**UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-Q**

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

**FOR THE QUARTERLY PERIOD ENDEDJune 30, 2006**

**Commission File Number 000-51281**

**TENNESSEE COMMERCE BANCORP, INC.**(Exact Name of Registrant As Specified in Its Charter)

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

(Address of Principal Executive Offices and Zip Code)

**(615) 599-2274**(Registrant’s Telephone Number, Including Area Code)

**Not Applicable**(Former name, former address and former fiscal year ifchanges since last report)
| Indicate by check mark  whether the registrant (1) has filed all reports required to be filed by  Section 13 or 15(d) of the Securities Exchange Act of 1934 during  the preceding 12 months (or for such shorter period that the registrant was  required to file such reports), and (2) has been subject to such filing  requirements for the past 90 days. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                   | Yes x | No o |

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): 
| Large Accelerated Filer o                                                                                               | Accelerated Filer o | Non-accelerated  Filer x |
|-------------------------------------------------------------------------------------------------------------------------|--------------------------|-------------------------------|
|                                                                                                                    |                     |                          |
| Indicate by check mark  whether the registrant is a shell company (as defined in Rule 12b-2 of  the Exchange Act). |
|                                                                                                                         | Yes o                    | No x                          |
|                                                                                                                         |                          |                               |  |  |

 

As of July 31, 2006 there were  4,390,674 shares of common stock, $0.50 parvalue per share, issued and outstanding.

 

 

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**Tennessee Commerce Bancorp, Inc.**

Table of Contents
| **Part I**  | **Financial  Information**                                                                                                                                      | 3      |
|------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|             |                                                                                                                                                            |   |
| Item 1.          | Financial  Statements                                                                                                                                           | 3      |
|             |                                                                                                                                                            |   |
|             | Consolidated  Balance Sheets at June 30, 2006 (unaudited) and December 31, 2005                                                                       | 3      |
|             |                                                                                                                                                            |   |
|             | Consolidated  Statements of Income (unaudited) for the Six Months Ended June 30, 2006  and 2005 and for the Three Months Ended June 30, 2006 and 2005 | 4      |
|             |                                                                                                                                                            |   |
|             | Consolidated  Statements of Changes in Shareholders’ Equity (unaudited) for the Six Months  Ended June 30, 2006 and 2005                                   | 5      |
|             |                                                                                                                                                            |   |
|             | Consolidated  Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2006  and 2005                                                             | 6      |
|             |                                                                                                                                                            |   |
|             | Notes  to Consolidated Financial Statements (unaudited)                                                                                                         | 7      |
|             |                                                                                                                                                            |   |
| Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                     | 12     |
|             |                                                                                                                                                            |   |
| Item 3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                     | 26     |
|             |                                                                                                                                                            |   |
| Item 4.          | Controls and  Procedures                                                                                                                                        | 30     |
|             |                                                                                                                                                            |   |
| **Part II** | **Other Information**                                                                                                                                           | 30     |
|             |                                                                                                                                                            |   |
| Item  1.         | Legal  Proceedings                                                                                                                                              | 30     |
|             |                                                                                                                                                            |   |
| Item  1A.        | Risk  Factors                                                                                                                                                   | 30     |
|             |                                                                                                                                                            |   |
| Item 2.          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                    | 32     |
|             |                                                                                                                                                            |   |
| Item 3.          | Defaults Upon  Senior Securities                                                                                                                                | 32     |
|             |                                                                                                                                                            |   |
| Item 4.          | Submission of  Matters to a Vote of Security Holders                                                                                                            | 32     |
|             |                                                                                                                                                            |   |
| Item  5.         | Other  Information                                                                                                                                              | 33     |
|             |                                                                                                                                                            |   |
| Item  6.         | Exhibits                                                                                                                                                        | 34     |
|             |                                                                                                                                                            |   |
| Signatures       | 35                                                                                                                                                              |

 

2

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**PART I:FINANCIAL INFORMATION**

**ITEM 1: FINANCIAL STATEMENTS**

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

(dollars in thousands except share data)
| ** **                                                                                                                                                                                                      | ** ** | **June 30,2006** | ** ** | **December 31,2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------------|------------|
| **ASSETS**                                                                                                                                                                                                      |       |                  |       |                      |       |
| Cash and due from  financial institutions                                                                                                                                                                       |       | $                     | 7,027      |                      | $          | 6,877 |   |
| Federal funds sold                                                                                                                                                                                              |       | 16,004                |       | 12,535                    |       |
| Cash and cash  equivalents                                                                                                                                                                                      |       | 23,031                |       | 19,412                    |       |
| Securities available  for sale                                                                                                                                                                                  |       | 41,366                |       | 31,992                    |       |
| Loans                                                                                                                                                                                                           |       | 434,006               |       | 348,586                   |       |
| Allowance for loan  losses                                                                                                                                                                                      |       | (5,508                | )          | (4,399                    | )          |
| Net loans                                                                                                                                                                                                       |       | 428,498               |       | 344,187                   |       |
|                                                                                                                                                                                                            |       |                  |       |                      |       |
| Premises and equipment,  net                                                                                                                                                                                    |       | 850                   |       | 769                       |       |
| Accrued interest  receivable                                                                                                                                                                                    |       | 2,867                 |       | 2,148                     |       |
| Restricted equity  securities                                                                                                                                                                                   |       | 606                   |       | 383                       |       |
| Deferred tax asset                                                                                                                                                                                              |       | 1,109                 |       | 490                       |       |
| Other assets                                                                                                                                                                                                    |       | 5,941                 |       | 4,659                     |       |
|                                                                                                                                                                                                            |       |                  |       |                      |       |
| Total assets                                                                                                                                                                                                    |       | $                     | 504,268    |                      | $          | 404,040 |   |
|                                                                                                                                                                                                            |       |                  |       |                      |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                                  |       |                  |       |                      |       |
| Liabilities                                                                                                                                                                                                     |       |                  |       |                      |       |
| Deposits                                                                                                                                                                                                        |       |                  |       |                      |       |
| Noninterest-bearing                                                                                                                                                                                             |       | $                     | 21,239     |                      | $          | 33,372 |   |
| Interest-bearing                                                                                                                                                                                                |       | 440,470               |       | 334,333                   |       |
| Total deposits                                                                                                                                                                                                  |       | 461,709               |       | 367,705                   |       |
|                                                                                                                                                                                                            |       |                  |       |                      |       |
| Accrued interest  payable                                                                                                                                                                                       |       | 1,253                 |       | 1,126                     |       |
| Short-term debt                                                                                                                                                                                                 |       | 5,000                 |       | —                    |       |
| Long-term  subordinated debt                                                                                                                                                                                    |       | 8,248                 |       | 8,248                     |       |
| Other  liabilities                                                                                                                                                                                              |       | 231                   |       | 531                       |       |
| Total  liabilities                                                                                                                                                                                              |       | 476,441               |       | 377,610                   |       |
| Shareholders’ equity                                                                                                                                                                                       |       |                  |       |                      |       |
| Preferred stock,  no par value. Authorized 1,000,000 shares; none issued                                                                                                                                        |       | —                |       | —                    |       |
| Common stock,  $0.50 par value. Authorized 10,000,000 shares at June 30, 2006 and 5,000,000  at December 31, 2005; Issued and outstanding 3,240,674 at June 30, 2006  and 3,238,674 December 31, 2005 |       | 1,620                 |       | 1,619                     |       |
| Additional  paid-in capital                                                                                                                                                                                     |       | 21,506                |       | 21,401                    |       |
| Retained  earnings                                                                                                                                                                                              |       | 5,622                 |       | 3,781                     |       |
| Accumulated  other comprehensive loss                                                                                                                                                                           |       | (921                  | )          | (371                      | )          |
| Total  shareholders’ equity                                                                                                                                                                                |       | 27,827                |       | 26,430                    |       |
|                                                                                                                                                                                                            |       |                  |       |                      |       |
| Total liabilities and  shareholders’ equity                                                                                                                                                                |       | $                     | 504,268    |                      | $          | 404,040 |   |

 

Note : The balance sheet presented above atDecember 31, 2005 has been derived from the audited consolidated financialstatements at that date but does not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements.

See accompanying notes to consolidated financialstatements.

3

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

(dollarsin thousands except share data)
| ** **                                           | ** ** | **Six Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                          | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Interest income                                      |       |                                              |       |                                                |       |   |   |   |   |
| Loans, including  fees                               |       | $                                                 | 16,659     |                                                | $          | 9,752 |   | $ | 8,812 |   | $ | 5,290 |   |
| Securities                                           |       | 943                                               |       | 406                                                 |       | 488 |   | 211 |   |
| Federal funds  sold                                  |       | 156                                               |       | 63                                                  |       | 54 |   | 47 |   |
| Total interest  income                               |       | 17,758                                            |       | 10,221                                              |       | 9,354 |   | 5,548 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Interest expense                                     |       |                                              |       |                                                |       |   |   |   |   |
| Deposits                                             |       | 8,723                                             |       | 3,681                                               |       | 4,721 |   | 2,064 |   |
| Other                                                |       | 337                                               |       | 150                                                 |       | 190 |   | 142 |   |
| Total interest  expense                              |       | 9,060                                             |       | 3,831                                               |       | 4,911 |   | 2,206 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Net interest income                                  |       | 8,698                                             |       | 6,390                                               |       | 4,443 |   | 3,342 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Provision for loan  losses                           |       | 2,000                                             |       | 1,800                                               |       | 1,000 |   | 1,150 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Net interest income  after provision for loan losses |       | 6,698                                             |       | 4,590                                               |       | 3,443 |   | 2,192 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Non interest income                                  |       |                                              |       |                                                |       |   |   |   |   |
| Service charges  on deposit accounts                 |       | 80                                                |       | 54                                                  |       | 31 |   | 28 |   |
| Mortgage banking                                     |       | 36                                                |       | 39                                                  |       | 14 |   | 20 |   |
| Securities gains                                     |       | —                                            |       | 4                                                   |       | — |   | 7 |   |
| Gain on sale of  loans                               |       | 612                                               |       | 440                                                 |       | 358 |   | 295 |   |
| Other                                                |       | (194                                              | )          | 38                                                  |       | (114 | ) | 16 |   |
| Total non  interest income                           |       | 534                                               |       | 575                                                 |       | 289 |   | 366 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Non interest expense                                 |       |                                              |       |                                                |       |   |   |   |   |
| Salaries and  employee benefits                      |       | 2,505                                             |       | 1,788                                               |       | 1,305 |   | 885 |   |
| Occupancy and  equipment                             |       | 390                                               |       | 288                                                 |       | 190 |   | 162 |   |
| Data processing  fees                                |       | 330                                               |       | 226                                                 |       | 173 |   | 113 |   |
| Professional  fees                                   |       | 381                                               |       | 162                                                 |       | 190 |   | 75 |   |
| Other                                                |       | 628                                               |       | 524                                                 |       | 358 |   | 227 |   |
| Total non  interest expense                          |       | 4,234                                             |       | 2,988                                               |       | 2,216 |   | 1,462 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Income before income  taxes                          |       | 2,998                                             |       | 2,177                                               |       | 1,516 |   | 1,096 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Income tax expense                                   |       | 1,157                                             |       | 894                                                 |       | 584 |   | 475 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Net income                                           |       | $                                                 | 1,841      |                                                | $          | 1,283 |   | $ | 932 |   | $ | 621 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Earnings per share  (EPS):                           |       |                                              |       |                                                |       |   |   |   |   |
| Basic EPS                                            |       | $                                                 | 0.57       |                                                | $          | 0.40 |   | $ | 0.29 |   | $ | 0.19 |   |
| Diluted EPS                                          |       | 0.52                                              |       | 0.37                                                |       | 0.27 |   | 0.18 |   |
|                                                 |       |                                              |       |                                                |       |   |   |   |   |
| Weighted average shares  outstanding:                |       |                                              |       |                                                |       |   |   |   |   |
| Basic                                                |       | 3,240,619                                         |       | 3,238,674                                           |       | 3,240,674 |   | 3,238,674 |   |
| Diluted                                              |       | 3,549,680                                         |       | 3,479,977                                           |       | 3,533,632 |   | 3,479,977 |   |

 

Seeaccompanying notes to consolidated financial statements.

4

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TENNESSEE COMMERCEBANCORP, INC.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYSIX MONTHS ENDED JUNE 30, 2006 and 2005(UNAUDITED)

(dollarsin thousands except share data)
| ** **                                                                      | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**        | ** ** | ** **             | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | ** ** | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Other**              | ** ** | **Total**              | ** ** |
| ** **                                                                      | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **Earnings**  | ** ** | **Comprehensive**      | ** ** | **Shareholders’** | ** ** |
| ** **                                                                      | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **Income (Loss)** | ** ** | **Equity**             | ** ** |
|                                                                            |       |       |       |           |       |          |       |                   |       |                   |       |
| Balance at  December 31, 2004                                              |       | $          | 1,619      |           | $          | 21,401        |       | $                      | 714        |                   | $          | (134 | ) | $ | 23,600 |   |
| Comprehensive  income                                                           |       |       |       |           |       |          |       |                   |       |                   |       |
| Net income                                                                      |       | —     |       | —         |       | 1,283         |       | —                 |       | 1,283                  |       |
| Other comprehensive income, net of income taxes                                 |       |       |       |           |       |          |       |                   |       |                   |       |
| Unrealized gains on securities available for sale  during the period            |       | —     |       | —         |       | —        |       | 57                     |       | 57                     |       |
| Reclassification adjustment for gains included in  net income, net of $1 in tax |       | —     |       | —         |       | —        |       | 3                      |       | 3                      |       |
|                                                                            |       |       |       |           |       |          |       |                   |       |                   |       |
| Total  comprehensive income                                                     |       | —     |       | —         |       | —        |       | —                 |       | 1,343                  |       |
|                                                                            |       |       |       |           |       |          |       |                   |       |                   |       |
| Balance at  June 30, 2005                                                  |       | $          | 1,619      |           | $          | 21,401        |       | $                      | 1,997      |                   | $          | (74 | ) | $ | 24,943 |   |
|                                                                            |       |       |       |           |       |          |       |                   |       |                   |       |
| Balance at  December 31, 2005                                              |       | $          | 1,619      |           | $          | 21,401        |       | $                      | 3,781      |                   | $          | (371 | ) | $ | 26,430 |   |
| Comprehensive  income                                                           |       |       |       |           |       |          |       |                   |       |                   |       |
| Net income                                                                      |       | —     |       | —         |       | 1,841         |       | —                 |       | 1,841                  |       |
| Other comprehensive income, net of income taxes                                 |       |       |       |           |       |          |       |                   |       |                   |       |
| Unrealized gains on securities available for sale  during the period            |       | —     |       | —         |       | —        |       | (550                   | )          | (550                   | )          |
|                                                                            |       |       |       |           |       |          |       |                   |       |                   |       |
| Total  comprehensive income                                                     |       | —     |       | —         |       | —        |       | —                 |       | 1,291                  |       |
|                                                                            |       |       |       |           |       |          |       |                   |       |                   |       |
| Exercise of  stock options to purchase 2,000 common shares                      |       | 1          |       | 24             |       | —        |       | —                 |       | 25                     |       |
| Stock based  compensation expense                                               |       |       |       | 81             |       |          |       |                   |       | 81                     |       |
|                                                                            |       |       |       |           |       |          |       |                   |       |                   |       |
| Balance at  June 30, 2006                                                  |       | $          | 1,620      |           | $          | 21,506        |       | $                      | 5,622      |                   | $          | (921 | ) | $ | 27,827 |   |

 

Seeaccompanying notes to consolidated financial statements.

5

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

(dollarsin thousands except share data)
| ** **                                                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
|                                                                              |       |                                          |       |   |   |
| **Cash flows from operating  activities**                                         |       |                                          |       |   |   |
| Net income                                                                        |       | $                                             | 1,841      |   | $ | 1,283 |   |
| Adjustments to  reconcile net income to net cash used by operating activities     |       |                                          |       |   |   |
| Depreciation                                                                      |       | 103                                           |       | 80 |   |
| Deferred loan  fees                                                               |       | 20                                            |       | (2 | ) |
| Provision for  loan losses                                                        |       | 2,000                                         |       | 1,800 |   |
| FHLB stock  dividends                                                             |       | (6                                            | )          | (7 | ) |
| Stock-based  compensation expense                                                 |       | 81                                            |       | — |   |
| Deferred Income  Tax                                                              |       | (283                                          | )          | — |   |
| Net amortization  of investment securities                                        |       | 14                                            |       | 22 |   |
| Gain on sales of  securities                                                      |       | —                                        |       | (4 | ) |
| Change in:                                                                        |       |                                          |       |   |   |
| Accrued interest  payable                                                         |       | (719                                          | )          | (435 | ) |
| Accrued interest  receivable                                                      |       | 127                                           |       | 264 |   |
| Other assets and  liabilities                                                     |       | (1,582                                        | )          | (951 | ) |
| Net cash from  operating activities                                               |       | 1,596                                         |       | 2,050 |   |
|                                                                              |       |                                          |       |   |   |
| **Cash flows from investing activities**                                          |       |                                          |       |   |   |
| Purchases of  securities available for sale                                       |       | (11,019                                       | )          | (5,470 | ) |
| Proceeds from  sales of securities available for sale                             |       | —                                        |       | 1,489 |   |
| Proceeds from  maturities, prepayments and calls of securities available for sale |       | 745                                           |       | 914 |   |
| Investment in  unconsolidated subsidiary                                          |       | —                                        |       | (248 | ) |
| Net change in  loans                                                              |       | (86,331                                       | )          | (64,624 | ) |
| Purchases of  Federal Home Loan Bank Stock                                        |       | (217                                          | )          | (125 | ) |
| Net purchases of  premises and equipment                                          |       | (184                                          | )          | (279 | ) |
| Net cash from  investing activities                                               |       | (97,006                                       | )          | (68,343 | ) |
|                                                                              |       |                                          |       |   |   |
| **Cash flows from financing  activities**                                         |       |                                          |       |   |   |
| Net change in  deposits                                                           |       | 94,004                                        |       | 57,787 |   |
| Proceeds from  short-term debt                                                    |       | 5,000                                         |       | — |   |
| Proceeds from  long-term subordinated debt                                        |       | —                                        |       | 8,248 |   |
| Proceeds from  exercise of common stock options                                   |       | 25                                            |       | — |   |
| Net cash from  financing activities                                               |       | 99,029                                        |       | 66,035 |   |
|                                                                              |       |                                          |       |   |   |
| **Net change in cash and cash  equivalents**                                      |       | 3,619                                         |       | (258 | ) |
|                                                                              |       |                                          |       |   |   |
| Cash and cash  equivalents at beginning of period                                 |       | 19,412                                        |       | 10,420 |   |
|                                                                              |       |                                          |       |   |   |
| **Cash and cash equivalents at  end of period**                                   |       | $                                             | 23,031     |   | $ | 10,162 |   |
|                                                                              |       |                                          |       |   |   |
| **Supplemental cash flow  information:**                                          |       |                                          |       |   |   |
| Cash paid during  period for interest                                             |       | $                                             | 8,933      |   | $ | 3,567 |   |
| Cash paid during period  for income taxes                                         |       | 1,346                                         |       | 1,289 |   |

 

Seeaccompanying notes to consolidated financial statements.

6

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TENNESSEECOMMERCE BANCORP, INC.

Notes to Consolidated Financial Statements (unaudited)

Note 1 –Basis of Presentation

Tennessee Commerce Bancorp, Inc. (the “Corporation”)is a holding company for Tennessee Commerce Bank (the “Bank”).  In March,2005, the Corporation formed a wholly owned subsidiary, Tennessee Commerce BankStatutory Trust I, (the “Trust I”). The Bank and the Trust I are the onlysubsidiaries of the Corporation. The accompanying consolidated financialstatements include the accounts of the Corporation, and the Bank. The Trust Iis not consolidated in accordance with FASB Interpretation No. 46 (revisedDecember 2003) Consolidation of Variable Interest Entities (FIN46R).Material intercompany accounts and transactions have been eliminated.

The unaudited consolidated financial statements as ofJune 30, 2006 and for the six and three month periods ended June 30, 2006 and2005 have been prepared in accordance with accounting principles generallyaccepted in the United States of America and in accordance with theinstructions to Form 10-Q and Article 10 of Regulation S-X aspromulgated by the Securities and Exchange Commission (“SEC”), and in theopinion of management, include all adjustments, consisting of normal recurringadjustments, to present fairly the information. They do not include all theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. Operating results for the six month periodended June 30, 2006 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2006. For further information,refer to the 2005 consolidated financial statements and footnotes theretoincluded in our Form 10K.

Note 2 – Earnings per Share of Common Stock

The factors used in the earnings per share computationfollow.

(dollarsin thousands except share data)
| ** **                                                                      | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                      | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Basic                                                                           |       |                                          |       |                                            |       |   |   |   |   |
| Net income                                                                      |       | $                                             | 1,841      |                                            | $          | 1,283 |   | $ | 932 |   | $ | 621 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Weighted average  common shares outstanding                                     |       | 3,240,619                                     |       | 3,238,674                                       |       | 3,240,674 |   | 3,238,674 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Basic earnings  per common share                                                |       | $                                             | 0.57       |                                            | $          | 0.40 |   | $ | 0.29 |   | $ | 0.19 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Diluted                                                                         |       |                                          |       |                                            |       |   |   |   |   |
| Net income                                                                      |       | $                                             | 1,841      |                                            | $          | 1,283 |   | $ | 932 |   | $ | 621 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Weighted average  common shares outstanding for basic earnings per common share |       | 3,240,619                                     |       | 3,238,674                                       |       | 3,240,674 |   | 3,238,674 |   |
| Add: Dilutive  effects of assumed exercises of stock options                    |       | 309,121                                       |       | 241,303                                         |       | 292,958 |   | 241,303 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Average shares  and dilutive potential common shares                            |       | 3,549,680                                     |       | 3,479,977                                       |       | 3,533,632 |   | 3,479,977 |   |
|                                                                            |       |                                          |       |                                            |       |   |   |   |   |
| Diluted earnings per common share                                               |       | $                                             | 0.52       |                                            | $          | 0.37 |   | $ | 0.27 |   | $ | 0.18 |   |

 

Nooptions were antidilutive.

7

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Note 3 –Stock Compensation

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

We adopted SFAS No. 123(R) using themodified prospective method which requires the application of the accountingstandard as of January 1, 2006. The accompanying consolidated financialstatements as of and for the periods ending June 30, 2006 reflect the impact ofadopting SFAS No. 123(R). In accordance with the modified prospectivemethod, the consolidated financial statements for prior periods have not beenrestated to reflect, and do not include, the impact of SFAS No. 123(R).

Stock-based compensation expense recognized during theperiod is based on the value of the portion of stock-based payment awards thatis ultimately expected to vest. Stock-based compensation expense recognized inthe accompanying consolidated statements of income for the periods ending June30, 2006 included compensation expense for stock-based payment awards grantedprior to, but not yet vested, as of June 30, 2006 based on the grant date fairvalue estimated in accordance with SFAS No. 123(R). As stock-basedcompensation expense recognized in the accompanying statement of income for theperiod ending June 30, 2006 is based on awards ultimately expected to vest, ithas 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.

Stock-based expense recognized for the six monthsended June 30, 2006 was $81. The options vesting in that period were granted in2003 and 2005. The 30,000 options granted in 2003, vested in February andhad an estimated fair value of $1.65 per share. The options granted in 2005were granted in July, August and November and had an estimated fair valueof $3.96, $4.07 and $4.26 respectively.

Theimpact on our results of operations (compensation and employee benefitsexpense) and earnings per share of recording stock-based compensation inaccordance with SFAS No. 123(R) (related to stock option awards) for thesix-month period ended June 30, 2006 was as follows:
| Stock-based compensation  expense                                             |   | $       | 81,005 |   |
|-------------------------------------------------------------------------------|--------|---------|--------|--------|
| Deferred income  tax benefit                                                  |   | (31,400 | )      |
| Impact of  stock-based compensation expense after deferred income tax benefit |   | $       | 49,605 |   |
| Impact on  earnings per share:                                                |   |    |   |
| Basic -  3,240,619 weighted average shares outstanding                        |   | $       | 0.015  |   |
| Fully diluted –  3,649,680 weighted average shares outstanding           |   | $       | 0.014  |   |

 

8

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A summary of the activity in the stock option plan isas follows :
| ** **                                         | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**       | ** ** | ** **         | ** ** |
|----------------------------------------------------|------------|------------|------------|---------------|------------|---------------------|------------|--------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** **    | ** ** | **Average**         | ** ** | ** **         | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Contractual**     | ** ** | **Aggregate**      | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**       | ** ** | **Intrinsic**      | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Term**            | ** ** | **Value (1)** | ** ** |
| ** **                                         | ** ** | **Number** | ** ** | **Price**     | ** ** | **(in years)** | ** ** | **(000’s)**   | ** ** |
| Outstanding at December  31, 2005                  |       | 937,842    |       | $             | 8.85       |                |       |               |       |   |
| Granted                                            |       | —     |       | —        |       |                |       |               |       |
| Exercised                                          |       | (2,000     | )          | 5.00          |       |                |       |               |       |
| Forfeited or expired                               |       | (3,750     | )          | 16.00         |       |                |       |               |       |
| Outstanding at June 30,  2006                      |       | 932,092    |       | $             | 8.83       |                | 6.2        |               | $          | 8,545 |   |
| Outstanding and  expected to vest at June 30, 2006 |       | 932,092    |       | $             | 8.83       |                | 6.2        |               | $          | 8,545 |   |
| Options exercisable at June 30, 2006               |       | 893,842    |       | $             | 8.53       |                | 6.0        |               | $          | 8,469 |   |

 

----

(1)            The aggregateintrinsic value is calculated as the difference between the exercise price ofthe underlying options and the quoted price of our stock of $18.00 per commonshare for the 932,092 options that were in-the-money at June 30, 2006.

The estimated fair values are computed using theBlack-Scholes option valuation model, using the following weighted-averageassumptions as of grant date shown below. No options were granted during thesix months ending June 30, 2006 or June 30, 2005.
|                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |     |       |
| Risk-free  interest rate |       | 3.96     | %          | 3.23     | %          | 3.82     | %          |
| Expected option  life    |       | 5 years  |       | 7 years  |       | 7 years  |       |
| Dividend yield           |       | 0.0      | %          | 0.0      | %          | 0.0      | %          |

 

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

Note 4 –Trust Preferred Securities

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

Note 5 –Stock issuance

On July 3, 2006 and on July 28, 2006, we issued1,000,000 and 150,000 shares respectively of our common stock. The followingadjusted balance sheet at June 30, 2006 and adjusted income statementinformation is presented on an actual basis and on an as adjusted basis toreflect the sale and issuance of this common stock.  The as adjusted column on the balance sheetpresents the balance sheet as if the 1,150,000 shares were issued on June 30, 2006.

9

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TENNESSEE COMMERCE BANCORP, INC.CONSOLIDATED BALANCE SHEETSJUNE 30, 2006 (UNAUDITED)and JUNE 30, 2006 As Adjusted

(dollarsin thousands except share data)
| ** **                                                                                                                                       | ** ** | **Actual**                  | ** ** | ** **  | ** ** | **As Adjusted**        | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------|------------|-----------------------------|------------|
| ** **                                                                                                                                       | ** ** | **June 30, 2006** | ** ** | **Changes** | ** ** | **June 30, 2006** | ** ** |
| **ASSETS**                                                                                                                                       |       |                        |       |        |       |                        |       |
| Cash and due from  financial institutions                                                                                                        |       | $                           | 7,027      |        | 19,116     |                        | $          | 26,143 |   |
| Federal funds sold                                                                                                                               |       | 16,004                      |       |        |       | 16,004                      |       |
| Cash and cash  equivalents                                                                                                                       |       | 23,031                      |       | 19,116      |       | 42,147                      |       |
| Securities available  for sale                                                                                                                   |       | 41,366                      |       |        |       | 41,366                      |       |
| Loans                                                                                                                                            |       | 434,006                     |       |        |       | 434,006                     |       |
| Allowance for loan  losses                                                                                                                       |       | (5,508                      | )          |        |       | (5,508                      | )          |
| Net loans                                                                                                                                        |       | 428,498                     |       |        |       | 428,498                     |       |
|                                                                                                                                             |       |                        |       |        |       |                        |       |
| Premises and equipment,  net                                                                                                                     |       | 850                         |       |        |       | 850                         |       |
| Accrued interest  receivable                                                                                                                     |       | 2,867                       |       |        |       | 2,867                       |       |
| Restricted equity  securities                                                                                                                    |       | 606                         |       |        |       | 606                         |       |
| Deferred tax asset                                                                                                                               |       | 1,109                       |       |        |       | 1,109                       |       |
| Other assets                                                                                                                                     |       | 5,941                       |       |        |       | 5,941                       |       |
|                                                                                                                                             |       |                        |       |        |       |                        |       |
| Total assets                                                                                                                                     |       | $                           | 504,268    |        | 19,116     |                        | $          | 523,384 |   |
|                                                                                                                                             |       |                        |       |        |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                   |       |                        |       |        |       |                        |       |
| Liabilities                                                                                                                                      |       |                        |       |        |       |                        |       |
| Deposits                                                                                                                                         |       |                        |       |        |       |                        |       |
| Noninterest-bearing                                                                                                                              |       | $                           | 21,239     |        |       |                        | $          | 21,239 |   |
| Interest-bearing                                                                                                                                 |       | 440,470                     |       |        |       | 440,470                     |       |
| Total deposits                                                                                                                                   |       | 461,709                     |       |        |       | 461,709                     |       |
|                                                                                                                                             |       |                        |       |        |       |                        |       |
| Accrued interest  payable                                                                                                                        |       | 1,253                       |       |        |       | 1,253                       |       |
| Accrued bonuses                                                                                                                                  |       | 250                         |       |        |       | 250                         |       |
| Short-term debt                                                                                                                                  |       | 5,000                       |       |        |       | 5,000                       |       |
| Long-term  subordinated debt                                                                                                                     |       | 8,248                       |       |        |       | 8,248                       |       |
| Other  liabilities                                                                                                                               |       | (19                         | )          |        |       | (19                         | )          |
| Total  liabilities                                                                                                                               |       | 476,441                     |       |        |       | 476,441                     |       |
| Shareholders’ equity                                                                                                                        |       |                        |       |        |       |                        |       |
| Preferred stock,  no par value. Authorized 1,000,000 shares; none issued                                                                         |       | —                      |       |        |       | —                      |       |
| Common stock,  $0.50 par value. Authorized 10,000,000 shares at June 30, 2006 Issued and  outstanding 3,240,674 Actual and 4,390,674 As Adjusted |       | 1,620                       |       | 575         |       | 2,195                       |       |
| Additional  paid-in capital                                                                                                                      |       | 21,506                      |       | 18,541      |       | 40,047                      |       |
| Retained  earnings                                                                                                                               |       | 5,622                       |       |        |       | 5,622                       |       |
| Accumulated  other comprehensive income (loss)                                                                                                   |       | (921                        | )          |        |       | (921                        | )          |
| Total  shareholders’ equity                                                                                                                 |       | 27,827                      |       | 19,116      |       | 46,943                      |       |
|                                                                                                                                             |       |                        |       |        |       |                        |       |
| Total  liabilities and shareholders’ equity                                                                                                 |       | $                           | 504,268    |        | 19,116     |                        | $          | 523,384 |   |
|                                                                                                                                             |       |                        |       |        |       |                        |       |
| Shares Outstanding                                                                                                                               |       | 3,240,674                   |       | 1,150,000   |       | 4,390,674                   |       |
| Book value per share                                                                                                                             |       | $                           | 8.59       |        |       |                        | $          | 10.69 |   |

 

10

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TENNESSEE COMMERCEBANCORP, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOMESIX MONTHS ENDED JUNE 30, 2006

(dollarsin thousands except share data)
| ** **                            | ** ** | **Actual**                  | ** ** | ** **  | ** ** | **As Adjusted (1)** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **June 30, 2006** | ** ** | **Changes** | ** ** | **June 30, 2006**   | ** ** |
| Net income                            |       | 1,841                       |       |        |       | 1,841                         |       |
|                                  |       |                        |       |        |       |                          |       |
| Earnings per share  (EPS):            |       |                        |       |        |       |                          |       |
| Basic EPS                             |       | 0.57                        |       |        |       | 0.42                          |       |
| Diluted EPS                           |       | 0.52                        |       |        |       | 0.39                          |       |
|                                  |       |                        |       |        |       |                          |       |
| Weighted average shares  outstanding: |       |                        |       |        |       |                          |       |
| Basic                                 |       | 3,240,619                   |       | 1,150,000   |       | 4,390,619                     |       |
| Diluted                               |       | 3,549,680                   |       | 1,150,000   |       | 4,699,680                     |       |

 

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(1) Earnings per share and weighted average sharesoutstanding are computed as if the 1,150,000 shares were issued and outstandingon January 1, 2006.

 

11

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

**Forward-Looking Statements**

Management’s discussion about us and management’sanalysis of our operations and prospects, and other matters, may includeforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995 and other provisions of federal and statesecurities laws.  Although we believe that the assumptions underlying suchforward-looking statements contained in this report are reasonable, any of theassumptions could be inaccurate and, accordingly, there can be no assurancethat the forward-looking statements included herein will prove to beaccurate.  The use of such words as expect, anticipate, forecast, and comparableterms should be understood by the reader to indicate that the statement is “forward-looking”and thus subject to change in a manner that can be unpredictable.  Factorsthat could cause actual results to differ materially from the resultsanticipated, but not guaranteed, in this report, include (without limitation)economic and social conditions, competition for loans, mortgages, and otherfinancial services and products, changes in interest rates, unforeseen changesin liquidity, results of operations, and financial conditions affecting ourcustomers, as well as other risks that cannot be accurately quantified orcompletely identified.  Many factors affecting our financial condition andprofitability, including changes in economic conditions, the volatility ofinterest rates, political events and competition from other providers offinancial services simply cannot be predicted.  Because these factors areunpredictable and beyond our control, earnings may fluctuate from period toperiod.  The purpose of this type of information is to provide readerswith information relevant to understanding and assessing our financialcondition and results of operations, and not to predict the future or toguarantee results.  We are unable to predict the types of circumstances,conditions, and factors that can cause anticipated results to change.  Weundertake no obligation to publish revised forward-looking statements toreflect the occurrence of changes or unanticipated events, circumstances, orresults.

**Corporation Overview**

Tennessee CommerceBancorp, Inc., headquartered in Franklin, Tennessee, is the holdingcompany for Tennessee Commerce Bank.  Organized in January 2000,Tennessee Commerce Bank has a focused strategy that serves the banking needs ofsmall to medium-sized businesses, entrepreneurs and professionals in theNashville metropolitan statistical area, or the Nashville MSA, as well as thefunding needs of certain national and regional equipment vendors and financialservices companies.  We call this strategy our “business bank” strategy.We primarily conduct business from a single location in the Cool Springscommercial area of Franklin, Tennessee, fifteen miles south of Nashville. Franklin is in Williamson County, one of the most rapidly growing counties inthe nation. According to the U.S. Census Bureau, Williamson County ranked 59th out of the top 100 fastest growing counties inthe nation from July 2004 to July 2005. We also operate a loanproduction office in Birmingham, Alabama, which we opened in February 2006and which is staffed with one senior lending officer.

We offer a fullrange of competitive retail and commercial banking services to local customersin the Nashville MSA.  Our deposit services include a broad offering ofchecking accounts, savings accounts, money market investment accounts,certificates of deposits, and retirement accounts.  Lending servicesinclude consumer installment loans, various types of mortgage loans, personallines of credit, home equity loans, credit cards, real estate constructionloans, commercial loans to small and medium-sized businesses and professionals,and letters of credit. We issue VISA credit cards and are a merchant depositoryfor cardholder drafts under VISA credit cards.  We also offer check cardsand debit cards.  We offer our local customers free courier services,access to third-party automated teller machines, or ATMs, and state of the artelectronic banking. We have trust powers but do not have a trust department.

**Our Business Strategy**

We execute ourbusiness bank strategy by combining the personal service and appeal of acommunity banking institution with the sophistication of a larger bank. We believe this strategy distinguishes us from our competitors in efforts toattract loans and deposits of local small to medium-sized businesses andnational and regional equipment vendors and financial services companies. The November 2005 issue of the Nashville Business Journal ranked usas the second largest Nashville area small business lender (ranked by dollaramount of small business loans) for the second year in a row.  Further,the rapid growth within the Nashville MSA along with several bank mergers andacquisitions has left many business owners without significant bankingrelationships. We seek to take advantage of this opportunity.

12

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We do not competebased on the traditional definition of “convenience” and currently have noplans to develop a comprehensive branch bank network.  For us, convenienceis created by technology and by a free courier service for local customerswhich transports deposits directly from the business location to thebank.  We conduct business primarily from a single banking office with noteller line, drive-through window or extended banking hours.  We competeby providing responsive and personalized service to meet customer needs. We provide free electronic banking and cash management tools and on-sitetraining for business customers.  We compete for consumer business byproviding superior products, attractive deposit rates, free internet bankingservices, and access to a third party regional ATM network. We primarily targetservice, manufacturing, and professional customers and avoid retail businesseswith high transaction volume.

The business bankstrategy is highlighted by differences between the financial statements of ourbank and more traditional financial institutions. The business bank modelcreates a high degree of leverage.  By avoiding the investment andmaintenance costs of a typical branch network, we are able to maintain earningassets at a higher level than peer institutions.  Management targets aminimum earning asset ratio of 97% compared to the average of 85% to 90% forall FDIC-insured banks and at June 30, 2006 we had an earnings asset ratio of96.35%.

The business bankmodel is also highly efficient.  We target the non-retail sector of thecommercial market, which is characterized by lower levels of transactions andprocessing costs.  The commercial customer mix and the strategicoutsourcing of non-customer functions, such as data processing, informationtechnology and internal audit, allow us to operate with a smaller, morehighly-trained staff.  Management targets an average assets per employeeratio of $7.5 million, compared to the average ratio of approximately $2.9 millionassets per employee for Tennessee state chartered banks at the end of the thirdquarter 2005. At June 30, 2006, assets per employee were $10.5 million.

In addition to ourWilliamson County and Nashville MSA focus, we have also developed an expertisein indirect lending to companies across the country.  The transactions arefixed rate monthly installment loans originated through a third party equipmentvendor or financial services company. Our indirect lending programs are dividedinto two programs based on loan size. In the first program, through anestablished network of vendors and financial service companies, we haveopportunities to finance business asset secured loan transactions for nationalmiddle-market and investment grade companies. In the second program, adifferent network of vendors and financial service companies located inTennessee, Alabama, Georgia, California and Michigan partner with us in anindirect funding program for smaller transactions (generally $125,000 or lessper transaction). Both indirect funding programs provide geographic andcollateral diversity for the portfolio.

**Our Market Area**

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

Williamson Countyand the Nashville MSA possess a diverse and growing economy.  Majoremployment is supported by sectors including government, education, financialservices, healthcare, manufacturing, distribution and entertainment.  TheNashville MSA is home to 19 colleges and universities educating over 94,000students.  As a result, employers are provided with a relatively well-educatedworkforce capable of serving a wide variety of industries.  Centrallylocated within the eastern half of the United States and directly connected tothree major interstate highways, the Nashville area is also an idealdistribution center for many companies.

13

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**Overviewof Operating Results for the Three  andSix Months ended June 30, 2006 and June 30, 2005 and Financial Condition atJune 30, 2006 and December 31, 2005.**

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

The results of operations for the quarter ended June30, 2006, compared to the quarter ended June 30, 2005 reflected a 50.08%increase in net income and a 50.00% increase in diluted earnings per share. Theincrease in earnings resulted primarily from a 32.94% increase in net interestincome due to higher average loan balances. The increased net interest incomewas partially offset by increases in non-interest expense. For the six monthsended June 30, 2006, net income was $1,841, an increase of $558 or 43.49%compared to net income of $1,283 for the same period in 2005. Diluted earningsper share increased $0.15 per share or 40.54% for the six months ended June 30,2006 compared to the same period in 2005. The six months ended June 30, 2006,reflected a continuation of the Bank’s trend of rapid asset growth increasingby $100,228 or 24.81% from $404,040 at December 31, 2005 to $504,268 atJune 30, 2006. Net loans increased by 24.50% or $84,311 from December 31,2005 to June 30, 2006, while total deposits increased by 25.57% or $94,004during that same period.

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

**Net Income** -Net income for the quarter ended June 30, 2006 was $932 an increase of $311 or50.08%, compared to the net income of $621 for the quarter ended June 30,2005.  The increase is attributable to a 32.94% increase in net interestincome from $3,342 for the quarter ended June 30, 2005 to $4,443 for the sameperiod in 2006. The increase of $1,101 in net interest income was the result ofour overall growth, including a 55.17% increase in net loan balances at June30, 2006 compared to the same date in 2005. This increase in net interestincome was partially offset by increased non-interest expense. Non-interestexpense increased by 51.57% to $2,216 for the three month period ended June 30,2006 compared to $1,462 for the same period in 2005. The increase innon-interest expense was due to an increase in personnel and general operatingexpenses due to our growth.

(dollars in thousands)
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **2006**                                        | ** ** | **2005**   | ** ** | **% Change** | ** ** |
|                                         |       |                                            |       |       |       |   |   |
| Interest income                              |       | $                                               | 9,354      |       | $          | 5,548 |   | 68.60 | % |
| Interest expense                             |       | 4,911                                           |       | 2,206      |       | 122.62 |   |
| Net interest income                          |       | 4,443                                           |       | 3,342      |       | 32.94 |   |
| Provision for  loan losses                   |       | 1,000                                           |       | 1,150      |       | (13.04 | ) |
| Net interest after provision for loan losses |       | 3,443                                           |       | 2,192      |       | 57.07 |   |
| Non-interest  income                         |       | 289                                             |       | 366        |       | (21.04 | ) |
| Non-interest  expense                        |       | 2,216                                           |       | 1,462      |       | 51.57 |   |
| Net income before taxes                      |       | 1,516                                           |       | 1,096      |       | 38.32 |   |
| Income tax  expense                          |       | 584                                             |       | 475        |       | 22.95 |   |
| Net income                                   |       | $                                               | 932        |       | $          | 621 |   | 50.08 | % |

** **

14

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**Net Interest Income**- Net interest income for the quarter ended June 30, 2006 was $4,443 comparedto $3,342 for the same period in 2005, a gain of $1,101 or 32.94%.  Theincrease of $1,101 in net interest income was the result of our overall growth,including a 55.17% increase in net loan balances at June 30, 2006 compared tothe same date in 2005.

**Provision for Loan Losses**- The provision for loan losses for the three months ended June 30, 2006was $1,000, a decrease of $150, or 13.04%, below the provision of $1,150expensed in the same period in 2005.  This decrease was primarily due to adecrease in the net charge offs as a percentage of average loans outstandingand a decrease in non-accrual loans. The provision is discussed as it relatesto the allowance for loan losses in the following Comparison of FinancialCondition section. At June 30, 2006, the loan loss reserve of $5,508 was1.27% of gross loans of $434,006.

**Non-interest Income**– Non-interest income decreased by 21.04% or $77, from $366 in the quarterended June 30, 2005 to $289 for the same period in 2006. The decrease wasprimarily due to losses of $127 recorded on the disposition of repossessedassets in the quarter ended June 30, 2006.

**Non-interest Expense**– Non-interest expense for the three months ended June 30, 2006 was$2,216, an increase of $754 or 51.57%, over the $1,462 expensed in the sameperiod in 2005.  Approximately 50.66% of the increase was due to theaddition of ten new employees during the period between the two quarter enddates. At June 30, 2006, the Corporation had 48 full time employees.

**Comparison of Operating Results forthe Six Months ended June 30, 2006 and June 30, 2005**

**Net Income** -Net income for the six months ended June 30, 2006 was $1,841 an increase of $558or 43.49%, compared to the net income of $1,283 for the six months ended June30, 2005.  The increase is attributable to a 36.12% increase in netinterest income from $6,390 for the two quarters ended June 30, 2005 to $8,698for the same period in 2006. The increase of $2,308 in net interest income wasthe result of our overall growth, including a 55.50% increase in average netloan balances at June 30, 2006 compared to the same date in 2005. This positiveeffect was partially offset by an 11.11% increase in the provision for loanlosses, from $1,800 during the two quarters ended June 30, 2005 to $2,000 forthe same period in 2006. Also, non-interest expense increased by 41.70% to$4,234 for the six month period ended June 30, 2006 compared to $2,988 for thesame period in 2005. The increase in the provision for loan losses wasprimarily the result of funding the allowance for loan losses to match thesignificant loan growth. The increase in non-interest expense was due to theincrease in personnel and general operating expenses due to our growth.

(dollars inthousands)
| ** **                                   | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **2006**                                      | ** ** | **2005**   | ** ** | **% Increase** | ** ** |
|                                         |       |                                          |       |       |       |   |   |
| Interest income                              |       | $                                             | 17,758     |       | $          | 10,221 |   | 73.74 | % |
| Interest expense                             |       | 9,060                                         |       | 3,831      |       | 136.49 |   |
| Net interest income                          |       | 8,698                                         |       | 6,390      |       | 36.12 |   |
| Provision for  loan losses                   |       | 2,000                                         |       | 1,800      |       | 11.11 |   |
| Net interest after provision for loan losses |       | 6,698                                         |       | 4,590      |       | 45.93 |   |
| Non-interest  income                         |       | 534                                           |       | 575        |       | (7.13 | ) |
| Non-interest  expense                        |       | 4,234                                         |       | 2,988      |       | 41.70 |   |
| Net income before taxes                      |       | 2,998                                         |       | 2,177      |       | 37.71 |   |
| Income tax  expense                          |       | 1,157                                         |       | 894        |       | 29.42 |   |
| Net income                                   |       | $                                             | 1,841      |       | $          | 1,283 |   | 43.49 | % |

 

**Net Interest Income**- Net interest income for the two quarters ended June 30, 2006 was $8,698compared to $6,390 for the same period in 2005, an increase of $2,308 or36.12%.  The increase in net interest income was largely attributable tostrong loan growth.  The average net loan balance for the six months endedJune 30 increased by 55.50% or $136,215 from $245,453 for that period in 2005to $381,668 for the same period in 2006. Loan growth was matched by an increasein average interest earning deposits from $233,369 for the six months endedJune 30, 2005 to $383,217 for the same period in 2006 – an increase of $149,848or 64.21%.

15

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**Net Interest Margin**- The net interest margin decreased from 4.75% for the two quarters endedJune 30, 2005 to 4.08% for the same period in 2006 due to an increase in thecost of funds which offset an increase in the yield on earning assets. Interest income increased by $7,537 or 73.74%, from $10,221 during the twoquarters ended June 30, 2005 to $17,758 during the same period in 2006. Theincrease was primarily due to increased volume.  Average earning assetsincreased from $270,721 in the six months ended June 30, 2005 to $428,762 inthe same period in 2006, an increase of $158,041 or 58.38%.  The increasein earning assets was primarily due to loan growth. Average loan balancesincreased by $136,215 or 55.50%.  The average yield on earning assetsincreased from 7.61% in the two quarters ended June 30, 2005 to 8.34% in thesame period in 2006. The increase in yield on earning assets and cost of funds,as a percentage of average balances was primarily due to recent increases inshort term interest rates by the Federal Reserve Open Market Committee, or FOMC.Between June 30, 2005 and June 30, 2006, the FOMC raised the federal funds rateby 200 basis points.

Interest expense increased from $3,831 in the twoquarters ended June 30, 2005, to $9,060 in the two quarters ended June 30,2006. The $5,229 or 136.49%, increase in expense was due to increases in thevolume of deposits as well as rate increases. Average interest earningliabilities increased by $155,423 or 65.28%.  The cost of funds increasedfrom 3.25% in the six months ended June 30, 2005 to 4.64% in the same twoquarters in 2006, an increase of 139 basis points.

16

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**Average Balance Sheets, Net Interest Income, andChanges in Interest Income and Interest Expense**

The following table shows the average daily balancesof each principal category of our assets, liabilities and stockholders’ equity,and an analysis of net interest income, and the change in interest income andinterest expense segregated into amounts attributable to changes in volume andchanges in rates for the six month periods ended June 30, 2006 and 2005. Thetable is presented on a tax equivalent basis if applicable.
| ** **                                       | ** ** | **Six Months Ended June 30,  2006** | ** ** | **Six Months Ended June 30,  2005** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                       | ** ** | **Average**                                             | ** ** | ** **                                              | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **(dollars in thousands)**             | ** ** | **Balance**                                             | ** ** | **Interest**                                            | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **ASSETS**                                       |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
|                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest earning  assets                         |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Securities  (taxable) (1)                        |       | $                                                       | 39,298     |                                                    | $          | 943 |   | 4.74 | % | $ | 20,023 |   | $ | 406 |   | 4.03 | % |
| Loans  (2) (3)                              |       | 381,668                                                 |       | 16,659                                                  |       | 8.80 | % | 245,453 |   | 9,752 |   | 8.01 | % |
| Federal funds  sold                              |       | 7,796                                                   |       | 156                                                     |       | 4.04 | % | 5,245 |   | 63 |   | 2.42 | % |
| Total interest  earning assets                   |       | 428,762                                                 |       | 17,758                                                  |       | 8.34 | % | 270,721 |   | 10,221 |   | 7.61 | % |
|                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Non-interest  earning assets                     |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Cash and due from banks                          |       | 3,978                                                   |       |                                                    |       |   |   | 3,663 |   |   |   |   |   |
| Net fixed assets and equipment                   |       | 813                                                     |       |                                                    |       |   |   | 675 |   |   |   |   |   |
| Accrued interest and other assets                |       | 8,578                                                   |       |                                                    |       |   |   | 3,813 |   |   |   |   |   |
|                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Total assets                                     |       | $                                                       | 442,131    |                                                    |       |   |   |   | $ | 278,872 |   |   |   |   |   |
|                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
|                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                    |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Deposits (other than demand)                     |       | $                                                       | 383,217    |                                                    | $          | 8,723 |   | 4.59 | % | $ | 233,369 |   | $ | 3,681 |   | 3.18 | % |
| Federal funds purchased                          |       | 1,414                                                   |       | 38                                                      |       | 5.42 | % | 508 |   | 10 |   | 3.84 | % |
| Subordinated debt                                |       | 8,861                                                   |       | 299                                                     |       | 6.80 | % | 4,192 |   | 140 |   | 6.75 | % |
| Total interest bearing liabilities               |       | 393,492                                                 |       | 9,060                                                   |       | 4.64 | % | 238,069 |   | 3,831 |   | 3.25 | % |
|                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities                |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Non-interest bearing demand deposits             |       | 18,999                                                  |       |                                                    |       |   |   | 15,447 |   |   |   |   |   |
| Other liabilities                                |       | 2,464                                                   |       |                                                    |       |   |   | 1,241 |   |   |   |   |   |
| Shareholders’ equity                        |       | 27,176                                                  |       |                                                    |       |   |   | 24,115 |   |   |   |   |   |
|                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Total liabilities  and shareholders’ equity |       | $                                                       | 442,131    |                                                    |       |   |   |   | $ | 278,872 |   |   |   |   |   |
|                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Net Interest  Spread                             |       | 3.70                                                    | %          |                                                    |       |   |   | 4.36 | % |   |   |   |   |
|                                             |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Net Interest Margin                              |       | 4.08                                                    | %          |                                                    |       |   |   | 4.75 | % |   |   |   |   |

 

----

(1)   Unrealized loss of $820and $307 is excluded from yield calculation for the two quarters ended June 30,2006 and 2005 respectively.

(2)   Non-accrual loans areincluded in average loan balances and loan fees of $1,196 and $757 are includedin interest income for the two quarters ended June 30, 2006 and 2005 respectively.

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

17

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The following table outlines the components of the netinterest margin for the six month periods ended June 30, 2006 and 2005 andidentifies the impact of changes in volume and the changes in rate.
| ** **                           | ** ** | **June 30, 2006 change from  June 30, 2005 due to:** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **Volume**                                                                                   | ** ** | **Rate** | ** ** | **Total** | ** ** |
|                                 |       |                                                                                         |       |   |   |   |   |
| Interest income                      |       |                                                                                         |       |   |   |   |   |
| Loans                                |       | $                                                                                            | 5,865      |   | $ | 1,042 |   | $ | 6,907 |   |
| Securities – taxable (1)        |       | 442                                                                                          |       | 95 |   | 537 |   |
| Federal funds sold                   |       | 39                                                                                           |       | 54 |   | 93 |   |
| Total interest  income               |       | 6,346                                                                                        |       | 1,191 |   | 7,537 |   |
|                                 |       |                                                                                         |       |   |   |   |   |
| Interest expense                     |       |                                                                                         |       |   |   |   |   |
| Deposits (other than demand)         |       | 2,983                                                                                        |       | 2,059 |   | 5,042 |   |
| Federal funds purchased              |       | 23                                                                                           |       | 5 |   | 28 |   |
| Subordinated debt                    |       | 158                                                                                          |       | 1 |   | 159 |   |
| Total interest  expense              |       | 3,164                                                                                        |       | 2,065 |   | 5,229 |   |
|                                 |       |                                                                                         |       |   |   |   |   |
| Net interest income                  |       | $                                                                                            | 3,182      |   | $ | (874 | ) | $ | 2,308 |   |

 

----

(1) Unrealized loss of $820 and $307 is excludedfrom yield calculation for the six months ended June 30, 2006 and 2005respectively.

**Provisionfor Loan Losses** - The provision for loan losses for thesix months ended June 30, 2006 was $2,000, an increase of $200, or 11.11%,above the provision of $1,800 expensed in the same period in 2005.  Thisincrease was primarily due to significant loan growth. The provision isdiscussed as it relates to the allowance for loan losses in the followingComparison of Financial Condition section. At June 30, 2006, the loan lossreserve of $5,508 was 1.27% of gross loans of $434,006.

**Non-interestIncome** - We earned $36 in mortgage origination feesduring the two quarters ended June 30, 2006 compared to $39 earned in 2005, adecrease of $3 or 7.69%.  Income earned in the form of service charges ondeposits totaled $80 for the two quarters ended June 30, 2006, an increase of$26 compared to the same period in 2005. No gain or loss was recognized on thesale of securities in the two quarters ended June 30, 2006 compared with a gainof $4 for the same period in 2005.

The Bank earned $612 on loan sale transactions in thetwo quarters ended June 30, 2006, a 39.09% increase compared to $440 during thesame period in 2005. This increase was primarily due to demand from purchasers.Management will continue to consider loan sale transactions if the opportunityfor a reasonable return is available.

**Non-interestExpense** – Non-interest expense for the six months endedJune 30, 2006, was $4,234, an increase of $1,246 or 41.70%, over the $2,988expensed in the same period in 2005.  Approximately 54.49% of the increasewas due to the addition of 10 new employees during the period between the two quarterend dates. At June 30, 2006, we had 48 full time employees. Assets per employeewere $8.2 million at June 30, 2005 and $10.5 million at June 30, 2006.Management targets $7.5 million per full time employee as a measure of staffingefficiency.

18

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EfficiencyRatio(dollars in thousands )
|                       | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------|------------|-----------------------------------------------|------------|
| ** **            | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Non-interest  expense |       | $                                             | 4,234      |   | $ | 2,988 |   |
|                  |       |                                          |       |   |   |
| Net interest  income  |       | 8,698                                         |       | 6,390 |   |
| Non-interest  income  |       | 534                                           |       | 575 |   |
| Total Revenues        |       | $                                             | 9,232      |   | $ | 6,965 |   |
|                  |       |                                          |       |   |   |
| Efficiency Ratio      |       | 45.86                                         | %          | 42.90 | % |

 

**Income Taxes** –Our effective tax rate for the six months ended June 30, 2006 was 38.59%compared to 41.06% for the six months ended June 30, 2005. Managementanticipates that tax rates in future periods will approximate the rates paid in2006.

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

**Assets -**Totalassets at June 30, 2006 were $504,268 an increase of $100,228 or 24.81%, overtotal assets of $404,040 at December 31, 2005. Loan growth was the primaryreason for the increase.  June 30, 2006 net loans were $428,498, up$84,311, or 24.50% over the December 31, 2005 total net loans of $344,187.The cash and cash equivalents balance increased by $3,619 betweenDecember 31, 2005 and June 30, 2006 primarily as a result of short termborrowings at the end of the quarter that had not yet been used to fund loans.

Our business bank model of operation results in ahigher level of earning assets than peer banks.  Earning assets aredefined as assets which earn interest income.  Earning assets includeshort-term investments, the investment portfolio, and net loans.  Wemaintain a higher level of earning assets because fewer assets are allocated tofacilities, cash, and due-from bank accounts used for transactionprocessing.  Earning assets at June 30, 2006, were $485,868, or 96.35% oftotal assets of $504,268.  Earning assets at December 31, 2005, were$388,714, or 96.21% of total assets of $404,040.

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**Loans** - We hadtotal net loans of $428.5 million at June 30, 2006. The following table setsforth the composition of our loan portfolio at June 30, 2006 andDecember 31, 2005:
| (dollars in thousands)        | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Real estate                             |       |                    |       |                        |       |
| Construction                            |       | $                       | 55,584     |                        | $          | 38,279 |   |
| 1-4 family residential                  |       | 21,467                  |       | 18,358                      |       |
| Other                                   |       | 56,118                  |       | 50,371                      |       |
| Commercial,  financial and agricultural |       | 289,877                 |       | 233,948                     |       |
| Consumer                                |       | 3,778                   |       | 3,149                       |       |
| Other                                   |       | 7,182                   |       | 4,481                       |       |
|                                    |       |                    |       |                        |       |
| Total loans                             |       | 434,006                 |       | 348,586                     |       |
| Less: allowance  for loan losses        |       | (5,508                  | )          | (4,399                      | )          |
|                                    |       |                    |       |                        |       |
| Net loans                               |       | $                       | 428,498    |                        | $          | 344,187 |   |

 

Composition of loan portfolio by type
|                                         | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Real estate:                            |       |                    |       |                        |       |
| Construction                            |       | 12.81                   | %          | 10.98                       | %          |
| 1 to 4 family residential               |       | 4.95                    | %          | 5.27                        | %          |
| Other                                   |       | 12.93                   | %          | 14.45                       | %          |
| Commercial,  financial and agricultural |       | 66.79                   | %          | 67.11                       | %          |
| Consumer                                |       | 0.87                    | %          | 0.90                        | %          |
| Other                                   |       | 1.65                    | %          | 1.29                        | %          |
|                                    |       |                    |       |                        |       |
| Total                                   |       | 100                     | %          | 100                         | %          |

 

20

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The following table sets forth the composition of ourloan portfolio by source at June 30, 2006 and December 31, 2005:
|                                      | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **(dollars in thousands)** | ** ** | **Amount**              | ** ** | **%**                       | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                 |       |                    |       |                        |       |   |   |   |   |
| Direct funding                       |       | $                       | 264,897    |                        | 61.04      | % | $ | 200,333 |   | 57.47 | % |
| Indirect funding                     |       |                    |       |                        |       |   |   |   |   |
| Large                                |       | 66,935                  |       | 15.42                       | %          | 61,693 |   | 17.70 | % |
| Small                                |       | 102,174                 |       | 23.54                       | %          | 86,560 |   | 24.83 | % |
| Total                                |       | $                       | 434,006    |                        | 100.00     | % | $ | 348,586 |   | 100.00 | % |

 

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

The following table presents information regardingnon-accrual, past due and restructured loans at June 30, 2006 andDecember 31, 2005:
| (dollars in thousands)                                                                         | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Non-accrual  loans                                                                                       |       |                    |       |                        |       |
| Number                                                                                                   |       | 38                      |       | 46                          |       |
| Amount                                                                                                   |       | $                       | 2,596      |                        | $          | 2,928 |   |
|                                                                                                     |       |                    |       |                        |       |
| Accruing loans  which are contractually past due 90 days or more as to principal and interest  payments: |       |                    |       |                        |       |
| Number                                                                                                   |       | 32                      |       | 9                           |       |
| Amount                                                                                                   |       | $                       | 898        |                        | $          | 352 |   |
|                                                                                                     |       |                    |       |                        |       |
| Loans defined as  “troubled debt restructurings”                                               |       |                    |       |                        |       |
| Number                                                                                                   |       | 3                       |       | 3                           |       |
| Amount                                                                                                   |       | $                       | 1,129      |                        | $          | 1,144 |   |

 

As of June 30,2006 and December 31, 2005, there are no loans classified for regulatorypurposes as doubtful or substandard that have not been disclosed in the abovetable, 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 which causes management to haveserious doubts as to the ability of such borrowers to comply with the loanrepayment terms.

 

21

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

It is management’s intent to maintain an ALL which isadequate to absorb current and estimated losses which are inherent in a loanportfolio.  The historical loss ratio (net charge-offs as a percentage ofaverage loans) was 0.23% for the six months ended June 30, 2006 and 0.37% forthe six months ended June 30, 2005. The ALL as a percentage of the outstandingloans at the end of the period was 1.27% at June 30, 2006 and 1.33% at June 30,2005.

An analysis of our loss experience is furnished in thefollowing table for the six months ended June 30, 2006 and the same periodended June 30, 2005:
| (dollars in thousands)                  | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Allowance for  loan losses at beginning of period |       | $                       | 4,399      |                    | $          | 2,841 |   |
| Charge-offs:                                      |       |                    |       |                    |       |
| Real estate:                                      |       |                    |       |                    |       |
| Construction                                      |       | —                  |       | —                  |       |
| 1 to 4 family residential                         |       | —                  |       | —                  |       |
| Other                                             |       | —                  |       | —                  |       |
| Commercial, financial and agricultural            |       | 1,027                   |       | 987                     |       |
| Consumer                                          |       | 6                       |       | 4                       |       |
| Total Charge-offs                                 |       | 1,033                   |       | 991                     |       |
|                                              |       |                    |       |                    |       |
| Recoveries:                                       |       |                    |       |                    |       |
| Real estate:                                      |       |                    |       |                    |       |
| Construction                                      |       | —                  |       | —                  |       |
| 1 to 4 family residential                         |       | —                  |       | 1                       |       |
| Other                                             |       | —                  |       | —                  |       |
| Commercial, financial and agricultural            |       | 121                     |       | 53                      |       |
| Consumer                                          |       | 21                      |       | 23                      |       |
| Total Recoveries                                  |       | 142                     |       | 77                      |       |
|                                              |       |                    |       |                    |       |
| Net Charge-offs                                   |       | 891                     |       | 914                     |       |
|                                              |       |                    |       |                    |       |
| Provision for  loans charged to expense           |       | 2,000                   |       | 1,800                   |       |
| Allowance for loan  losses at end of period       |       | $                       | 5,508      |                    | $          | 3,727 |   |

 
|                                                                                                   | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Net charge-offs  as a percentage of average total loans outstanding during the period             |       | 0.23                    | %          | 0.37                    | %          |
|                                                                                              |       |                    |       |                    |       |
| Ending allowance for  loan losses as a percentage of total loans outstanding at end of the period |       | 1.27                    | %          | 1.33                    | %          |

 

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

22

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**Securities** -The securities portfolio at June 30, 2006 was $41,366 compared to $31,992 atDecember 31, 2005.  We view the securities portfolio as a source ofincome and liquidity.  The securities portfolio was 8.20% of total assetsat June 30, 2006 and 7.92% of total assets at December 31, 2005.

**Liabilities -**We depend on a growing deposit base to fund loan and other asset growth. Wecompete for local deposits by offering attractive products with premiumrates.  We also obtain funding in the wholesale deposit market which isaccessed by means of an electronic bulletin board.  This electronic marketlinks banks and acquirers of funds to credit unions, school districts, laborunions, and other organizations with excess liquidity. The process is highlyefficient and the average rate is generally less than rates paid in the localmarket. Wholesale deposits are categorized as “Purchased Time Deposits” on thedetail of deposits shown in the table below.

Total deposits at June 30, 2006 were $461,709, up$94,004 or 25.57% over the December 31, 2005, total deposits of $367,705.Total average deposits during the two quarters ending June 30, 2006, were$402,216, an increase of $153,400, or 61.65% over the total average deposits of$248,816 during the two quarters ending June 30, 2005. Average non-interestbearing deposits increased by $3,552, or 22.99%, from $15,447 in the six monthsending June 30, 2005, to $18,999 in the six months ending June 30, 2006.Average deposit balances for the six months ended June 30, 2006 and 2005 andthe average rates paid on those balances are shown below.

Deposits
|                                       | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **(dollars in thousands)**  | ** ** | **Average  Balance**                              | ** ** | **Average  Rate  Paid (1)** | ** ** | **Average  Balance** | ** ** | **Average  Rate  Paid (1)** | ** ** |
| Types of  Deposits                    |       |                                              |       |   |   |   |   |   |   |
| Non-interest-bearing  demand deposits |       | $                                                 | 18,999     |   | — |   | $ | 15,447 |   | — |   |
| Interest-bearing  demand deposits     |       | 5,544                                             |       | 3.50 | % | 2,625 |   | 1.24 | % |
| Money market  accounts                |       | 55,102                                            |       | 5.04 | % | 33,683 |   | 3.34 | % |
| Savings accounts                      |       | 15,084                                            |       | 2.66 | % | 25,510 |   | 2.57 | % |
| IRA accounts                          |       | 4,628                                             |       | 4.79 | % | 1,167 |   | 3.81 | % |
| Purchased time  deposits              |       | 165,921                                           |       | 4.43 | % | 140,978 |   | 3.24 | % |
| Time deposits                         |       | 136,938                                           |       | 4.85 | % | 29,406 |   | 3.48 | % |
| Total deposits                        |       | $                                                 | 402,216    |   |   |   | $ | 248,816 |   |   |   |

 

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(1) Rate is annualized

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

**SubordinatedDebt** - In March 2005, we formed a financingsubsidiary, Tennessee Commerce Statutory Trust I, a Delaware statutory trust,or the Trust I. In March 2005, Trust I issued and sold $8,000 of Trust I’sFixed/Floating rate capital securities, with a liquidation amount of $1,000 percapital security, to First Tennessee Bank, National Association. At the sametime, we issued to Trust I $8,248,000 of Fixed/Floating rate juniorsubordinated deferrable interest debentures due 2035. The debentures pay a 6.73%fixed rate payable quarterly for the first five years and a floating rate basedon a 3 month Libor rate plus a margin thereafter.

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

**Off-balance Sheet Arrangements**

We are a party to financial instruments withoff-balance sheet risk in the normal course of business to meet the financingneeds of its customers. At June 30, 2006, we had unfunded loan commitmentsoutstanding of $57 million and standby letters of credit of $5.6 million. Thoseinstruments involve, to varying degrees, elements of credit risk in excess of theamount recognized in the balance sheet.  The contract or notional amountsof those instruments reflect the extent of our involvement in those particularfinancial instruments. We use the same credit policies in making commitmentsand conditional obligations as it does for on-balance sheet instruments.

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

# **Capital Resources/Liquidity**

**Liquidity** - Ofprimary importance to depositors, creditors and regulators is the ability tohave readily available funds sufficient to repay fully maturingliabilities.  We are subject to general FDIC guidelines which do notrequire a minimum level of liquidity. Liquidity requirements can also be metthrough short-term borrowings or the disposition of short-term assets which aregenerally matched to correspond to the maturity of liabilities. Managementbelieves its liquidity ratios meet the general FDIC guidelines and we have assetsand borrowing capacity to provide adequate liquidity. Management does not knowof any trends or demands which are reasonably likely to result in liquidityincreasing or decreasing in any material manner.

**Capital Adequacy –**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 generating earnings, issuing equities, borrowingfunds, or a combination of those activities. In 2004, we issued equitysecurities increasing capital by $8.5 million.  In March 2005, oursubsidiary Trust I issued $8 million in Trust Preferred Securities that meetthe capital guidelines to be classified as Tier I capital as explained below.On July 3, 2006, and July 28, 2006, we issued 1,000,000 shares and 150,000shares respectively of our common stock in order to raise $19.1 million incapital in 2006.

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

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The capital guidelines classify capital into twotiers, referred to as Tier I and Tier II.  Under risk-basedcapital requirements, total capital consists of Tier I capital which isgenerally common stockholders’ equity less goodwill and Tier II capital whichis primarily a portion of the allowance for loan losses and certain qualifyingdebt instruments.  In determining risk-based capital requirements, assetsare assigned risk-weights of 0% to 100%, depending primarily on the regulatoryassigned levels of credit risk associated with such assets.  Off-balancesheet items are considered in the calculation of risk-adjusted assets throughconversion factors established by the regulators.  The framework forcalculating risk-based capital requires banks and bank holding companies tomeet the regulatory minimums of 4% Tier I and 8% total risk-basedcapital.  In 1990, regulators added a leveraged computation to the capitalrequirements, comparing Tier I capital to total average assets lessgoodwill.

The Federal Deposit Insurance Corporation ImprovementAct of 1991 (“FDICIA”) established five capital categories for banks and bankholding companies.  The bank regulators adopted regulations defining thesefive capital categories in September 1992.  Under these newregulations each bank is classified into one of the five categories based on itslevel of risk-based capital as measured by Tier I capital, totalrisk-based capital, and Tier I leverage ratios and its supervisoryratings.

At June 30, 2006 and December 31, 2005, the Bank’sand the Corporation’s risk-based capital ratios and the minimums for capitaladequacy and to be considered well-capitalized under the Federal Reserve Board’sprompt corrective action guidelines were as follows:
| ** **                                               | ** ** | ** **        | ** ** | ** **            | ** ** | **Minimum  for** | ** ** | **Minimum to**    | ** ** |
|----------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **capital**      | ** ** | **be considered** | ** ** |
| ** **                                               | ** ** | **2006**          | ** ** | **2005**              | ** ** | **adequacy**     | ** ** | **well-capitalized**   | ** ** |
|                                                     |       |              |       |                  |       |             |       |                   |       |
| Tier 1 leverage ratio                                    |       |              |       |                  |       |             |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 8.96              | %          | 9.08                  | %          | 4.00             | %          | 5.00                   | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 8.03              | %          | 9.33                  | %          | 4.00             | %          | n/a                    |       |
|                                                     |       |              |       |                  |       |             |       |                   |       |
| Tier 1 “core” capital  to risk-weighted assets |       |              |       |                  |       |             |       |                   |       |
| Tennessee Commerce  Bank                                 |       | 9.05              | %          | 9.30                  | %          | 4.00             | %          | 6.00                   | %          |
| Tennessee  Commerce Bancorp, Inc.                   |       | 8.10              | %          | 9.56                  | %          | 4.00             | %          | n/a                    |       |
|                                                     |       |              |       |                  |       |             |       |                   |       |
| Total capital to  risk-weighted assets                   |       |              |       |                  |       |             |       |                   |       |
| Tennessee  Commerce Bank                                 |       | 10.26             | %          | 10.51                 | %          | 8.00             | %          | 10.00                  | %          |
| Tennessee Commerce  Bancorp, Inc.                   |       | 9.31              | %          | 10.77                 | %          | 8.00             | %          | n/a                    |       |

 

On June 30, 2006 and December 31, 2005, both theBank and the Corporation exceeded the regulatory minimum capital requirementsto be considered well-capitalized.

**Impact of Inflation and ChangingPrices** - The financial statements and related financialdata presented herein have been prepared in accordance with U.S. generallyaccepted accounting principles which require the measurement of financialposition and operating results in terms of historical dollars withoutconsidering the changes in the relative purchasing power of money over time anddue to inflation.  The impact of inflation on operations of the Bank isreflected in increased operating costs.  Unlike most industrial companies,virtually all of the assets and liabilities of the Bank are monetary innature.  As a result, interest rates have a more significant impact on theBank’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the samemagnitude as the price of goods and services.

25

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**ITEM 3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

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

The asset liability committee uses a computer model toanalyze the maturities of rate sensitive assets and liabilities. The modelmeasures the “gap” which is defined as the difference between the dollar amountof rate sensitive assets repricing during a period and the volume of ratesensitive liabilities repricing during the same period. Gap is also expressedas the ratio of rate sensitive assets divided by rate sensitive liabilities. Ifthe ratio is greater than “one”, the dollar value of assets exceeds the dollarvalue of liabilities; the balance sheet is “asset sensitive”. Conversely, ifthe value of liabilities exceeds the value of assets, the ratio is less thanone and the balance sheet is “liability sensitive”. Our internal policyrequires management to maintain the gap within a range of 0.75 to 1.25.

The model measures scheduled maturities in periods ofthree months, four to twelve months, one to five years and over five years. Thechart below illustrates our rate sensitive position at June 30, 2006.Management uses the one year gap as the appropriate time period for settingstrategy.

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RateSensitivity Gap Analysis(dollars in thousands)
| ** **                                                      | ** ** | ** **   | ** ** | **1-3**    | ** ** | **4-12**   | ** ** | **1-5**   | ** ** | **Over**         | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|-----------|------------|------------------|------------|------------|------------|
| ** **                                                      | ** ** | **Floating** | ** ** | **Months** | ** ** | **Months** | ** ** | **Years** | ** ** | **5 years** | ** ** | **Total**  | ** ** |
| **Maturities :**                                                |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest Earnings  Assets                                       |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Federal funds sold                                              |       | $            | 16,004     |       | $          | —     |       | $         | —     |             | $          | —     |       | $ | — |   | $ | 16,004 |   |
| Interest bearing  deposits in banks                             |       |         |       |       |       | 2,000      |       |      |       |             |       | 2,000      |       |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Securities                                                      |       |         |       |       |       |       |       |      |       |             |       |       |       |
| U.S. government  agencies                                       |       | —       |       | —     |       | 493        |       | 10,343    |       | 23,198           |       | 34,034     |       |
| Mortgage-backed  securities                                     |       | —       |       | 824        |       | 2,506      |       | 2,960     |       | 1,042            |       | 7,332      |       |
| Total securities                                                |       |         |       | 824        |       | 2,999      |       | 13,303    |       | 24,240           |       | 41,366     |       |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total loans                                                     |       | 137,312      |       | 43,004     |       | 111,404    |       | 134,425   |       | 7,861            |       | 434,006    |       |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total Interest Earning  Assets                                  |       | 153,316      |       | 43,828     |       | 116,403    |       | 147,728   |       | 32,101           |       | 493,376    |       |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other Assets                                                    |       | —       |       | —     |       | —     |       | —    |       | 10,892           |       | 10,892     |       |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total Assets                                                    |       | $            | 153,316    |       | $          | 43,828     |       | $         | 116,403    |             | $          | 147,728    |       | $ | 42,993 |   | $ | 504,268 |   |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest Bearing  Liabilities                                   |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Deposits                                                        |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Interest  checking                                              |       | $            | 4,700      |       | $          | —     |       | $         | —     |             | $          | —     |       | $ | — |   | $ | 4,700 |   |
| Money market and  savings                                       |       | 64,179       |       | —     |       | —     |       | 21,393    |       | —           |       | 85,572     |       |
| Time deposits                                                   |       | —       |       | 57,363     |       | 191,371    |       | 101,464   |       | —           |       | 350,198    |       |
| Total deposits                                                  |       | 68,879       |       | 57,363     |       | 191,371    |       | 122,857   |       | —           |       | 440,470    |       |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Short term Debt                                                 |       | —       |       | 5,000      |       | —     |       | —    |       | —           |       | 5,000      |       |
| Subordinated Debt                                               |       | —       |       | —     |       | —     |       | —    |       | 8,248            |       | 8,248      |       |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total Interest Bearing  Liabilities                             |       | 68,879       |       | 62,363     |       | 191,371    |       | 122,857   |       | 8,248            |       | 453,718    |       |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Other Liabilities                                               |       | —       |       | —     |       | —     |       | —    |       | 22,723           |       | 22,723     |       |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Shareholders’ Equity                                       |       | —       |       | —     |       | —     |       | —    |       | 27,827           |       | 27,827     |       |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Total Liabilities and  Shareholders’ Equity                |       | $            | 68,879     |       | $          | 62,363     |       | $         | 191,371    |             | $          | 122,857    |       | $ | 58,798 |   | $ | 504,268 |   |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate Sensitive Gap by  period                                   |       | $            | 84,437     |       | $          | (18,535    | )          | $         | (74,968    | )                | $          | 24,871     |       | $ | 23,853 |   |   |   |
| Cumulative Gap                                                  |       |         |       | $          | 65,902     |       | $          | (9,066    | )          | $                | 15,805     |       | $          | 39,658 |   |   |   |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Cumulative Gap as a  percent of Total Assets                    |       |         |       | 13.07      | %          | -1.80      | %          | 3.13      | %          |             |       |       |       |
|                                                            |       |         |       |       |       |       |       |      |       |             |       |       |       |
| Rate sensitive assets / Rate sensitive liabilities (cumulative) |       | 2.23         |       | 1.50       |       | 0.97       |       | 1.04      |       | 1.09             |       |       |       |

 

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From June 30, 2005 to June 30, 2006, the FederalReserve Open Market Committee has raised interest rates by 200 basis points.Management has positioned the balance sheet to be neutral for asset andliability sensitivity. At June 30, 2006, our one year GAP was 0.97.

The interest rate risk model that defines the GAP positionalso performs a “rate shock” test of the balance sheet. The rate shock testmeasures the impact on the net interest margin of an immediate shift ininterest rates in either direction. Although this test is a static model thatprovides information only at a certain point in time, it is useful in assessingthe impact of an unanticipated movement in interest rates. As shown below, thenet interest dollar amount decrease assuming a 300 basis point drop in interestrates is .23% of the average assets for 2006.

The chart below identifies the net interest marginimpact of a shift in rates of 100, 200 and 300 basis points in eitherdirection.

InterestIncome and Expense Under Rate ShockAt June 30, 2006(dollars in thousands)
| **Rate Change**      | ** ** | **-300bp** | ** ** | **-200bp** | ** ** | **-100bp** | ** ** | **0bp** | ** ** | **+100bp** | ** ** | **+200bp** | ** ** | **+300bp** | ** ** |
|---------------------------|------------|------------|------------|------------|------------|------------|------------|---------|------------|------------|------------|------------|------------|------------|------------|
| Net Interest Income       |       | $          | 17,578     |       | $          | 18,068     |       | $       | 18,528     |       | $          | 18,941     |       | $          | 19,272     |   | $ | 19,560 |   | $ | 19,830 |   |
| Actual dollar risk        |       | (1,363     | )          | (873       | )          | (413       | )          | —  |       | 331        |       | 619        |       | 889        |       |
| Percent of risk           |       | 7.20       | %          | 4.61       | %          | 2.18       | %          | —  |       | 1.75       | %          | 3.27       | %          | 4.69       | %          |
| Percent of average assets |       | 0.23       | %          | 0.14       | %          | 0.07       | %          | —  |       | 0.05       | %          | 0.10       | %          | 0.15       | %          |
|                           |            |            |            |            |            |            |            |         |            |            |            |            |            |            |            |  |  |  |  |  |  |  |

 

The chart below identifies the net income impact of ashift in rates of 100, 200 and 300 basis points in either direction.

NetIncome Under Rate ShockAt June 30, 2006(dollars in thousands)
| **Rate Change**      | ** ** | **-300bp** | ** ** | **-200bp** | ** ** | **-100bp** | ** ** | **0bp** | ** ** | **+100bp** | ** ** | **+200bp** | ** ** | **+300bp** | ** ** |
|---------------------------|------------|------------|------------|------------|------------|------------|------------|---------|------------|------------|------------|------------|------------|------------|------------|
| Net Income                |       | $          | 4,409      |       | $          | 4,711      |       | $       | 4,995      |       | $          | 5,250      |       | $          | 5,454      |   | $ | 5,632 |   | $ | 5,798 |   |
| Actual dollar risk        |       | (841       | )          | (539       | )          | (255       | )          | —  |       | 204        |       | 382        |       | 549        |       |
| Percent of risk           |       | 16.02      | %          | 10.26      | %          | 4.85       | %          | —  |       | 3.89       | %          | 7.28       | %          | 10.45      | %          |
| Percent of average assets |       | 0.14       | %          | 0.09       | %          | 0.04       | %          | —  |       | 0.03       | %          | 0.06       | %          | 0.09       | %          |
|                           |            |            |            |            |            |            |            |         |            |            |            |            |            |            |            |  |  |  |  |  |  |  |

 

As shown above, net interest income and net incomeshould benefit from an increase in market interest rates. The model simulatesactivity so that maturing balances are replaced with new balances at the newrate level and repricing balances are adjusted to the new rate shock level. Ina rising rate environment, early withdrawal and repricing levels may increase.Because the balance sheet is asset neutral as shown by the one year GAP ratioof 0.97, the net effect of the early withdrawals of the liabilities and therepricing of the assets will only be a small increase in net interest incomeand net income.

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The above analysismay not on its own be an entirely accurate indicator of how net interest incomeor net 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 in interestrates. In addition, the magnitude and duration of changes in interest rates mayhave a significant impact on net interest income. Interest rates on certaintypes of assets and liabilities fluctuate in advance of changes in generalmarket rates, while interest rates on other types may lag behind changes ingeneral market rates. The asset liability committee develops its view of futurerate trends by monitoring economic indicators, examining the views ofeconomists and other experts, and understanding the current status of ourbalance sheet and conducts a quarterly analysis of the rate sensitivityposition. The results of the analysis are reported to the board.

 

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** **

**ITEM 4:CONTROLS AND PROCEDURES**

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, asdefined in Rule 13a-15(e) promulgated under the Securities ExchangeAct of 1934 (the “Exchange Act”), that are designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Wecarried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered by this report.Based on the evaluation of these disclosure controls and procedures, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective.

Changes in Internal Controls and Procedures

There were no changes in our internal controls overfinancial reporting during the quarter ended June 30, 2006, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**PART II:OTHER INFORMATION**

**ITEM 1:LEGAL PROCEEDINGS**

None

**ITEM 1A:RISK FACTORS**

There were no material changes to our riskfactors included in Part I, Item 1A of our Form 10-K as filed withthe Securities and Exchange Commission on March 28, 2006, except asset forth below as related to the issuance of 1,150,000 shares of common stock.

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

While we believe that since we are listed on theNasdaq Global Market, the trading volume of our common stock should increase,we cannot be certain when a more active and liquid trading market for ourcommon stock will develop or be sustained. Because of this, our shareholdersmay not be able to sell their shares at the volumes, prices or times thatthey desire.

We cannot predict the effect, if any, that futuresales of our common stock in the market, or availability of shares of ourcommon stock for sale in the market, will have on the market price of ourcommon stock. We, therefore, can give no assurance that sales of substantialamounts of our common stock in the market, or the potential for large amountsof sales in the market, would not cause the price of our common stock todecline or impair our ability to raise capital through sales of our commonstock.

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The market price of our common stockmay fluctuate in the future, and these fluctuations may be unrelatedto our performance. General market price declines or overall market volatilityin the future could adversely affect the price of our common stock, and thecurrent market price may not be indicative of future market prices.

***We may issueadditional common stock or other equity securities in the future which coulddilute the ownership interest of existing shareholders.***

In order to maintain our capital at desired levels orrequired regulatory levels, or to fund future growth, our board of directorsmay decide from time to time to issue additional shares of common stock,or securities convertible into, exchangeable for or representing rights toacquire shares of our common stock. The sale of these securitiesmay significantly dilute our shareholders’ ownership interest as ashareholder and the per share book value of our common stock. New investors inthe future may also have rights, preferences and privileges senior to ourcurrent shareholders which may adversely impact our current shareholders.

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

We have supported our continued growth through theissuance of trust preferred securities from an affiliated special purpose trustand accompanying subordinated debentures. At June 30, 2006, we had outstandingtrust preferred securities and accompanying subordinated debentures totaling$8.2 million. We conditionally guarantee payments of the principal and intereston the trust preferred securities. Further, the accompanying subordinateddebentures we issued to the trust are senior to our shares of common stock. Asa result, we must make payments on the subordinated debentures before anydividends can be paid on our common stock and, in the event of our bankruptcy,dissolution or liquidation, the holders of the subordinated debentures must besatisfied before any distributions can be made on our common stock. We have theright to defer distributions on our subordinated debentures (and the relatedtrust preferred securities) for up to five years, during which time we may notpay dividends on our common stock.

***Our ability todeclare and pay dividends on our common stock is limited by law and wemay be unable to pay future dividends.***

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

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

(a)          None

(b)   None

(c)   None

Our ability to declare and pay dividends on our commonstock is limited by law and we may be unable to pay future dividends. Wederive our income solely from dividends on the shares of common stock of thebank. The bank’s ability to declare and pay dividends to us is limited by itsobligations to maintain sufficient capital and by other general restrictions onits dividends that are applicable to banks that are regulated by the FDIC andthe TDFI. In addition, the Federal Reserve Board may impose restrictionson our ability to pay dividends on our common stock. As a result, we cannotassure our shareholders that we will declare or pay dividends on shares of ourcommon stock in the future.

**ITEM 3:DEFAULTS UPON SENIOR SECURITIES**

(a)   None

(b)   None

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

A.    The AnnualMeeting of Shareholders of the Corporation was held May 3, 2006.

B.    Directors electedat the Annual Meeting were: Arthur F. Helf, Fowler H. Low, Regg E. Swanson,Paul A. Thomas, M.D.  Other Directors ofthe Corporation whose term of office as a director continued after the AnnualMeeting were: Dorris E. Bennett, H. Lamar Cox, Paul W. Dierksen, Dennis L.Grimaud, Winston C. Hickman, William W. McInnes, Thomas R. Miller, DarrelReifschneider, and Michael R. Sapp.

C.    The followingproposals were considered by shareholders at the Annual Meeting :

Proposal 1– Amendment of the Corporation’s charter to increase the number of authorizedshares of common stock to 10,000,000.

| Votes      | ** ** |
|------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| 1,879,939  |       | 39,000 |   | — |   | — |   |
|            |            |  |  |  |  |  |  |  |

 

 

Proposal 2– Election of Class I Directors

The following Directors were re-elected
|                      | ** ** | **Votes**  | ** ** |
|----------------------|------------|------------|------------|
| ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| ** **           | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| Arthur F. Helf       |       | 1,919,439  |       | 2,500 |   | — |   | — |   |
| Fowler H. Low        |       | 1,919,439  |       | 2,500 |   | — |   | — |   |
| Regg E. Swanson      |       | 1,919,439  |       | 2,500 |   | — |   | — |   |
| Paul A. Thomas, M.D. |       | 1,919,439  |       | 2,500 |   | — |   | — |   |

 

32

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Proposal 3– Ratification of the appointment of KraftCPA’s, PLLC as the Corporation’sindependent accountants and auditors for the fiscal year 2006

| Votes      | ** ** |
|------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
| 1,906,939  |       | — |   | — |   | — |   |
|            |            |  |  |  |  |  |  |  |

 

D. None

**ITEM 5:OTHER INFORMATION**

(a)   None

(b)   None

33

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**ITEM 6:EXHIBITS**

| Exhibit No. | ** ** | **Description**                                                                                          |
|------------------|------------|----------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                     |
| 2.1 *            |       | Articles of Share Exchange of Tennessee Commerce Bank  and Tennessee Commerce Bancorp, Inc.         |
|             |       |                                                                                                     |
| 2.2 *            |       | Plan of Share Exchange of Tennessee Commerce Bank  and Tennessee Commerce Bancorp, Inc.             |
|             |       |                                                                                                     |
| 3.1*             |       | Charter of Tennessee Commerce Bancorp, Inc.                                                         |
|             |       |                                                                                                     |
| 3.2 *            |       | Bylaws of Tennessee Commerce Bancorp, Inc.                                                          |
|             |       |                                                                                                     |
| 10.1**           |       | Employment Agreement between Tennessee Commerce  Bancorp, Inc. and George W. Fort                   |
|             |       |                                                                                                     |
| 31.1             |       | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|             |       |                                                                                                     |
| 31.2             |       | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|             |       |                                                                                                     |
| 32.1             |       | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
|             |       |                                                                                                     |
| 32.2             |       | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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*   Previously filed as an Exhibit to Tennessee CommerceBancorp, Inc.’s Form 10 as filed with the Securities ExchangeCommission on April 29, 2005 and incorporated by reference herein.

** Previously filed as an Exhibit to Tennessee CommerceBancorp, Inc.’s Form S-1 as filed with the Securities ExchangeCommission on April 25, 2006 and incorporated by reference herein.

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SIGNATURES

In accordance with the requirements of the ExchangeAct, the Registrant caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                       | Tennessee Commerce  Bancorp, Inc. |
|-----------------------|----------------------------------------|
|                  | (Registrant)                           |
|                  |                                   |
|                  |                                   |
| August 14,  2006 |                                   | /s/ Arthur F. Helf |
| (Date)                |                                   | Arthur F. Helf |
|                  |                                   | Chairman and Chief Executive  Officer |
|                  |                                   |   |
|                  |                                   |   |
| August 14, 2006       |                                   | /s/ George W. Fort |
| (Date)                |                                   | George W. Fort |
|                  | Chief Financial Officer                |

 

35

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