswas $852 and a loss of $629 for the three-month periods ended June 30,2008 and 2009, respectively. The loss on dispositions of assets was $120 and$1,157 for the three-month periods ended June 30, 2008 and 2009,respectively.

 

We earned $6 in mortgageorigination fees during the three months ended June 30, 2009 compared to$12 during the same period in 2008, a decrease of $6 or 50%, primarily as aresult of a slower market.  We recognized an $80 loss on the sale ofsecurities in the three months ended June 30, 2009 and no gain or loss forthe same period in 2008.

 

We lost $629 on loan saletransactions in the three months ended June 30, 2009, a 173.83% decreasecompared to $852 earned during the same period in 2008. This decrease wasprimarily 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 ended June 30, 2009 was $6,385,an increase of $2,535 or 65.84%, over the $3,850 expensed in the same period in2008.  Approximately 25.12% of the increase was a result of increases inFDIC assessments and 37.52% of the increase was attributable to the increasednumber of full-time employees.  At June 30, 2009, the Bank had 85full-time employees compared with 75 full-time employees at June 30, 2008.

 

**NetInterest Income**- Net interest income for the three months ended June 30, 2009 was $10,451compared to $8,396 for the same period in 2008, a gain of $2,055 or24.48%.  The increase in net interest income was largely attributable tocontinuing loan growth.  The average net loan balance increased by$231,033 or 26.05% from $886,808 for the three months ended June 30, 2008to $1,117,841 for the same period in 2009. Loan growth was accompanied by anincrease in average interest-bearing deposits from $897,607 for the threemonths ended June 30, 2008 to $1,115,266 for the same period in 2009, anincrease of $217,659 or 24.25%.

 

**NetInterest Margin**- The net interest margin increased from 3.44% for the three months ended June 30,2008 to 3.45% for the same period in 2009 because of a decrease in our cost fordeposits.  Interest income increased by $1,478 or 8.02%, from $18,429during the three months ended June 30, 2008 to $19,907 during the sameperiod in 2009. The increase was primarily a result of increased loanvolume.  Average earning assets increased from $983,332 in the threemonths ended June 30, 2008 to $1,215,671 in the same period in 2009, anincrease of $232,339 or 23.63%, primarily as a result of loan growth.Average loan balances increased by $231,033 or 26.05% for the three monthsended June 30, 2009, from the same period in 2008.  The average yieldon earning assets decreased from 7.54% in the three months ended June 30,2008 to 6.57% in the same period in 2009. The decrease in the cost of funds, asa percentage of average balances, was primarily a result of decreases inshort-term interest rates paid on deposits that support our loan growth.Between June 30, 2008 and June 30, 2009, the Federal Reserve OpenMarket Committee, or FOMC, lowered the federal funds rate by 225 basis points.

 

**InterestExpense** —Interest expense decreased from $10,033 in the three months ended June 30,2008 to $9,456 in the three months ended June 30, 2009. The $577, or5.75%, decrease in expense was a result of a decrease in the cost offunds. Average interest earning liabilities increased by $248,381 or26.84%.  The cost of funds decreased from 4.36% for the three months endedJune 30, 2008 to 3.23% for the same three months in 2009, a decrease of113 basis points. The decrease is largely attributed to time deposits maturingand being re-priced.

 

**IncomeTaxes** - Oureffective tax rate for the three months ended June 30, 2009 was 38.33%compared to 38.65% for the three months ended June 30, 2008. Managementanticipates that tax rates in future periods will approximate the rates paid in2009.

 

**EfficiencyRatio** - Ourefficiency ratio for the three months ended June 30, 2009 and 2008 was71.82% and 41.85%, respectively, an increase of 2,997 basis points. Thefollowing table reflects the calculation of the efficiency ratio:

 

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| ** **                  | ** ** | **Three Months Ended******** June 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                                    | ** ** | **2008** | ** ** |
| Non-interest  expense       |       | $                                                           | 6,385      |   | $ | 3,850 |   |
|                        |       |                                                        |       |   |   |
| Net  interest income        |       | 10,451                                                      |       | 8,396 |   |
| Non-interest  (loss) income |       | (1,561                                                      | )          | 803 |   |
| Net  Revenues               |       | $                                                           | 8,890      |   | $ | 9,199 |   |
|                        |       |                                                        |       |   |   |
| Efficiency  ratio           |       | 71.82                                                       | %          | 41.85 | % |

 

**Comparisonof Operating Results for the Six Months Ended June 30, 2009 and June 30,2008**

 

**NetIncome** - Netloss for the six months ended June 30, 2009 was $9,561, a decrease of$12,782 or 396.83% compared to net income of $3,221 for the six months ended June 30,2008.  The decrease is attributable to a 449.21% increase in the provisionfor loan loss from $3,940 for the six months ended June 30, 2008 to$21,639 for the same period in 2009. We experienced an increase of $3,324 inoperating expense which was the result of our overall growth, including a $835increase in FDIC assessments at June 30, 2009 compared to the same date in2008, as well as an increase in personnel and general operating expensesbecause of our growth.

 
| ** **                                    | ** ** | **Six Months Ended********June 30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **2009**                                            | ** ** | **2008**   | ** ** | **% Change** | ** ** |
|                                          |       |                                                |       |       |       |   |   |
| Interest  income                              |       | $                                                   | 39,363     |       | $          | 35,915 |   | 9.60 | % |
| Interest  expense                             |       | 19,072                                              |       | 20,057     |       | (4.91 | ) |
| Net  interest income                          |       | 20,291                                              |       | 15,858     |       | 27.95 |   |
| Provision  for loan losses                    |       | 21,639                                              |       | 3,940      |       | 449.21 |   |
| Net  interest after provision for loan losses |       | (1,348                                              | )          | 11,918     |       | (111.31 | ) |
| Non-interest  income                          |       | (1,534                                              | )          | 1,330      |       | (215.34 | ) |
| Non-interest  expense                         |       | 11,318                                              |       | 7,994      |       | 41.58 |   |
| Net  income before taxes                      |       | (14,200                                             | )          | 5,254      |       | (370.27 | ) |
| Income  tax expense                           |       | (5,435                                              | )          | 2,033      |       | (367.34 | ) |
| Net  income                                   |       | (8,765                                              | )          | 3,221      |       | (372.12 | ) |
| Preferred  dividends                          |       | (796                                                | )          | —     |       | 100.00 |   |
| Net  income available to common shareholders  |       | $                                                   | (9,561     | )          | $          | 3,221 |   | (396.83 | )% |

 

**Provisionfor Loan Losses**- The provision for loan losses for the six months ended June 30, 2009 was$21,639, an increase of $17,699, or 449.21%, above the provision of $3,940expensed in the same period in 2008.  This increase was primarily a resultof normal charge-offs and a charge-off of $3,500 on a $8,500 loan involvingapparent fraud. We have additionally reserved $1,500 for this loan and****weare in the process of recovering the balance through corporate and personalbankruptcy proceedings. We do not have sufficient information at this time toquantify the amount of potential recovery for this loan. At June 30,2008, the loan loss reserve of $18,938 was 1.65% of gross loans of $1,147,119.

 

**Non-interestIncome** -Non-interest income decreased by 215.34% or $2,864, from $1,330 in the sixmonths ended June 30, 2008 to a loss of $1,534 for the same period in2009. The decrease was primarily a result of losses on loan sales and losses ondispositions of assets not secured by real estate.   The gain on loansales was $1,418 and a loss of $989 for the six-month periods ended June 30,2008 and 2009, respectively.

 

We earned $20 in mortgageorigination fees during the six months ended June 30, 2009 compared to $24during the same period in 2008, a decrease of $4 or 16.67%, primarily as aresult of a slower market.  We recognized $338 on the sale of securitiesin the six months ended June 30, 2009 compared with $30 for the sameperiod in 2008, primarily as a result of the restructuring of portfolios inresponse to the prevailing economic situation.

 

We lost $989 on loan saletransactions in the six months ended June 30, 2009, a 169.75% decreasecompared to $1,418 earned during the same period in 2008. This increase wasprimarily a result of timing differences. Management will continue to considerloan sale transactions if the opportunity for a reasonable return is available.

 

**Non-interestExpense** -Non-interest expense for the six months ended June 30, 2009 was $11,318,an increase of $3,324 or 41.58%, over the $7,994 expensed in the same period in2008. Approximately 25.12% of the increase was a result of increases inFDIC assessments and 37.52% of the increase was a result of increases inpersonnel. At June 30, 2009, the Bank had 85 full-time employees comparedwith 75 employees at June 30, 2008.

 

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**NetInterest Income**— Net interest income for the six months ended June 30, 2009 was $20,291compared to $15,858 for the same period in 2008, a gain of $4,433 or 27.95%. The increase in net interest income was largely attributable to continuing loangrowth.  The average net loan balance for the six months ended June 30,2009 increased by 26.74% or $228,957 to $1,085,140 from $856,183 for thatperiod in 2008. Loan growth was accompanied by an increase in averageinterest-bearing deposits from $862,419 for the six months ended June 30,2008, to $1,085,115 for the same period in 2009, an increase of $222,696 or25.82%.

 

The following tableoutlines the components of net interest income for the six-month periods ended June 30,2009 and 2008 and identifies the impact of changes in volume and rate:

 
| ** **                    | ** ** | **June 30, 2009 change from******** June 30, 2008 due to:** | ** ** |
|-------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **Volume**                                                                                               | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                          |       |                                                                                                     |       |   |   |   |   |
| Interest  income              |       |                                                                                                     |       |   |   |   |   |
| Loans                         |       | $                                                                                                        | 8,154      |   | $ | (5,181 | ) | $ | 2,973 |   |
| Securities  (taxable) (1)     |       | 690                                                                                                      |       | (79 | ) | 611 |   |
| Federal  funds sold           |       | (46                                                                                                      | )          | (90 | ) | (136 | ) |
| Total  interest income        |       | 8,798                                                                                                    |       | (5,350 | ) | 3,448 |   |
|                          |       |                                                                                                     |       |   |   |   |   |
| Interest  expense             |       |                                                                                                     |       |   |   |   |   |
| Deposits  (other than demand) |       | 4,368                                                                                                    |       | (5,723 | ) | (1,355 | ) |
| Federal  funds purchased      |       | 95                                                                                                       |       | (119 | ) | (24 | ) |
| Subordinated  debt            |       | 440                                                                                                      |       | (46 | ) | 394 |   |
| Total  interest expense       |       | 4,903                                                                                                    |       | (5,888 | ) | (985 | ) |
|                          |       |                                                                                                     |       |   |   |   |   |
| Net  interest income          |       | $                                                                                                        | 3,895      |   | $ | 538 |   | $ | 4,433 |   |

 

----

(1)    Unrealized gain of $257 and $661 is excluded fromyield calculation for the six months ended June 30, 2009 and 2008,respectively.

 

**NetInterest Margin**- The net interest margin increased from 3.37% for the six months ended June 30,2008 to 3.42% for the same period in 2009 because of a decrease in our cost fordeposits.  Interest income increased by $3,448 or 9.60%, from $35,915during the six months ended June 30, 2008 to $39,363 during the sameperiod in 2009. The increase was primarily a result of increased loanvolume.  Average earning assets increased from $946,492 in the six monthsended June 30, 2008 to $1,196,124 in the same period in 2009, an increaseof $249,632 or 26.37%, primarily as a result of loan growth. Average loanbalances increased by $228,957 or 26.74% for the six months ended June 30,2009, from the same period in 2008.  The average yield on earning assetsdecreased from 7.64% in the six months ended June 30, 2008 to 6.63% in thesame 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 June 30, 2008and June 30, 2009, the FOMC lowered the federal funds rate by 225 basispoints.

 

**InterestExpense** —Interest expense decreased from $20,057 in the six months ended June 30,2008 to $19,072 in the six months ended June 30, 2009. While averageinterest earning liabilities increased by $255,158 or 28.80%, the cost offunds decreased from 4.55% in the six months ended June 30, 2008 to 3.30%during the same six months in 2009, a decrease of 125 basis points.

 

**IncomeTaxes** — Oureffective tax rate for the six months ended June 30, 2009 was 38.27%compared to 38.69% for the six months ended June 30, 2008. Managementanticipates that tax rates in future periods will approximate the rates paid in2009.

 

**EfficiencyRatio** — Ourefficiency ratio for the six months ended June 30, 2009 and 2008 was60.34% and 46.51%, respectively, an increase of 1,383 basis points. Thefollowing table reflects the calculation of the efficiency ratio:

 
| ** **                  | ** ** | **Six Months Ended******** June 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                                  | ** ** | **2008** | ** ** |
| Non-interest  expense       |       | $                                                         | 11,318     |   | $ | 7,994 |   |
|                        |       |                                                      |       |   |   |
| Net  interest income        |       | 20,291                                                    |       | 15,858 |   |
| Non-interest  (loss) income |       | (1,534                                                    | )          | 1,330 |   |
| Net  revenues               |       | $                                                         | 18,757     |   | $ | 17,188 |   |
|                        |       |                                                      |       |   |   |
| Efficiency  ratio           |       | 60.34                                                     | %          | 46.51 | % |

 

18

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*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 six-monthperiods ended June 30, 2009 and 2008. The table is presented on a taxequivalent basis, as applicable.

 
| ** **                                       | ** ** | **Six Months Ended June 30,******** 2009** | ** ** | **Six Months Ended June 30,******** 2008** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Average**                                                         | ** ** | ** **                                                          | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                       | ** ** | **Balance**                                                         | ** ** | **Interest**                                                        | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                                       |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Interest  earning assets                         |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Securities  (taxable) (1)                        |       | $                                                                   | 105,214    |                                                                | $          | 2,788 |   | 5.33 | % | $ | 79,270 |   | $ | 2,177 |   | 5.57 | % |
| Loans  (2) (3)                              |       | 1,085,140                                                           |       | 36,570                                                              |       | 6.80 | % | 856,183 |   | 33,597 |   | 7.89 | % |
| Federal  funds sold                              |       | 5,770                                                               |       | 5                                                                   |       | 0.17 | % | 11,039 |   | 141 |   | 2.57 | % |
| Total  interest earning assets                   |       | 1,196,124                                                           |       | 39,363                                                              |       | 6.63 | % | 946,492 |   | 35,915 |   | 7.64 | % |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Non-interest  earning assets                     |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Cash  and due from banks                         |       | 8,606                                                               |       |                                                                |       |   |   | 3,448 |   |   |   |   |   |
| Net  fixed assets and equipment                  |       | 2,249                                                               |       |                                                                |       |   |   | 1,458 |   |   |   |   |   |
| Accrued  interest and other assets               |       | 63,056                                                              |       |                                                                |       |   |   | 27,200 |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Total  assets                                    |       | $                                                                   | 1,270,035  |                                                                |       |   |   |   | $ | 978,598 |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**    |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                    |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Deposits  (other than demand)                    |       | $                                                                   | 1,085,115  |                                                                | $          | 18,083 |   | 3.36 | % | $ | 862,419 |   | $ | 19,438 |   | 4.53 | % |
| Federal  funds purchased                         |       | 22,805                                                              |       | 67                                                                  |       | 0.59 | % | 6,084 |   | 91 |   | 3.01 | % |
| Subordinated  debt                               |       | 33,198                                                              |       | 922                                                                 |       | 5.60 | % | 17,457 |   | 528 |   | 6.08 | % |
| Total  interest-bearing liabilities              |       | 1,141,118                                                           |       | 19,072                                                              |       | 3.37 | % | 885,960 |   | 20,057 |   | 4.55 | % |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities                |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing demand deposits            |       | 23,079                                                              |       |                                                                |       |   |   | 24,143 |   |   |   |   |   |
| Other  liabilities                               |       | 8,445                                                               |       |                                                                |       |   |   | 3,922 |   |   |   |   |   |
| Shareholders’  equity                       |       | 97,393                                                              |       |                                                                |       |   |   | 64,573 |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |       | $                                                                   | 1,270,035  |                                                                |       |   |   |   | $ | 978,598 |   |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Net  interest spread                             |       | 3.26                                                                | %          |                                                                |       |   |   | 3.09 | % |   |   |   |   |
|                                             |       |                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Net  interest margin                             |       | 3.42                                                                | %          |                                                                |       |   |   | 3.37 | % |   |   |   |   |

 

----

(1)   Unrealized (loss) gain of $(257) and $661are excluded from yield calculation for the six months ended June 30, 2009and 2008, respectively.

(2)   Non-accrual loans are included in averageloan balances, and loan fees of $2,990 and $2,070 are included in interestincome for the six months ended June 30, 2009 and 2008, respectively.

(3)   Loans are presented net of allowance forloan loss.

 

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**Comparisonof Financial Condition at June 30, 2009 and December 31, 2008**

 

**Assets****—** Total assets at June 30, 2009 were$1,339,539, an increase of $121,455, or 9.97%, over total assets of $1,218,084at December 31, 2008. Loan growth was the primary reason for theincrease.  At June 30, 2009, net loans equaled $1,128,181, up$104,910, or 10.25%, over the December 31, 2008 total net loans of$1,023,271. The cash and cash equivalents balance decreased by $24,893 between December 31,2008 and June 30, 2009, as funds were used to fund loans made in the firsttwo quarters of 2009.

 

Our business bank modelof operation generally results in a higher level of earning assets than ourpeer banks.  Earning assets are defined as assets that earn interestincome and include short-term investments, the investment portfolio and netloans.  We generally maintain a higher level of earning assets than ourpeer banks because fewer assets are allocated to facilities, cash and “due from”bank accounts used for transaction processing.  Earning assets at June 30,2009 were $1,235,285 or 92.22% of total assets of $1,339,539.  Earningassets 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 $1,128,181at June 30, 2009. The following table sets forth the composition of ourloan portfolio at June 30, 2009 and December 31, 2008:

 
| ** **                              | ** ** | **June 30,******** 2009** | ** ** | **December 31,******** 2008** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| Real  estate                            |       |                                |       |                                    |       |
| Construction                            |       | $                                   | 216,208    |                                    | $          | 181,638 |   |
| 1 to  4 family residential              |       | 37,988                              |       | 37,822                                  |       |
| Other                                   |       | 175,510                             |       | 171,150                                 |       |
| Commercial,  financial and agricultural |       | 639,287                             |       | 589,518                                 |       |
| Consumer                                |       | 3,827                               |       | 3,572                                   |       |
| Other                                   |       | 74,299                              |       | 53,025                                  |       |
|                                    |       |                                |       |                                    |       |
| Total  loans                            |       | 1,147,119                           |       | 1,036,725                               |       |
| Less:  allowance for loan losses        |       | (18,938                             | )          | (13,454                                 | )          |
|                                    |       |                                |       |                                    |       |
| Net  loans                              |       | $                                   | 1,128,181  |                                    | $          | 1,023,271 |   |

 

The following table setsforth the percentage composition of our loan portfolio by type at June 30,2009 and December 31, 2008:

 
| ** **                              | ** ** | **June 30,******** 2009** | ** ** | **December 31,******** 2008** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| Real  estate:                           |       |                                |       |                                    |       |
| Construction                            |       | 18.85                               | %          | 17.52                                   | %          |
| 1 to  4 family residential              |       | 3.31                                |       | 3.65                                    |       |
| Other                                   |       | 15.30                               |       | 16.51                                   |       |
| Commercial,  financial and agricultural |       | 55.73                               |       | 56.86                                   |       |
| Consumer                                |       | 0.33                                |       | 0.34                                    |       |
| Other                                   |       | 6.48                                |       | 5.12                                    |       |
|                                    |       |                                |       |                                    |       |
| Total                                   |       | 100.00                              | %          | 100.00                                  | %          |

 

The following table setsforth the composition of our commercial loan portfolio by source at June 30,2009 and December 31, 2008:

 
| ** **         | ** ** | **June 30,******** 2009** | ** ** | **December 31,******** 2008** | ** ** |
|--------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| ** **         | ** ** | **Amount**                          | ** ** | **%**                                   | ** ** | **Amount** | ** ** | **%** | ** ** |
|               |       |                                |       |                                    |       |   |   |   |   |
| Direct  funding    |       | $                                   | 306,021    |                                    | 47.87      | % | $ | 267,542 |   | 45.38 | % |
| Indirect  funding: |       |                                |       |                                    |       |   |   |   |   |
| Large              |       | 149,168                             |       | 23.33                                   |       | 148,538 |   | 25.20 |   |
| Small              |       | 184,098                             |       | 28.80                                   |       | 173,438 |   | 29.42 |   |
| Total              |       | $                                   | 639,287    |                                    | 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.

 

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The following tablepresents information regarding non-accrual, past due and restructured loans at June 30,2009 and December 31, 2008:

 
| ** **                                                                                               | ** ** | **June 30,******** 2009** | ** ** | **December 31,******** 2008** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| Non-accrual  loans:                                                                                      |       |                                |       |                                    |       |
| Number                                                                                                   |       | 214                                 |       | 186                                     |       |
| Amount                                                                                                   |       | $                                   | 23,332     |                                    | $          | 11,603 |   |
|                                                                                                     |       |                                |       |                                    |       |
| Accruing  loans which are contractually past due 90 days or more as to principal and  interest payments: |       |                                |       |                                    |       |
| Number                                                                                                   |       | 49                                  |       | 51                                      |       |
| Amount                                                                                                   |       | $                                   | 2,240      |                                    | $          | 18,788 |   |
|                                                                                                     |       |                                |       |                                    |       |
| Loans  defined as “troubled debt restructurings”:                                              |       |                                |       |                                    |       |
| Number                                                                                                   |       | 1                                   |       | 3                                       |       |
| Amount                                                                                                   |       | $                                   | 121        |                                    | $          | 668 |   |

 

As of June 30, 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 six months ended June 30, 2009, troubled debtrestructurings decreased as a result of the restructuring of only one credit ina total amount of $121. At June 30, 2009, total impaired loans includingnon-accruals totaled $53,165.

 

**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 0.87% for the six monthsended June 30, 2009, and 0.32% for the six months ended June 30,2008. The ALL as a percentage of the outstanding loans at the end of the periodwas 1.65% at June 30, 2009, and 1.23% at June 30, 2008.

 

An analysis of ourallowance for loan loss and net charge-offs is furnished in the following tablefor the six months ended June 30, 2009 and the same period ended June 30,2008:

 
| ** **                                                                                         | ** ** | **June 30,******** 2009** | ** ** | **June 30,******** 2008** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| Allowance  for loan losses at beginning of period                                                  |       | $                                   | 13,454     |                                | $          | 10,321 |   |
| Charge-offs:                                                                                       |       |                                |       |                                |       |
| Real  estate:                                                                                      |       |                                |       |                                |       |
| Construction                                                                                       |       | 2,918                               |       | 150                                 |       |
| 1 to  4 family residential                                                                         |       | 346                                 |       | —                              |       |
| Other                                                                                              |       | 202                                 |       | —                              |       |
| Commercial,  financial and agricultural                                                            |       | 13,312                              |       | 2,548                               |       |
| Consumer                                                                                           |       | 8                                   |       | 77                                  |       |
| Total  Charge-offs                                                                                 |       | 16,786                              |       | 2,775                               |       |
|                                                                                               |       |                                |       |                                |       |
| Recoveries:                                                                                        |       |                                |       |                                |       |
| Real  estate:                                                                                      |       |                                |       |                                |       |
| Construction                                                                                       |       | —                              |       | —                              |       |
| 1 to  4 family residential                                                                         |       | —                              |       | —                              |       |
| Other                                                                                              |       | —                              |       | —                              |       |
| Commercial,  financial and agricultural                                                            |       | 631                                 |       | 33                                  |       |
| Consumer                                                                                           |       | —                              |       | 1                                   |       |
| Total  Recoveries                                                                                  |       | 631                                 |       | 34                                  |       |
|                                                                                               |       |                                |       |                                |       |
| Net  Charge-offs                                                                                   |       | 16,155                              |       | 2,741                               |       |
|                                                                                               |       |                                |       |                                |       |
| Provision  for loans charged to expense                                                            |       | 21,639                              |       | 3,940                               |       |
| Allowance  for loan losses at end of period                                                        |       | $                                   | 18,938     |                                | $          | 11,520 |   |
| ** **                                                                                         | ** ** | ** **                          | ** ** | ** **                          | ** ** |
| ** **                                                                                         | ** ** | **June 30,******** 2009** | ** ** | **June 30,******** 2008** | ** ** |
| Net  charge-offs as a percentage of average total loans outstanding during the  period             |       | 1.47                                | %          | 0.32                                | %          |
|                                                                                               |       |                                |       |                                |       |
| Ending  allowance for loan losses as a percentage of total loans outstanding at end  of the period |       | 1.65                                | %          | 1.23                                | %          |

 

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

 

**Securities** — The securities portfolio at June 30,2009 was $107,099 compared to $101,290 at December 31, 2008.  We viewthe securities portfolio as a source of income and liquidity.  Thesecurities portfolio was 8.00% of total assets at June 30, 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 the wholesaledeposit 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 June 30, 2009 were $1,203,681, up $134,538 or 12.58%over the December 31, 2008 total deposits of $1,069,143. Totalaverage deposits during the six months ended June 30, 2009 were$1,108,194, an increase of $221,632, or 25.00% over the total average depositsof $886,562 during the six months ended June 30, 2008. Averagenon-interest bearing deposits decreased by $1,064, or 4.41%, from $24,143 inthe six months ended June 30, 2008, to $23,079 in the six months ended June 30,2009.

 

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%, as there was no balance at June 30,2009. This strategy was primarily executed to reduce overnight liquidity riskand to mitigate interest rate sensitivity on the balance sheet. At June 30,2009, the maximum available advance was $16,788 with no outstanding principlebalance and at December 31, 2008, there was no outstanding principlebalance. At June 30, 2009, the total capital stock balance was 2,169shares with a value of $2,169.

 

The following table setsforth average deposit balances for the six months ended June 30, 2009 and2008 and the average rates paid on those balances:

 
| ** **                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **Average******** Balance**                  | ** ** | **Average******** Rate******** Paid (1)** | ** ** | **Average******** Balance** | ** ** | **Average******** Rate******** Paid (1)** | ** ** |
| Types  of Deposits:                   |       |                                              |       |   |   |   |   |   |   |
| Non-interest-bearing  demand deposits |       | $                                                 | 23,079     |   | — | % | $ | 24,143 |   | — | % |
| Interest-bearing  demand deposits     |       | 7,113                                             |       | 0.14 |   | 7,100 |   | 1.00 |   |
| Money  market accounts                |       | 45,327                                            |       | 0.71 |   | 74,833 |   | 2.38 |   |
| Savings  accounts                     |       | 16,456                                            |       | 2.29 |   | 6,379 |   | 2.69 |   |
| IRA  accounts                         |       | 35,090                                            |       | 4.01 |   | 23,212 |   | 4.97 |   |
| Purchased  time deposits              |       | 540,774                                           |       | 3.77 |   | 398,029 |   | 4.82 |   |
| Time  deposits                        |       | 440,335                                           |       | 3.17 |   | 352,866 |   | 4.74 |   |
| Total  deposits                       |       | $                                                 | 1,108,194  |   |   |   | $ | 886,562 |   |   |   |

 

----

(1)               Rate is annualized

 

**Short-TermDebt** — As of May 4,2009, we have a $10,000 line of credit with a qualified investor. The balanceon this line of credit is $10,000 at June 30, 2009.

 

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**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 Wall Street Journal* on the firstbusiness day of each distribution period plus 50 basis points (but in no eventgreater than 8.0% or less than 5.75%).

 

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.

 

**Off-BalanceSheet Arrangements**

 

We are a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of our customers. At June 30, 2009,we had unfunded loan commitments outstanding of $119,722 and standbyletters of credit and financial guarantees of $10,188. Those instrumentsinvolve, to varying degrees, elements of credit risk in excess of the amountrecognized in the balance sheet.  The contract or notional amounts ofthose instruments reflect the extent of our involvement in those particularfinancial instruments. We use the same credit policies in making commitmentsand conditional 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 had available federal fund lines at June 30, 2009totaling $40,853.

 

**Liquidity/Capital Resources**

 

**Liquidity** — Of primary importance to depositors,creditors and regulators is the ability to have readily available fundssufficient to repay fully maturing liabilities.  We are subject to generalFDIC guidelines, 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 assets and borrowing capacity to provide adequateliquidity. Management does not know of any trends or demands that arereasonably likely to result in our liquidity increasing or decreasing in anymaterial 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 and certainpreferred stock and qualifying debt instruments. In determining risk-basedcapital requirements, assets are assigned risk-weights of 0% to 100%, dependingprimarily on the regulatory assigned levels of credit risk associated with suchassets. Off-balance sheet items are considered in the calculation ofrisk-adjusted assets through conversion factors established by the regulators.The framework for calculating risk-based capital requires banks and bankholding companies to meet the regulatory minimums of 4% Tier I and 8%total risk-based capital. In 1990, regulators added a leverage computation tothe capital requirements, comparing Tier I capital to total average assetsless 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.

 

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At June 30, 2009 andDecember 31, 2008, the Bank’s and our risk-based capital ratios and theminimums for capital adequacy and to be considered well capitalized under theFederal Reserve Board’s prompt corrective action guidelines were as follows:

 
| ** **                                               | ** ** | ** **        | ** ** | ** **            | ** ** | ** **           | ** ** | **Minimum to**    | ** ** |
|----------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                               | ** ** | ** **        | ** ** | ** **            | ** ** | **Minimum**          | ** ** | **be considered** | ** ** |
| ** **                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **for capital** | ** ** | **well-**              | ** ** |
| ** **                                               | ** ** | **2009**          | ** ** | **2008**              | ** ** | **adequacy**         | ** ** | **capitalized**        | ** ** |
|                                                     |       |              |       |                  |       |                 |       |                   |       |
| Tier  1 leverage ratio                                   |       |              |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 8.79              | %          | 9.26                  | %          | 4.00                 | %          | 5.00                   | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 8.77              | %          | 10.62                 | %          | 4.00                 | %          | n/a                    |       |
|                                                     |       |              |       |                  |       |                 |       |                   |       |
| Tier  1 “core” capital to risk-weighted assets |       |              |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 9.28              | %          | 9.79                  | %          | 4.00                 | %          | 6.00                   | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 9.24              | %          | 11.20                 | %          | 4.00                 | %          | n/a                    |       |
|                                                     |       |              |       |                  |       |                 |       |                   |       |
| Total  capital to risk-weighted assets                   |       |              |       |                  |       |                 |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 10.53             | %          | 11.01                 | %          | 8.00                 | %          | 10.00                  | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 10.49             | %          | 12.42                 | %          | 8.00                 | %          | n/a                    |       |

 

Based solely on ouranalysis of federal banking regulatory categories, on June 30, 2009 and December 31,2008, we and 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.

 

 

**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 one to three months, four to 12 months, oneto five years and over five years. The chart below illustrates our ratesensitive position at June 30, 2009. Management uses the one-year gap asthe appropriate time period for setting strategy.

 

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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                                              |       | $            | 5          |       | $          | —     |       | $         | —     |             | $          | —     |       | $ | — |   | $ | 5 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Securities                                                       |       |         |       |       |       |       |       |      |       |             |       |       |       |
| U.S.  government agencies                                        |       | —       |       | 47,890     |       | —     |       | 261       |       | 58,740           |       | 106,891    |       |
| Mortgage-backed  securities                                      |       | —       |       | 26         |       | 78         |       | 104       |       | —           |       | 208        |       |
| Total  securities                                                |       | —       |       | 47,916     |       | 78         |       | 365       |       | 58,740           |       | 107,099    |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  loans                                                     |       | 256,642      |       | 176,490    |       | 354,861    |       | 293,373   |       | 65,753           |       | 1,147,119  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  interest-earning assets                                   |       | 256,647      |       | 224,406    |       | 354,939    |       | 293,738   |       | 124,493          |       | 1,254,223  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other  assets                                                    |       | —       |       | —     |       | —     |       | —    |       | 85,316           |       | 85,316     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  assets                                                    |       | $            | 256,647    |       | $          | 224,406    |       | $         | 354,939    |             | $          | 293,738    |       | $ | 209,809 |   | $ | 1,339,539 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest-bearing  liabilities                                    |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Deposits                                                         |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest  checking                                               |       | $            | 3,286      |       | $          | —     |       | $         | —     |             | $          | 5,139      |       | $ | — |   | $ | 8,425 |   |
| Money  market and savings                                        |       | 50,780       |       | —     |       | —     |       | 36,771    |       | —           |       | 87,551     |       |
| Time  deposits                                                   |       | —       |       | 272,479    |       | 494,346    |       | 315,660   |       | —           |       | 1,082,485  |       |
| Total  deposits                                                  |       | 54,066       |       | 272,479    |       | 494,346    |       | 357,570   |       | —           |       | 1,178,461  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Federal  funds purchased                                         |       | —       |       | —     |       | —     |       | —    |       | —           |       | —     |       |
| Short-term  debt                                                 |       | —       |       | —     |       | 10,000     |       | —    |       | —           |       | 10,000     |       |
| Subordinated  debt                                               |       | —       |       | —     |       | —     |       | —    |       | 23,198           |       | 23,198     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  interest-bearing liabilities                              |       | 54,066       |       | 272,479    |       | 504,346    |       | 357,570   |       | 23,198           |       | 1,211,659  |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other  liabilities                                               |       | —       |       | —     |       | —     |       | —    |       | 37,154           |       | 37,154     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Shareholders’  equity                                       |       | —       |       | —     |       | —     |       | —    |       | 90,726           |       | 90,726     |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total  liabilities and shareholders’ equity                 |       | $            | 54,066     |       | $          | 272,479    |       | $         | 504,346    |             | $          | 357,570    |       | $ | 151,078 |   | $ | 1,339,539 |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate  sensitive gap by period                                    |       | $            | 202,581    |       | $          | (48,073    | )          | $         | (149,407   | )                | $          | (63,832    | )          | $ | 101,295 |   |   |   |
| Cumulative  gap                                                  |       |         |       | $          | 154,508    |       | $          | 5,101     |       | $                | (58,731    | )          | $          | 42,564 |   |   |   |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Cumulative  gap as a percentage of total assets                  |       |         |       | 11.53      | %          | 0.38       | %          | (4.38     | )%         | 3.18             | %          |       |       |
|                                                             |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate  sensitive assets / rate sensitive liabilities (cumulative) |       | 4.75         |       | 1.47       |       | 1.01       |       | 0.95      |       | 1.04             |       |       |       |

 

From June 30, 2008to June 30, 2009, the FOMC decreased interest rates by 225 basis points.Management has positioned the balance sheet to be essentially neutral for assetand liability sensitivity. At June 30, 2009, our one-year gap was 1.01.

 

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 

 

25

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risk, we have a guidelinefor our earnings at risk which sets a limit on the variance of net interestincome to less than a 5% percent decline for a 100-basis point change upor down in rates from management’s flat interest rate forecast over the nexttwelve months. At June 30, 2008, we were in compliance with thisguideline.

 

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 stating thatfor an instantaneous 100-basis point increase or decrease in interest rates,the economic value of equity will not decrease by more than 10% from the basecase. At June 30, 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.

 

**ITEM 4. CONTROLS AND PROCEDURES.**

 

**Evaluation of Disclosure Controlsand 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 Over FinancialReporting**

 

There were no changes inour internal control over financial reporting during the quarter ended June 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**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, 2008.

 

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

 

The annual meeting ofshareholders (the “Annual Meeting”) of Tennessee Commerce Bancorp, Inc.(the “Corporation”) was scheduled for May 19, 2009. Because a quorum wasnot present, however, the Annual Meeting was adjourned until June 12,2009.  The following proposals were considered by shareholders at theAnnual Meeting:

 

Proposal 1 — Election of Class I Directors

 

The following directorswere elected to serve as Class I directors until their respectivesuccessors are elected and qualified:

 
| ** **            | ** ** | **Votes** | ** ** | ** **   | ** ** |
|-----------------------|------------|-----------|------------|--------------|------------|
| ** **            | ** ** | **For**   | ** ** | **Withheld** | ** ** | **Abstained** | ** ** |
| Arthur  F. Helf       |       | 3,542,704 |       | 255,241      |       | — |   |
| William  W. McInnes   |       | 3,596,336 |       | 201,609      |       | — |   |
| Paul  A. Thomas, M.D. |       | 3,596,736 |       | 201,209      |       | — |   |

 

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The following directorscontinued in office following the Annual Meeting and they will serve until theannual meeting of shareholders in the years indicated or until their respectivesuccessors are elected and qualified:

 
| ** **               | ** ** | **Term******** Expires** | ** ** |
|--------------------------|------------|-------------------------------|------------|
| H.  Lamar Cox            |       | 2010                          |       |
| Thomas  R. Miller        |       | 2010                          |       |
| Darrel  E. Reifschneider |       | 2010                          |       |
| Paul  W. Dierksen        |       | 2011                          |       |
| Dennis  L. Grimaud       |       | 2011                          |       |
| Michael  R. Sapp         |       | 2011                          |       |

 

Proposal 2 — Ratification of the appointment ofKraftCPAs PLLC as the Corporation’s independent registered public accountingfirm for the fiscal year 2009:

 
| ** ** | ** ** | **Votes**   | ** ** | **Broker**  | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| 3,689,628  |       | 78,875      |       | 29,442      |       | — |   |

 

Proposal 3 — Approval of an advisory (non-binding)resolution on the compensation of certain of the Corporation’s executiveofficers:

 
| ** ** | ** ** | **Votes**   | ** ** | **Broker**  | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| 3,288,438  |       | 392,512     |       | 116,995     |       | — |   |

 

**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) |
| 10.1                 |       |            | Amended and Restated  Employment Agreement, dated as of May 19, 2009, by and among Arthur F.  Helf, Tennessee Commerce Bancorp, Inc. and Tennessee Commerce Bank (8) |
| 10.2                 |       |            | Amended and Restated  Employment Agreement, dated as of May 19, 2009, by and among Michael R.  Sapp, Tennessee Commerce Bancorp, Inc. and Tennessee Commerce Bank (8) |
| 10.3                 |       |            | Amended and Restated  Employment Agreement, dated as of May 19, 2009, by and among H. Lamar  Cox, Tennessee Commerce Bancorp, Inc. and Tennessee Commerce Bank (8) |
| 10.4                 |       |            | Form of Split  Dollar Agreement, dated as of May 19, 2009, by and among Tennessee  Commerce Bancorp, Inc., Tennessee Commerce Bank and each of Arthur F.  Helf, Michael R. Sapp and H. Lamar Cox (8) |
| 10.5                 |       |            | Form of Salary  Continuation Plan, dated as of May 19, 2009, by and among Tennessee  Commerce Bancorp, Inc., Tennessee Commerce Bank and each of Michael R.  Sapp and H. Lamar Cox (8) |
| 10.6                 |       |            | Form of Consulting  and Non-Competition Agreement, dated as of May 19, 2009, by and among  Tennessee Commerce Bancorp, Inc., Tennessee Commerce Bank and each of  Arthur F. Helf and H. Lamar Cox (8) |
| 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 |

 

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| 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  April 18, 2008, and incorporated herein by reference.                                                |
|   |                                                                                                                                                                                                                                                                                 |
| (3)    | Previously filed as an  exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on  Form 8-K, as filed with the Securities and Exchange Commission on  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.                                                    |
|   |                                                                                                                                                                                                                                                                                 |
| (8)    | 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  May 26, 2009, and incorporated herein by reference.                                                       |

 

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)                           |
|                 |   |                                   |
|                 |   |                                   |
| August 10, 2009 |   | /s/ Frank Perez                        |
| (Date)               |   | Frank Perez                            |
|                 |   | Chief Financial Officer                |

 

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**INDEXTO 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) |
| 10.1                 |       |            | Amended and Restated  Employment Agreement, dated as of May 19, 2009, by and among Arthur F.  Helf, Tennessee Commerce Bancorp, Inc. and Tennessee Commerce Bank (8) |
| 10.2                 |       |            | Amended and Restated  Employment Agreement, dated as of May 19, 2009, by and among Michael R.  Sapp, Tennessee Commerce Bancorp, Inc. and Tennessee Commerce Bank (8) |
| 10.3                 |       |            | Amended and Restated  Employment Agreement, dated as of May 19, 2009, by and among H. Lamar  Cox, Tennessee Commerce Bancorp, Inc. and Tennessee Commerce Bank (8) |
| 10.4                 |       |            | Form of Split  Dollar Agreement, dated as of May 19, 2009, by and among Tennessee  Commerce Bancorp, Inc., Tennessee Commerce Bank and each of Arthur F.  Helf, Michael R. Sapp and H. Lamar Cox (8) |
| 10.5                 |       |            | Form of Salary  Continuation Plan, dated as of May 19, 2009, by and among Tennessee  Commerce Bancorp, Inc., Tennessee Commerce Bank and each of Michael R.  Sapp and H. Lamar Cox (8) |
| 10.6                 |       |            | Form of Consulting  and Non-Competition Agreement, dated as of May 19, 2009, by and among  Tennessee Commerce Bancorp, Inc., Tennessee Commerce Bank and each of  Arthur F. Helf and H. Lamar Cox (8) |
| 31.1                 |       |            | Certification of Chief  Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2                 |       |            | Certification of Chief  Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1                 |       |            | Certification of Chief  Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2                 |       |            | Certification of Chief  Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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| (1)    | Previously filed as an  exhibit to Tennessee Commerce Bancorp, Inc.’s Registration Statement on  Form 10, as filed with the Securities and Exchange Commission on  April 29, 2005, and incorporated herein by reference.                                         |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                 |
| (2)    | Previously filed as an  exhibit to Tennessee Commerce Bancorp, Inc.’s Annual Report on  Form 10-K, as filed with the Securities and Exchange Commission on  April 18, 2008, and incorporated herein by reference.                                                |
|   |                                                                                                                                                                                                                                                                                 |
| (3)    | Previously filed as an  exhibit to Tennessee Commerce Bancorp, Inc.’s Current Report on  Form 8-K, as filed with the Securities and Exchange Commission on  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.                                                    |
|   |                                                                                                                                                                                                                                                                                 |
| (8)    | 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  May 26, 2009, and incorporated herein by reference.                                                       |

 

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