**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

  **(Mark One)**

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

 

**For thequarterly period ended September 30, 2007**

 

**OR**

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

 

**For thetransition period from                      to                      **

 

**Commissionfile number  000-50771**

 

**AMERICAN PATRIOTFINANCIAL GROUP, INC.**

(Exactname of registrant as specified in its charter)

 

| **Tennessee**                                                  | ** ** | **20-0307691**                        |
|----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of                               |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                                |       |                                  |
|                                                           |       |                                  |
| **3095  East Andrew Johnson Highway Greeneville,   Tennessee** | ** ** | **37745**                             |
| (Address of principal executive  offices)                      |       | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code:  **(423)636-1555**

 

**Not Applicable**

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

 

Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

 

Large accelerated filer o        Acceleratedfiler o        Non-acceleratedfiler x

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct.)  YES o  NO x

 

As of November 1, 2007, there were 2,314,091 shares ofcommon stock, $0.333 par value, issued and outstanding.

 

 

----

 
| ***PART  I - FINANCIAL INFORMATION*** |
|---------------------------------------|
| *** ***                          | *** *** | *** *** |
| **Item 1.**                           | **Financial Statements.** |   |
|                                  |   |   |
|                                  | The consolidated financial statements of the Registrant and its  wholly owned subsidiary are as follows: |   |
|                                  |   |   |
|                                  | Consolidated  Balance Sheets – September 30, 2007 (unaudited) and December 31, 2006. |   |
|                                  |   |   |
|                                  | Consolidated  Statements of Income - For the nine months ended September 30, 2007 and 2006  (unaudited). |   |
|                                  |   |   |
|                                  | Consolidated Statements of Income - For the  three months ended September 30, 2007 and 2006 (unaudited). |   |
|                                  |   |   |
|                                  | Consolidated  Statements of Cash Flows - For the nine months ended September 30, 2007 and  2006 (unaudited). |   |
|                                  |   |   |
|                                  | Notes to Consolidated Financial Statements. |   |
|                                  |   |   |
| **Item 2.**                           | **Management’s  Discussion and Analysis or Plan of Operation.** |   |
|                                  |   |   |
| **Item 3.**                           | **Quantitative  and Qualitative Disclosures about Market Risk.** |   |
|                                  |   |   |
| **Item 4.**                           | **Controls and  Procedures.** |   |
|                                  |   |   |
| **PART  II - OTHER INFORMATION**      |
|                                  |   |   |
| **Item 1.**                           | **Legal Proceedings.** |   |
|                                  |   |   |
| **Item 1A.**                          | **Risk Factors.** |   |
|                                  |   |   |
| **Item 2.**                           | **Unregistered  Sales of Equity Securities and Use of Proceeds.** |   |
|                                  |   |   |
| **Item 3.**                           | **Defaults Upon  Senior Securities.** |   |
|                                  |   |   |
| **Item 4.**                           | **Submission of  Matters to a Vote of Security Holders.** |   |
|                                  |   |   |
| **Item 5.**                           | **Other Information.** |   |
|                                  |   |   |
| **Item 6.**                           | **Exhibits.** |   |

 

2

----

 

**AMERICANPATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

 

**Part I. FINANCIALINFORMATION**

 

**Item 1. Financial Statements**

** **
| ** **                                                                                                                                                             | ** ** | **As of**                   | ** **  | **As of**                  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **September 30, 2007** | ** **  | **December 31, 2006** | ** ** |
| ** **                                                                                                                                                             | ** ** | **(Unaudited)**                  | ** **  | ** **                      | ** ** |
| **ASSETS**                                                                                                                                                             | ** ** | ** **                       | ** **  | ** **                      | ** ** |
|                                                                                                                                                                   |       |                             |        |                            |       |
| Cash and due  from banks                                                                                                                                               |       | $                                | 3,688,653   |                            | $          | 3,263,969 |   |
| Federal funds  sold                                                                                                                                                    |       | 10,779,171                       |        | 12,224,443                      |       |
| Cash and cash  equivalents                                                                                                                                             |       | 14,467,824                       |        | 15,488,412                      |       |
| Federal Home  Loan Bank stock, at cost                                                                                                                                 |       | 258,800                          |        | 258,800                         |       |
| Loans, net of  estimated allowance for loan losses of $605,765 in 2007 and $617,956 in 2006                                                                            |       | 87,897,582                       |        | 77,059,828                      |       |
| Premises and  equipment, net                                                                                                                                           |       | 5,610,076                        |        | 3,799,519                       |       |
| Accrued interest  receivable                                                                                                                                           |       | 635,276                          |        | 506,906                         |       |
| Deferred tax  assets, net                                                                                                                                              |       | 145,445                          |        | 166,545                         |       |
| Foreclosed  assets                                                                                                                                                     |       | 460,745                          |        | 393,900                         |       |
| Other assets                                                                                                                                                           |       | 135,068                          |        | 78,771                          |       |
| CSV – Life  insurance                                                                                                                                             |       | 2,219,308                        |        | —                          |       |
| Total Assets                                                                                                                                                           |       | $                                | 111,830,124 |                            | $          | 97,752,681 |   |
|                                                                                                                                                                   |       |                             |        |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                          |       |                             |        |                            |       |
|                                                                                                                                                                   |       |                             |        |                            |       |
| **LIABILITIES**                                                                                                                                                        | ** ** | ** **                       | ** **  | ** **                      | ** ** |
| Deposits:                                                                                                                                                              |       |                             |        |                            |       |
| Noninterest-bearing                                                                                                                                                    |       |                             |        |                            |       |
| Demand                                                                                                                                                                 |       | $                                | 10,818,249  |                            | $          | 9,326,547 |   |
| Interest-bearing                                                                                                                                                       |       |                             |        |                            |       |
| Money market,  interest checking and savings                                                                                                                           |       | 33,108,625                       |        | 28,496,934                      |       |
| Time deposits                                                                                                                                                          |       | 55,921,730                       |        | 44,679,571                      |       |
| Total Deposits                                                                                                                                                         |       | 99,848,604                       |        | 82,503,052                      |       |
| Accrued interest  payable                                                                                                                                              |       | 563,580                          |        | 698,825                         |       |
| Securitized  borrowings                                                                                                                                                |       | —                           |        | 3,099,091                       |       |
| Other  liabilities                                                                                                                                                     |       | 329,236                          |        | 247,026                         |       |
| Federal Home  Loan Bank advances                                                                                                                                       |       | 2,002,658                        |        | 2,368,159                       |       |
| Total  Liabilities                                                                                                                                                     |       | 102,744,078                      |        | 88,916,153                      |       |
|                                                                                                                                                                   |       |                             |        |                            |       |
| **Commitments  and contingencies**                                                                                                                                     | ** ** | ** **                       | ** **  | ** **                      | ** ** |
| ** **                                                                                                                                                             | ** ** | ** **                       | ** **  | ** **                      | ** ** |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                         | ** ** | ** **                       | ** **  | ** **                      | ** ** |
| Stock:                                                                                                                                                                 |       |                             |        |                            |       |
| Preferred stock,  no par value; authorized 1,000,000 shares; none issued and outstanding                                                                               |       | —                           |        | —                          |       |
| Common stock,  $0.333 par value; authorized 6,000,000 shares; issued and outstanding 2,314,091  shares at September 30, 2007 and 2,310,771 shares at December 31, 2006 |       | 771,362                          |        | 770,256                         |       |
| Additional  paid-in capital                                                                                                                                            |       | 6,942,260                        |        | 6,932,307                       |       |
| Retained  earnings                                                                                                                                                     |       | 1,372,424                        |        | 1,133,965                       |       |
| Total  Stockholders’ Equity                                                                                                                                       |       | 9,086,046                        |        | 8,836,528                       |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                       |       | $                                | 111,830,124 |                            | $          | 97,752,681 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.  

 

3

----

 

**AMERICAN PATRIOT FINANCIAL GROUP, INC. ANDSUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                            | ** ** | **Nine ****Months**** Ended** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | **September 30, 2007**        | ** ** | **September 30, 2006** | ** ** |
| ** **                                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
| **Interest  and dividend income:**                    | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Loans, including  fees                                |       | $                                       | 5,540,497  |   | $ | 4,446,807 |   |
| Dividends on  Federal Home Loan Bank stock            |       | 12,502                                  |       | 10,664 |   |
| Federal funds  sold and other                         |       | 412,558                                 |       | 428,986 |   |
| Total interest  and dividend income                   |       | 5,965,557                               |       | 4,886,457 |   |
|                                                  |       |                                    |       |   |   |
| **Interest  expense:**                                | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Deposits                                              |       | 2,770,043                               |       | 1,971,983 |   |
| Borrowed funds                                        |       | 55,969                                  |       | 90,728 |   |
| Total interest  expense                               |       | 2,826,012                               |       | 2,062,711 |   |
| Net interest  income before provision for loan losses |       | 3,139,545                               |       | 2,823,746 |   |
| ** **                                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
| **Provision  for loan losses**                        |       | 132,811                                 |       | 39,075 |   |
| Net interest  income after provision for loan losses  |       | 3,006,734                               |       | 2,784,671 |   |
|                                                  |       |                                    |       |   |   |
| **Noninterest  income:**                              |       |                                    |       |   |   |
| Service charges  on deposit accounts                  |       | 409,871                                 |       | 184,805 |   |
| Fees from  origination of mortgage loans sold         |       | 64,337                                  |       | 72,849 |   |
| Investment sales  commissions                         |       | 54,326                                  |       | 107,486 |   |
| Other                                                 |       | 17,657                                  |       | 1,706 |   |
| Total  noninterest income                             |       | 546,191                                 |       | 366,846 |   |
|                                                  |       |                                    |       |   |   |
| **Noninterest  expense:**                             |       |                                    |       |   |   |
| Salaries and  employee benefits                       |       | 1,649,589                               |       | 1,341,232 |   |
| Occupancy                                             |       | 439,463                                 |       | 369,903 |   |
| Advertising                                           |       | 87,165                                  |       | 65,691 |   |
| Data processing                                       |       | 200,849                                 |       | 158,294 |   |
| Legal and  professional                               |       | 255,223                                 |       | 291,128 |   |
| Other operating                                       |       | 549,016                                 |       | 476,284 |   |
| Total  noninterest expense                            |       | 3,181,305                               |       | 2,702,532 |   |
| **Income  before income taxes**                       |       | 371,620                                 |       | 448,985 |   |
|                                                  |       |                                    |       |   |   |
| Income tax  expense                                   |       | 133,161                                 |       | 176,541 |   |
|                                                  |       |                                    |       |   |   |
| **Net  income**                                       |       | $                                       | 238,459    |   | $ | 272,444 |   |
|                                                  |       |                                    |       |   |   |
| Basic earnings  per common share                      |       | $                                       | .10        |   | $ | .12 |   |
| Diluted earnings  per common share                    |       | $                                       | .10        |   | $ | .11 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

4

----

 

**AMERICAN PATRIOT FINANCIAL GROUP, INC. ANDSUBSIDIARY**

**Greeneville, Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                                           | ** ** | **Three ****Months**** Ended** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                           | ** ** | **September 30, 2007**         | ** ** | **September 30, 2006** | ** ** |
| ** **                                                           | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Interest  and dividend income:**                                   | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Loans, including  fees                                               |       | $                                        | 1,955,874  |   | $ | 1,558,255 |   |
| Dividends on  Federal Home Loan Bank stock                           |       | 4,240                                    |       | 3,644 |   |
| Federal funds  sold and other                                        |       | 132,248                                  |       | 158,253 |   |
| Total interest  and dividend income                                  |       | 2,092,362                                |       | 1,720,152 |   |
|                                                                 |       |                                     |       |   |   |
| **Interest  expense:**                                               | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Deposits                                                             |       | 1,004,963                                |       | 731,256 |   |
| Borrowed funds                                                       |       | 17,926                                   |       | 22,365 |   |
| Total interest  expense                                              |       | 1,022,889                                |       | 753,621 |   |
| Net interest  income before provision for (benefit from) loan losses |       | 1,069,473                                |       | 966,531 |   |
| ** **                                                           | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**                        |       | 91,848                                   |       | (60,796 | ) |
| Net interest  income after provision for (benefit from) loan losses  |       | 977,625                                  |       | 1,027,327 |   |
|                                                                 |       |                                     |       |   |   |
| **Noninterest  income:**                                             |       |                                     |       |   |   |
| Service charges  on deposit accounts                                 |       | 138,407                                  |       | 58,611 |   |
| Fees from  origination of mortgage loans sold                        |       | 16,232                                   |       | 29,799 |   |
| Investment sales  commissions                                        |       | 37,949                                   |       | 22,110 |   |
| Other                                                                |       | 7,092                                    |       | — |   |
| Total  noninterest income                                            |       | 199,680                                  |       | 110,520 |   |
|                                                                 |       |                                     |       |   |   |
| **Noninterest  expense:**                                            |       |                                     |       |   |   |
| Salaries and  employee benefits                                      |       | 615,753                                  |       | 433,612 |   |
| Occupancy                                                            |       | 176,615                                  |       | 129,003 |   |
| Advertising                                                          |       | 38,358                                   |       | 22,865 |   |
| Data processing                                                      |       | 77,239                                   |       | 51,219 |   |
| Legal and  professional                                              |       | 43,338                                   |       | 73,642 |   |
| Other operating                                                      |       | 250,196                                  |       | 158,583 |   |
| Total  noninterest expense                                           |       | 1,201,499                                |       | 868,924 |   |
| **Income  (loss) before income taxes**                               |       | (24,194                                  | )          | 268,923 |   |
|                                                                 |       |                                     |       |   |   |
| Income tax  expense (benefit)                                        |       | (20,583                                  | )          | 114,859 |   |
|                                                                 |       |                                     |       |   |   |
| **Net  income (loss)**                                               |       | $                                        | (3,611     | ) | $ | 154,064 |   |
|                                                                 |       |                                     |       |   |   |
| Basic earnings  (loss) per common share                              |       | $                                        | (.00       | ) | $ | .07 |   |
| Diluted earnings  (loss) per common share                            |       | $                                        | (.00       | ) | $ | .06 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

----

** **

**AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine ****Months ****Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                         | ** ** | **September 30, 2007**                  | ** ** | **September 30, 2006** | ** ** |
|                                                                               |       |                                    |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         |       |                                    |       |   |   |
| Net income                                                                         |       | $                                       | 238,459    |   | $ | 272,444 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                    |       |   |   |
| Provision for  loan losses                                                         |       | 132,811                                 |       | 39,075 |   |
| Depreciation                                                                       |       | 194,886                                 |       | 197,638 |   |
| Write-down of  foreclosed assets                                                   |       | 38,137                                  |       | — |   |
| Realized loss on  sales of foreclosed/repossessed assets                           |       | 12,500                                  |       | 27,088 |   |
| Deferred income  tax expense                                                       |       | 21,100                                  |       | 38,381 |   |
| Net change in:                                                                     |       |                                    |       |   |   |
| Accrued interest  receivable                                                       |       | (128,370                                | )          | (43,220 | ) |
| Other assets                                                                       |       | (56,297                                 | )          | 66,193 |   |
| Other  liabilities                                                                 |       | 82,210                                  |       | 82,006 |   |
| Accrued interest  payable                                                          |       | (135,245                                | )          | 235,968 |   |
| Net cash  provided by operating activities                                         |       | 400,191                                 |       | 915,573 |   |
|                                                                               |       |                                    |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         |       |                                    |       |   |   |
|                                                                               |       |                                    |       |   |   |
| Federal Home  Loan Bank stock purchases                                            |       | —                                  |       | (10,500 | ) |
| Cash value of  life insurance                                                      |       | (2,219,308                              | )          | — |   |
| Proceeds from  sales of foreclosed/repossessed assets                              |       | 34,900                                  |       | 138,267 |   |
| Loan  originations and principal collections, net                                  |       | (11,122,947                             | )          | (5,888,871 | ) |
| Additions to  premises and equipment                                               |       | (2,005,443                              | )          | (227,580 | ) |
| Net cash used in  investing activities                                             |       | (15,312,798                             | )          | (5,988,684 | ) |
|                                                                               |       |                                    |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         |       |                                    |       |   |   |
| Net change in  deposits (non-time deposits)                                        |       | 6,103,393                               |       | 9,466,834 |   |
| Net change in  time deposits                                                       |       | 11,242,159                              |       | (5,636,094 | ) |
| Repayment of  securitized borrowings                                               |       | (3,099,091                              | )          | — |   |
| Federal Home  Loan Bank repayments                                                 |       | (365,501                                | )          | (1,763,884 | ) |
| Issuance of  stock                                                                 |       | 11,059                                  |       | — |   |
| Net cash  provided by financing activities                                         |       | 13,892,019                              |       | 2,066,856 |   |
|                                                                               |       |                                    |       |   |   |
| Net change in  cash and cash equivalents                                           |       | (1,020,588                              | )          | (3,006,255 | ) |
|                                                                               |       |                                    |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 15,488,412                              |       | 18,273,842 |   |
|                                                                               |       |                                    |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                                       | 14,467,824 |   | $ | 15,267,587 |   |
|                                                                               |       |                                    |       |   |   |
| **SUPPLEMENTARY  CASH FLOW INFORMATION:**                                          |       |                                    |       |   |   |
| Interest paid on  deposits and borrowed funds                                      |       | $                                       | 2,961,257  |   | $ | 1,826,743 |   |
| Income taxes  paid                                                                 |       | $                                       | 182,000    |   | $ | — |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

6

----

 
| ** **                                                                       | ** ** | **Nine ****Months ****Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                       | ** ** | **September 30, 2007**                  | ** ** | **September 30, 2006** | ** ** |
|                                                                             |       |                                    |       |   |   |
| **SUPPLEMENTAL  SCHEDULE OF NON-CASH ACTIVITIES:**                               |       |                                    |       |   |   |
| Foreclosed/repossessed  assets sold during the period and financed through loans |       | $                                       | 20,000     |   | $ | 204,203 |   |
| Loans moved to  foreclosed/repossessed assets                                    |       | $                                       | 152,382    |   | $ | 184,779 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

7

----

 

 

**AMERICANPATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note1.****   Summaryof Significant Accounting Policies**

 

*Nature of Business*:

 

American Patriot Financial Group, Inc.(the “Company”) is a bank holding company whose business is conducted by itswholly-owned subsidiary, American Patriot Bank (the “Bank”). American PatriotBank is engaged in the business of originating loans primarily within itslending area, Greeneville and Greene County in Tennessee. The Bank obtainsdeposits both inside and outside of its primary lending area. The Company wasorganized in October 2003. The Company had minimal assets, liabilities oroperations until January, 2004, when it acquired the Bank in a Plan of ShareExchange whereby the stockholders exchanged their shares of ownership in theBank for shares of ownership in the Company on a one-for-one basis. As a partof the Plan of Share Exchange, the Bank became a wholly owned subsidiary of theCompany.

 

The following is a description of thesignificant policies used in the preparation of the accompanying consolidatedfinancial statements.

 

*Basis of Presentation:*

 

These consolidated financial statementsinclude the accounts of the American Patriot Financial Group, Inc. and itswholly owned subsidiary, American Patriot Bank. Significant intercompanytransactions and accounts are eliminated in consolidation.

 

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities andExchange Commission (“SEC”). Accordingly, they do not include all theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals) considerednecessary for a fair presentation of the financial position and results ofoperations for the periods presented have been included. Operating results forthe three and nine months ended September 30, 2007 are not necessarilyindicative of the results that may be expected for the year ending December 31,2007. For further information, refer to the consolidated financial statementsand notes thereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2006. Certain amounts from prior period financialstatements have been reclassified to conform to current period’s presentation.

 

*Use of Estimates:*

 

The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities as of the balance sheet date and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates. The most significant management accounting estimate isthe allowance for loan losses. The allowance for loan losses is evaluated on aregular basis by management and is based upon management’s periodic review ofthe collectibility of the loans in light of historical experience, the natureand volume of the loan portfolio, adverse situations that may affect theborrower’s ability to repay, estimated value of any underlying collateral andprevailing economic conditions. This evaluation is inherently subjective as itrequires estimates that are susceptible to significant revision as moreinformation becomes available.

 

8

----

 

**Note2.****   StockOptions and Awards**

 

On July 1, 2005, the Company adopted the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), *Share-Based Payment*(“SFAS No. 123R”). Thisstatement supercedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees” (APB 25), which the Company had followed until the adoption of SFASNo. 123R. The revised statement addresses the accounting for share-basedpayment transactions with employees and other third parties, eliminates theability to account for share-based compensation transactions using APB 25 andrequires that the compensation costs relating to such transactions berecognized in the consolidated statement of income. In anticipation of adoptingSFAS No. 123R, on May 17, 2005 the Board of Directors approved that allnon-vested employee stock options granted to become fully vested andexercisable as of that date in order to avoid recognition of compensation costsin the consolidated statement of income in future periods. Any stock optionsgranted after May 17, 2005 are fully exercisable on the date granted. Accordingly,no compensation cost was recognized prior to the adoption of SFAS No. 123R onJuly 1, 2005. No additional options were granted during the period endedSeptember 30, 2007, therefore, no compensation cost is recognized in theconsolidated statement of income for the period ended September 30, 2007. Theaggregate intrinsic value of options was $960,822 at September 30, 2007. Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying option and the quoted market price of the Company’scommon stock of $8.50 per common share for the 220,309 options that werein-the-money at September 30, 2007.

 

**Note3.****   EarningsPer Share of Common Stock**

 

Basic earnings per share(EPS) of common stock is computed by dividing net income by the weightedaverage number of common shares outstanding during the period. Diluted earningsper share of common stock is computed by dividing net income by the weightedaverage number of common shares and potential dilutive common sharesoutstanding during the period. Stock options are regarded as potential commonshares. Potential common shares are computed using the treasury stock method. Forthe three and nine months ended September 30, 2007, 19,000 options are excludedfrom the effect of dilutive securities because they are anti-dilutive; 19,000options are similarly excluded from the effect of dilutive securities for thethree and nine months ended September 30, 2006.

 

9

----

 

The following is areconciliation of the numerators and denominators used in the basic and dilutedearnings per share computations for the three months and nine months endedSeptember 30, 2007 and 2006:

 
| ** **                                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | **Income**                           | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                      | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                 |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                                 |       |   |   |   |   |   |   |
| Income available  to common stockholders                          |       | $                                    | (3,611     | ) | 2,311,474 |   | $ | 154,064 |   | 2,310,771 |   |
|                                                              |       |                                 |       |   |   |   |   |   |   |
| Effect of  dilutive securities Stock options outstanding          |       | —                               |       | 106,299 |   | — |   | 133,523 |   |
|                                                              |       |                                 |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                 |       |   |   |   |   |   |   |
| Income available  to common shareholders plus assumed conversions |       | $                                    | (3,611     | ) | 2,417,773 |   | $ | 154,064 |   | 2,444,294 |   |

 
| ** **                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | **Income**                          | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                     | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                                |       |   |   |   |   |   |   |
| Income available  to common stockholders                          |       | $                                   | 238,459    |   | 2,311,474 |   | $ | 272,444 |   | 2,310,771 |   |
|                                                              |       |                                |       |   |   |   |   |   |   |
| Effect of  dilutive securities Stock options outstanding          |       | —                              |       | 114,622 |   | — |   | 148,234 |   |
|                                                              |       |                                |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                |       |   |   |   |   |   |   |
| Income available  to common shareholders plus assumed conversions |       | $                                   | 238,459    |   | 2,426,096 |   | $ | 272,444 |   | 2,459,005 |   |

 

10

----

 

**Item 2.****    Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Impact of Inflation**

 

The consolidated financial statements and relatedfinancial data presented herein have been prepared in accordance withaccounting principles generally accepted in the United States and practiceswithin the banking industry that require the measurement of financial positionand operating results in terms of historical dollars without considering thechanges in the relative purchasing power of money over time due to inflation. Unlikemost industrial companies, virtually all the assets and liabilities of afinancial institution are monetary in nature. As a result, interest rates havea more significant impact on a financial institution’s performance than theeffects of general levels of inflation.

 

**Critical Accounting Estimates**

 

The Company followsgenerally accepted accounting principles that are recognized in the UnitedStates, along with general practices within the banking industry. In connectionwith the application of those principles and practices, we have made judgmentsand estimates which, in the case of our Allowance for Loan and Lease Losses (ALLL),are material to the determination of our financial position and results ofoperation. Other estimates relate to the valuation of assets acquired inconnection with foreclosures or in satisfaction of loans, and realization ofdeferred tax assets.

 

**Recent Accounting Pronouncements**

 

In March 2006, the FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 156, *Accounting for Servicingof Financial Assets*, an Amendment of FASB Statement No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities*, (“SFAS 140”) which requires that allseparately recognized servicing assets and liabilities be initially measured atfair value, if practicable, and requires entities to elect either fair valuemeasurement with changes in fair value reflected in earnings or theamortization and impairment requirements of Statement 140 for subsequentmeasurement. SFAS 156 is effective as of the beginning of an entity’s firstfiscal year that begins after September 15, 2006. The Company adopted SFAS 156on January 1, 2007. The adoption of SFAS 156 did not have any material impacton the Company’s consolidated financial condition or results of operations.

 

In July 2006, FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*, (“FIN 48”). FIN48 became effective for fiscal years beginning after December 15, 2006. FIN 48applies to all income tax positions subject to FASB Statement No. 109, *Accounting for Income Tax* (“SFAS 109”), including taxpositions considered to be routine and those with a high degree of uncertainty.FIN 48 did not have a material impact on the Company’s consolidated financialstatements.

 

InSeptember, 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements* (“SFAS 157”). SFAS 157 defines fair value, establishesa framework for measuring fair value and expands disclosures about fair valuemeasurements. SFAS 157 will be applied prospectively and is effective forfiscal years beginning after November 15, 2007 and interim periods within thosefiscal years. SFAS 157 is not expected to have a material impact on the Company’sconsolidated financial statements.

 

InSeptember 2006, the Financial Accounting Standards Board ratified a consensusopinion reached by the Emerging Issues Task Force on Issue 06-4, *Accounting for Deferred Compensation and Postretirement Benefit Aspectsof Endorsement Split-Dollar Life Insurance Arrangements*, (“EITF06-04”) which requires employers that enter into endorsement split-dollar lifeinsurance arrangements that provide an employee with a postretirement benefitto recognize a liability for the future benefits promised based on thesubstantive agreement made with the employer. Whether the accrual is based on adeath benefit or on the future cost of maintaining the insurance would dependon what the employer has effectively agreed to provide during the employee’sretirement. The purchase of an endorsement-type life insurance policy does notqualify as a settlement of the liability.

 

11

----

 

Theconsensus in EITF 06-4 is effective for fiscal years beginning after December15, 2007. The Company intends to adopt EITF 06-4 effective January 1, 2008. TheCompany is currently evaluating the impact this guidance will have on the Company’sfinancial position and results of operation.

 

InSeptember 2006, the FASB ratified the consensus reached by the Emerging IssuesTask Force in Issue 06-5, *Accounting for Purchasesof Life Insurance*- *Determining the AmountThat Could Be Realized in Accordance with FASB Technical Bulletin No.85-47,Accounting for Purchases of Life Insurance* (“EITF 06-05”). EITF 06-5is effective for the fiscal years beginning after December 15, 2006. EITF 06-5pertains to companies with life insurance asset on a company’s balance sheet. TheCompany adopted this EITF effective January 1, 2007 and it did not have amaterial impact on the Company’s financial position and results of operations.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities.* This statement permits entitiesto choose to measure many financial instruments and certain other items at fairvalue. The objective of this standard is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. This statement iseffective as of the beginning of fiscal years beginning after November 15,2007, with early adoption permitted under certain circumstances. The Companydid not choose to early adopt this standard.

 

In March 2007, the EITFreached a final consensus on Issue No. 06-10 (“EITF 06-10”), “*Accounting for Deferred Compensation and Postretirement Benefit Aspectsof Collateral Assignment Split-Dollar Life Insurance Arrangements*.”  EITF 06-10 requires employers to recognize aliability for the post-retirement benefit related to collateral assignmentsplit-dollar life insurance arrangements in accordance with SFAS No. 106 or APBOpinion No. 12. EITF 06-10 also requires employers to recognize and measure anasset based on the nature and substance of the collateral assignmentsplit-dollar life insurance arrangement. The provisions of EITF 06-10 areeffective for the Company on January 1, 2008, with earlier applicationpermitted, and are to be applied as a change in accounting principle eitherthrough a cumulative-effect adjustment to retained earnings or other componentsof equity or net assets in the statement of financial position as of thebeginning of the year of adoption; or as a change in accounting principlethrough retrospective application to all prior periods. The Company does notexpect adoption of EITF 06-10 to have a significant impact on its consolidatedfinancial statements, results of operations or liquidity.

 

**Forward-LookingStatements**

 

Management’s discussion of the Company andmanagement’s analysis of the Company’s operations and prospects, and othermatters, may include forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 and other provisions offederal and state securities laws. Although the Company believes that theassumptions underlying such forward-looking statements contained in this reportare reasonable, any of the assumptions could be inaccurate and, accordingly,there can be no assurance that the forward-looking statements included hereinwill prove to be accurate. The use of such words as “expect,” “anticipate,” “forecast,”and comparable terms should be understood by the reader to indicate that thestatement is “forward-looking” and thus subject to change in a manner that canbe unpredictable. Factors that could cause actual results to differ from theresults anticipated, but not guaranteed, in this report, include (withoutlimitation) economic and social conditions, competition for loans, mortgages,and other financial services and products, changes in interest rates,unforeseen changes in liquidity, results of operations, and financialconditions affecting the Company’s customers, and other risks that cannot beaccurately quantified or completely identified. Many factors affecting theCompany’s financial condition and profitability, including changes in economicconditions, the volatility of interest rates, political events and competitionfrom other providers of financial services simply cannot be predicted. Becausethese factors are unpredictable and beyond the Company’s control, earnings mayfluctuate from period to period. The purpose of this type of information is toprovide readers with information relevant to understanding and assessing thefinancial condition and results of operations of the Company, and not topredict the future or to guarantee results. The Company is unable to predictthe types of circumstances, conditions and factors that can cause anticipatedresults to change. The Company undertakes no obligation to publish revisedforward-looking statements to reflect the occurrence of changed or unanticipatedevents, circumstances or results.

 

12

----

 

**General**

 

On January 23, 2004, American Patriot Financial Group,Inc. (formerly known as BG Financial Group, Inc.) (“Company”), a bank holdingcompany, acquired all of the outstanding shares of American Patriot Bank(formerly known as Bank of Greeneville) (“Bank”) in a one for one stockexchange. The Bank is a Tennessee-chartered, FDIC-insured, non-Membercommercial bank offering a wide range of banking services, including checking,savings, and money market deposit accounts, certificates of deposit and loansfor consumers, commercial and real estate purposes, and is the principalbusiness of the Company. The main office of the Corporation is located at 3095East Andrew Johnson Highway, Greeneville, Greene County, Tennessee, which isalso the main office of the Bank. This location is a 2.66 acre lot, on whichthere is a fully operational modular bank unit. Other full service branchbanking offices of the Bank are located at 506 Asheville Highway and 208 WestSummer Street, Greeneville, Greene County, Tennessee. Recently the Bankpurchased property in Maryville, Tennessee at 710 South Foothills Plaza Drive. Thislocation is a 1.17 acre lot, on which there is a 3,272 square foot fullyoperational brick bank building with drive through facilities and was openedfor business on July 9, 2007. These locations are centrally located and in hightraffic/exposure areas. Automatic teller machines and overnight “deposit drops”are positioned to serve the Bank’s clients. Additional branches may beestablished as market opportunities surface.

 

**Liquidity**

 

At September 30, 2007, the Company had liquid assetsof approximately $14.5 million in the form of cash and federal funds soldcompared to approximately $15.5 million on December 31, 2006. Managementbelieves that the liquid assets are adequate at September 30, 2007. Additionalliquidity should be provided by the growth in deposit accounts and loanrepayments. The Company also has the ability to purchase federal funds and is amember of the Federal Home Loan Bank of Cincinnati that will provide a creditline if necessary. Management is not aware of any trends, events oruncertainties that are reasonably likely to have a material impact on theCompany’s short term or long term liquidity.

 

**Resultsof Operations**

 

The Company had a net loss of $3,611 or $.00 pershare for the quarter ended September 30, 2007 compared to net income of$154,064 or $.07 per share for the quarter ended September 30, 2006. Net incomefor the nine months ended September 30, 2007 was $238,459 as compared to a netincome of $272,444 for the same period in 2006. Most of the net loss during thequarter ended September 30, 2007 is attributable to additional expensesincurred due to the startup of the new Maryville Branch.

 

13

----

 

*Net Interest Income/Margin*

 

Net interest income represents the amount by whichinterest earned on various assets exceeds interest paid on deposits and otherinterest-bearing liabilities and is the most significant component of theCompany’s earnings. Interest income for the quarter ended September 30, 2007was $2,092,362 compared to $1,720,152 for the same period in 2006, and totalinterest expense was $1,022,889 in 2007 compared to $753,621 in 2006 for thesame period. Interest income for the nine months ended September 30, 2007 was$5,965,557, compared to $4,886,457 for the same period in 2006, and totalinterest expense was $2,826,012 in 2007 compared to $2,062,711 in 2006 for thesame period. The Company pursues local deposits aggressively with attractiveinterest rates, which has resulted in compression of net interest margin. TheCompany benefited from a “catch up” interest payment of $121,082 received froma large loan previously in non accrual status during the nine months endedSeptember 30, 2007. Based on the Company’s mix of interest earning assets andinterest bearing liabilities, management believes that net interest marginshould remain stable or begin to decrease slightly for the remainder of theyear. If interest rates remain stable or continue to decline, net interestmargin could decline due to competitive pricing of both loans and interestbearing deposits.

 

*Provision for / Benefit from Loan Losses*

 

The provision for (benefit from) loan lossesrepresents a charge (or recovery) to operations necessary to establish anallowance for possible loan losses, which in management’s evaluation, isadequate to provide coverage for estimated losses on outstanding loans and toprovide for uncertainties in the economy. The provision for loan losses duringthe three month and nine month period ended September 30, 2007 was $91,848 and$132,811, respectively. The benefit from loan losses during the three monthperiod ended September 30, 2006 was $60,796, whereas there was a provision of$39,075 for the nine month period ended September 30, 2006. For the three months ended September 30,2006, the Bank was able to record a benefit from loan loss provision due toexcellent collection efforts on both consumer and commercial loans. Duringthe three and nine months ended September 30, 2007, loan charge-offs were$101,522 and $181,483 respectively. The recoveries for the three and nine monthperiods ended September 30, 2007 were $10,520 and $36,481, respectively. Theallowance for loan losses was $605,765 at September 30, 2007 as compared to$617,956 at December 31, 2006, a decrease of 2.0%. The allowance was .68% ofloans at September 30, 2007. Management believes the allowance for loan lossesat September 30, 2007 to be adequate and will increase during the year to matchnormal loan growth.

 

*Provision for/Benefit from Income Taxes*

 

The Company had a benefit from income taxes of $20,583for the three months ended September 30, 2007, whereas a provision for incometax expense of $133,161 for the nine months ended September 30, 2007 wasrecognized. This compares to a provision for income tax expense of $114,859 and$176,541 for the three and nine months ended September 30, 2006, respectively. Managementbelieves the provision for income taxes for the period ended September 30, 2007to be adequate.

 

14

----

 

*Noninterest Income*

 

The Company’s noninterest income consists of servicecharges on deposit accounts and other fees and commissions. Total noninterestincome for three and nine months ended September 30, 2007 was $199,680 and$546,191, respectively when compared to $110,520 and $366.846 for the sameperiods in 2006. The main reason for the increase for the three and nine monthperiods ended September 30, 2007, was an increase in service charges on depositaccounts. The increase in service charges was driven by a new program called “BounceProtection.”  This program pays customercheck overdrafts, up to a predetermined limit, for a service charge on eachoverdraft incurred by the customer. Management projects that other fees andcommissions and service charges will increase in 2007.

 

*Noninterest Expense*

 

Noninterest expenses totaled $1,201,499 and$3,181,305 for the three and nine months ended September 30, 2007, as comparedto $868,924 and $2,702,532 for the same periods in 2006. Salaries and benefitsincreased $182,141 and $308,357 for the three and nine months ended September30, 2007, respectively, when compared to the same periods for 2006. Theincrease was mainly due to the addition of key management personnel inanticipation of opening the branch bank in Maryville, Tennessee. The Maryvillebranch opened on July 9, 2007. Occupancy expenses increased $47,612 and $69,560for the three and nine months ended September 30, 2007, respectively, whencompared to the same periods in 2006. Other operating expenses increased$91,613 and $72,732 for the three and nine months ended September 30, 2007 whencompared to the same periods in 2006. Most of the noninterest expense increasescan be attributed to the opening of the new branch, which required newstationery, printing and advertising. Sharp increases in Federal DepositInsurance are another major contributing factor in the increase in othernoninterest expense.

 

**Financial Condition**

 

Totalassets at September 30, 2007, were $111,830,124, an increase of $14,077,443 or14.4% compared to 2006 year-end assets of $97,752,681. Deposits increased to$99,848,604 at September 30, 2007, an increase of $17,345,552 or 21.0% from$82,503,052 at December 31, 2006. The increase in deposits was mainly due tomanagement’s more aggressive efforts to obtain local deposits. Premises andequipment increased to $5,610,076 at September 30, 2007 an increase of$1,810,557 or 47.7% from $3,799,519 at December 31, 2006. The purchase of a newbranch located at 710 South Foothills Plaza Drive, Maryville, Tennessee,accounted for most of the increase in Premises and equipment. The Company places an emphasis on anintegrated approach to its balance sheet management. Significant balance sheetcomponents of loans and sources of funds are managed in an integrated mannerwith the management of interest rate risk, liquidity, and capital. Thesecomponents are discussed below.

 

*Loans*

 

Netloans outstanding totaled $87,897,582 at September 30, 2007 compared to$77,059,828 at December 31, 2006. Commercial and real estate loan growthaccounted for almost all of the approximately $10.8 million increase for thefirst three quarters of 2007. Management feels the overall quality of loansremains solid. In the event that a loan is 90 days or more past due the accrualof income is generally discontinued when the full collection of principal orinterest is in doubt unless the obligations are both well secured and in theprocess of collection. At September 30, 2007, total loans 90 days or more pastdue and still accruing interest were $0, while total loans in non-accrualstatus were $555,404. At December 31, 2006, total loans 90 days or more pastdue and still accruing interest were $0, while total loans in non-accrualstatus were $1,531,621.

 

15

----

 

*Restricted Equity Investments*

 

FederalHome Loan Bank (FHLB) stock at September 30, 2007 had an amortized cost andmarket value of $258,800 as compared to an amortized cost and a market value of$258,800 at December 31, 2006. As a member of the FHLB, the Company is requiredto maintain stock in an amount equal to .15% of total assets. Federal Home LoanBank stock is carried at cost. Federal Home Loan Bank stock is maintained bythe Company at par value of one hundred dollars per share.

 

*Deposits*

 

Total deposits, which are the principal source offunds for the Company, were $99,848,604 at September 30, 2007, compared to$82,503,052 at December 31, 2006, representing an increase of 21.0%. TheCompany has targeted local consumers, professional and commercial businesses asits central clientele, therefore, deposit instruments in the form of demanddeposits, savings accounts, money market demand accounts, NOW accounts,certificates of deposit and individual retirement accounts are offered tocustomers. The Company established a line of credit with the Federal Home LoanBank secured by a blanket-pledge of 1-4 family residential mortgage loans. AtSeptember 30, 2007 the Company had outstanding advances of $2,002,658 at theFederal Home Loan Bank.

 

*Securitized Borrowings*

 

Securitized borrowings were $0 at September 30,2007, compared to $3,099,091 at December 31, 2006. Certain loans amounting to$3,099,091 at December 31, 2006 were participated with other banks, butcontained prohibited language according to SFAS No. 140. Prior to Statement No.140, it was not uncommon for participation agreements to contain covenants thatrestricted the extent of control that a purchasing institution could exerciseover loans purchased from another institution. Under previous guidance, suchconstraints did not prohibit sale accounting from being used by the seller. However,under Statement No. 140, such constraints do prohibit sale accounting frombeing used and thus, the sold portion is accounted for as a secured borrowingon the seller’s financial statements. This situation arose when a softwareupdate (GulfPak) was installed by the Bank. The update contained the prohibitedlanguage according to Statement No. 140. The Bank was unaware of this changeuntil discovered in April 2007. This language was corrected and agreed to byall banks participating in the various loans.

 

*Capital*

 

Equity capital atSeptember 30, 2007 was $9,086,046, an increase of $249,518 from $8,836,528 atDecember 31, 2006, due to a net profit of $238,459 for the first nine months of2007, and the issuance of 3,320 shares of common stock pursuant to the exerciseof stock options for $11,059.

 

16

----

 

AtSeptember 30, 2007, both the Company’s and Bank’s capital ratios were in excessof the regulatory minimums. Those ratios are as follows:

 
| ** **                       | ** ** | **Required  Minimum  Ratio** | ** ** | **To be  Well  Capitalized** | ** ** | **Bank** | ** ** | **Company** | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|----------|------------|-------------|------------|
| Tier 1 Leverage  ratio           |       | 4.00                         | %          | 5.00                         | %          | 8.47     | %          | 8.61        | %          |
| Tier 1  risk-based capital ratio |       | 4.00                         | %          | 6.00                         | %          | 9.96     | %          | 10.02       | %          |
| Total risk-based  capital ratio  |       | 8.00                         | %          | 10.00                        | %          | 10.62    | %          | 10.69       | %          |

 

*Liability and Asset Management*

 

The Company’sAsset/Liability Committee (“ALCO”) actively measures and manages interest raterisk using a process developed by the Company. The ALCO is also responsible forimplementing the Company’s asset/liability management policies, overseeing theformulation and implementation of strategies to improve balance sheetpositioning and earnings, and reviewing the Company’s interest rate sensitivityposition.

 

The primary tool thatmanagement uses to measure short-term interest rate risk is a net interestincome simulation model prepared by an independent correspondent institution. Thesesimulations estimate the impact that various changes in the overall level ofinterest rates over one- and two-year time horizons would have on net interestincome. The results help the Company develop strategies for managing exposuresto interest rate risk.

 

Like any forecastingtechnique, interest rate simulation modeling is based on a large number ofassumptions. In this case, the assumptions relate primarily to loan and depositgrowth, asset and liability prepayments, interest rates and balance sheetmanagement strategies. Management believes that both individually and in theaggregate the assumptions are reasonable. Nevertheless, the simulation modelingprocess produces only a sophisticated estimate, not a precise calculation ofexposure.

 

At September 30, 2007,approximately 69% of the Company’s gross loans had adjustable rates. Based onthe asset/liability modeling, management believes that these loans reprice at afaster pace than liabilities held by the Company. Because the majority of theCompany’s liabilities are 12 months and under and the gap in repricing is assetsensitive, management believes that a rising rate environment would have apositive impact on the Company’s net interest margin. Floors in the majority ofthe Company’s adjustable rate assets also mitigate interest rate sensitivity ina decreasing rate environment.

 

*Off-Balance Sheet Arrangements*

 

TheCompany, at September 30, 2007, had outstanding unused lines of credit andstandby letters of credit that totaled approximately $18,230,734. Thesecommitments have fixed maturity dates and many will mature without being drawnupon, meaning that the total commitment does not necessarily represent thefuture cash requirements. The Company has the ability to liquidate Federalfunds sold or, on a short-term basis, to purchase Federal funds from otherbanks and to borrow from the Federal Home Loan Bank. At September 30, 2007, theCompany had established with correspondent banks the ability to purchaseFederal funds if needed.

 

17

----

 

**Item 3.****   ****Quantitative and QualitativeDisclosures about Market Risk**

 

Theinformation set forth on pages 11 through 17 of Item 2, “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS isincorporated herein by reference.

 

**Item 4.****   ****Controls and Procedures**

 

a)             Evaluation of Disclosure Controls andProcedures

 

The Company maintains disclosure controls andprocedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under theSecurities Exchange Act of 1934 (the “Exchange Act”), that are designed toensure that information required to be disclosed by it in the reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time period specified in the SEC’s rules and forms and thatsuch information is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer. The Companycarried out an evaluation, under the supervision and with the participation ofits management, including its Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of its disclosurecontrols and procedures as of the end of the period covered by this report. Basedon the evaluation of these disclosure controls and procedures, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure control and procedures were effective.

 

b)            Changes in Internal Controls andProcedures

 

There were no changes in our internal controls overfinancial reporting during the quarter ended September 30, 2007, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

18

----

 

**PART II - OTHER INFORMATION**

 

**Item 1.****    LEGAL PROCEEDINGS**

 

None.

 

**Item 1A. RISK FACTORS**

 

Therehave been no material changes to our risk factors as previously disclosed inPart I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2006, as filed with the Securities and Exchange Commission onApril 17, 2007.

 

**Item 2.****    UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

(a)   3,320 shares of the Company’s common stock were issuedduring the quarter ended September 30, 2007 as a result of the exercise of thefollowing stock options:

 
| **Date Exercised** | ** ** | **Number of Shares** | ** ** | **Exercise Price** | ** ** |
|-------------------------|------------|--------------------------------|------------|-------------------------|------------|
|                    |       |                           |       |                    |       |
| July 10, 2007           |       | 2,220                          |       | $                       | 3.33       |   |
| September 21,  2007     |       | 1,100                          |       | $                       | 3.33       |   |

 

The aggregate proceeds ofthe shares sold were $11,059.

 

There were nounderwriters and no underwriting discounts or commissions. All sales were forcash.

 

The Company believes that an exemption fromregistration of these shares was available to the Company in that the issuancethereof did not constitute a public offering of securities within the meaningof the Securities Act of 1933, as amended, pursuant to Section 4(2) of theSecurities Act.

 

The securities sold are not convertible orexchangeable into any other equity security.

 

The proceeds of the sales are being used by theCompany for general corporate purposes.

 

(b)   Not applicable.

 

(c)   No repurchases of Company securities were made duringthe quarter ended September 30, 2007.

 

The Company’s ability topay dividends is derived from the income of the Bank. The Bank’s ability todeclare and pay dividends is limited by its obligations to maintain sufficientcapital and by other general restrictions on its dividends that are applicableto banks that are regulated by the FDIC and the Tennessee Department ofFinancial Institutions. In addition, the Federal Reserve Board may imposerestrictions on the Company’s ability to pay dividends on its common stock. Asa result, the Company cannot assure its shareholders that it will declare orpay dividends on shares of its common stock in the future.

 

19

----

 

**Item 3.****    DEFAULTS UPON SENIOR SECURITIES**

 

(a)   None.

 

(b)   None.

 

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

 

None.

 

**Item 5.****    OTHER INFORMATION**

 

(a)   None.

 

(b)  None.

 

20

----

 

**Item 6.****    EXHIBITS.**

 

Indexto Exhibits.

 
| **Exhibit No.** | ** ** | **Description**                                                                                 |
|-----------------|------------|-------------------------------------------------------------------------------------------------|
|            |       |                                                                                            |
| 2.1*            |       | Articles of Share Exchange of American Patriot Bank  and American Patriot Financial Group, Inc. |
| 2.2*            |       | Plan of Share Exchange of American Patriot Bank and  American Patriot Financial Group, Inc.     |
|            |       |                                                                                            |
| 3.1*            |       | Charter of American Patriot Financial Group, Inc.                                               |
| 3.2*            |       | Bylaws of American Patriot Financial Group, Inc.                                                |
|            |       |                                                                                            |
| 10.1**          |       | Stock Option Agreement between American Patriot Bank  and J. Robert Grubbs                      |
| 10.2**          |       | Stock Option Agreement between American Patriot Bank  and T. Don Waddell                        |
|            |       |                                                                                            |
| 31.1            |       | Certification pursuant to Rule 13a-14(a)/15d-14(a)                                              |
| 31.2            |       | Certification pursuant to Rule 13a-14(a)/15d-14(a)                                              |
| 32.1            |       | Certification pursuant to Rule 18 USC Section  1350-Sarbanes-Oxley Act of 2002                  |
| 32.2            |       | Certification pursuant to Rule 18 USC Section  1350-Sarbanes-Oxley Act of 2002                  |

 

----

*Previously filed as an exhibit to a Form 8-K filed by American PatriotFinancial Group, Inc. with the Securities and Exchange Commission on May 21,2004, and incorporated herein by reference.

 

** Previouslyfiled as an exhibit to American Patriot Bank’s Registration Statement on Form10-SB, as filed with the Federal Deposit Insurance Corporation on April 27,2002, and incorporated herein by reference.

 

21

----

 

***SIGNATURES***

 

In accordance with the requirements of the ExchangeAct, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|   | AMERICAN PATRIOT  FINANCIAL GROUP, INC. |   |
|--------|-----------------------------------------|--------|
|   | (Registrant)                            |   |

 

 
| DATE:  | November 14,  2007 |   | /s/ J. Robert Grubbs    |
|--------|--------------------|--------|-------------------------|
|   |               |   | J. Robert Grubbs        |
|   |               |   | Chief Executive Officer |
|   |               |   |                    |
|   |               |   |                    |
| DATE:  | November 14,  2007 |   | /s/ T. Don Waddell      |
|   |               |   | T. Don Waddell          |
|   |               |   | Chief Financial Officer |

 

22

----