**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

| **(Mark One)**                                    |
|---------------------------------------------------|
| **x**                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                        | ** ** |
| **For the  quarterly period ended June 30, 2007** |
| ** **                                        |
| **OR**                                            |
| ** **                                        |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

**For the transition period from                          to                          **

**Commissionfile number   000-50771**

**AMERICAN PATRIOT FINANCIAL 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  telephone number, including area code:**  (423) 636-1555**  |
|                                                                                |   |                                  |
| **BG  FINANCIAL GROUP, INC.**                                                       |
| (Former name,  former address 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.

Largeaccelerated filer o  Accelerated filer o   Non-accelerated filer x

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

As of August 1, 2007, there were 2,310,771 shares ofcommon stock, $0.333 par value, issued and outstanding.

 

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| **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 - June 30, 2007  (unaudited) and December 31, 2006 |   |
|                                |   |   |   |
|                                |   | Consolidated Statements of Income - For the six months  ended June 30, 2007 and 2006 (unaudited) |   |
|                                |   |   |   |
|                                |   | Consolidated Statements of Income - For the three  months ended June 30, 2007 and 2006 (unaudited) |   |
|                                |   |   |   |
|                                |   | Consolidated Statements of Cash Flows - For the six  months ended June 30, 2007 and 2006 (unaudited) |   |
|                                |   |   |   |
|                                |   | Notes to Consolidated Financial Statements |   |
|                                |   |   |   |
| **Item 2.**                         | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | ** ** |
| ** **                          | ** ** | ** ** | ** ** |
| **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

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF FINANCIALCONDITION**

**Part I. FINANCIALINFORMATION**

**Item 1. Financial Statements**
| ** **                                                                                                                                    | ** ** | **As of  June 30, 2007  (Unaudited) ** | ** **  | **As of  December 31, 2006 ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|-------------|---------------------------------------------------|------------|
| **ASSETS**                                                                                                                                    |       |                                                       |        |                                              |       |
|                                                                                                                                          |       |                                                       |        |                                              |       |
| Cash and due  from banks                                                                                                                      |       | $                                                          | 3,105,269   |                                              | $          | 3,263,969 |   |
| Federal funds  sold                                                                                                                           |       | 9,578,546                                                  |        | 12,224,443                                        |       |
| Cash and cash equivalents                                                                                                                     |       | 12,683,815                                                 |        | 15,488,412                                        |       |
| Federal Home  Loan Bank stock, at cost                                                                                                        |       | 258,800                                                    |        | 258,800                                           |       |
| Loans, net of  estimated allowance for loan losses of $604,918 in 2007 and $617,956 in 2006                                                   |       | 82,628,681                                                 |        | 77,059,828                                        |       |
| Premises and  equipment, net                                                                                                                  |       | 5,500,591                                                  |        | 3,799,519                                         |       |
| Accrued interest  receivable                                                                                                                  |       | 771,805                                                    |        | 506,906                                           |       |
| Deferred tax  assets, net                                                                                                                     |       | 154,306                                                    |        | 166,545                                           |       |
| Foreclosed  assets                                                                                                                            |       | 393,900                                                    |        | 393,900                                           |       |
| Other assets                                                                                                                                  |       | 104,113                                                    |        | 78,771                                            |       |
| CSV – Life  insurance                                                                                                                    |       | 1,600,000                                                  |        | —                                            |       |
| Total Assets                                                                                                                                  |       | $                                                          | 104,096,011 |                                              | $          | 97,752,681 |   |
| ** **                                                                                                                                    |       |                                                       |        |                                              |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                 |       |                                                       |        |                                              |       |
|                                                                                                                                          |       |                                                       |        |                                              |       |
| **LIABILITIES**                                                                                                                               |       |                                                       |        |                                              |       |
| Deposits:                                                                                                                                     |       |                                                       |        |                                              |       |
| Noninterest-bearing                                                                                                                           |       |                                                       |        |                                              |       |
| Demand                                                                                                                                        |       | $                                                          | 10,427,649  |                                              | $          | 9,326,547 |   |
| Interest-bearing                                                                                                                              |       |                                                       |        |                                              |       |
| Money market, interest checking and savings                                                                                                   |       | 30,173,204                                                 |        | 28,496,934                                        |       |
| Time deposits                                                                                                                                 |       | 51,605,988                                                 |        | 44,679,571                                        |       |
| Total Deposits                                                                                                                                |       | 92,206,841                                                 |        | 82,503,052                                        |       |
| Accrued interest payable                                                                                                                      |       | 494,074                                                    |        | 698,825                                           |       |
| Securitized borrowings                                                                                                                        |       | —                                                     |        | 3,099,091                                         |       |
| Other liabilities                                                                                                                             |       | 269,790                                                    |        | 247,026                                           |       |
| Federal Home Loan Bank advances                                                                                                               |       | 2,046,708                                                  |        | 2,368,159                                         |       |
| Total Liabilities                                                                                                                             |       | 95,017,413                                                 |        | 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 2,310,771 shares at June 30, 2007 and December  31, 2006 |       | 770,256                                                    |        | 770,256                                           |       |
| Additional paid-in capital                                                                                                                    |       | 6,932,307                                                  |        | 6,932,307                                         |       |
| Retained earnings                                                                                                                             |       | 1,376,035                                                  |        | 1,133,965                                         |       |
| Total Stockholders’ Equity                                                                                                               |       | 9,078,598                                                  |        | 8,836,528                                         |       |
| Total  Liabilities and Stockholders’ Equity                                                                                              |       | $                                                          | 104,096,011 |                                              | $          | 97,752,681 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

3

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**
| ** **                                           | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006** | ** ** |
| **Interest  and dividend income:**                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Loans, including fees                                |       | $                              | 3,584,623  |   | $ | 2,888,552 |   |
| Dividends on Federal Home Loan Bank stock            |       | 8,262                          |       | 7,020 |   |
| Federal funds sold and other                         |       | 280,310                        |       | 270,733 |   |
| Total interest and dividend income                   |       | 3,873,195                      |       | 3,166,305 |   |
| ** **                                           | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Interest  expense:**                               | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Deposits                                             |       | 1,765,080                      |       | 1,240,727 |   |
| Borrowed funds                                       |       | 38,043                         |       | 68,363 |   |
| Total interest expense                               |       | 1,803,123                      |       | 1,309,090 |   |
| Net interest income before provision for loan losses |       | 2,070,072                      | ** ** | 1,857,215 | ** ** |
| ** **                                           | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Provision  for loan losses**                       |       | 40,963                         |       | 99,871 |   |
| Net interest income after provision for loan losses  | ** ** | 2,029,109                      | ** ** | 1,757,344 | ** ** |
|                                                 |       |                           |       |   |   |
| **Noninterest  income:**                             |       |                           |       |   |   |
| Service charges on deposit accounts                  |       | 271,464                        |       | 126,194 |   |
| Fees from origination of mortgage loans sold         |       | 48,105                         |       | 43,050 |   |
| Investment sales commissions                         |       | 16,377                         |       | 85,376 |   |
| Other                                                |       | 10,565                         |       | 9,187 |   |
| Total noninterest income                             |       | 346,511                        |       | 263,807 |   |
|                                                 |       |                           |       |   |   |
| **Noninterest  expense:**                            |       |                           |       |   |   |
| Salaries and employee benefits                       |       | 1,033,836                      |       | 907,620 |   |
| Occupancy                                            |       | 262,848                        |       | 240,900 |   |
| Advertising                                          |       | 48,807                         |       | 42,826 |   |
| Data processing                                      |       | 123,610                        |       | 107,075 |   |
| Legal and professional                               |       | 211,885                        |       | 217,486 |   |
| Other operating                                      |       | 298,820                        |       | 325,182 |   |
| Total noninterest expense                            |       | 1,979,806                      |       | 1,841,089 |   |
| **Income before income taxes**                       |       | 395,814                        |       | 180,062 |   |
|                                                 |       |                           |       |   |   |
| Income tax  expense                                  |       | 153,744                        |       | 61,682 |   |
|                                                 |       |                           |       |   |   |
| **Net income**                                       |       | $                              | 242,070    |   | $ | 118,380 |   |
|                                                 |       |                           |       |   |   |
| Basic earnings  per common share                     |       | $                              | .10        |   | $ | .05 |   |
| Diluted earnings per  common share                   |       | $                              | .10        |   | $ | .05 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

4

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**
| ** **                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006** | ** ** |
| **Interest  and dividend income:**                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Loans, including fees                                                |       | $                                | 1,865,500  |   | $ | 1,368,036 |   |
| Dividends on Federal Home Loan Bank stock                            |       | 4,462                            |       | 3,553 |   |
| Federal funds sold and other                                         |       | 167,677                          |       | 144,862 |   |
| Total interest and dividend income                                   |       | 2,037,639                        |       | 1,516,451 |   |
| ** **                                                           |       |                             | ** ** | ** ** | ** ** |
| **Interest  expense:**                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Deposits                                                             |       | 939,492                          |       | 645,593 |   |
| Borrowed funds                                                       |       | 18,282                           |       | 34,500 |   |
| Total interest expense                                               |       | 957,774                          |       | 680,093 |   |
| Net interest income before provision for (benefit  from) loan losses |       | 1,079,865                        | ** ** | 836,358 | ** ** |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**                        |       | (63,401                          | )          | 150,368 |   |
| Net interest income after provision for (benefit  from) loan losses  | ** ** | 1,143,266                        | ** ** | 685,990 | ** ** |
|                                                                 |       |                             |       |   |   |
| **Noninterest  income:**                                             |       |                             |       |   |   |
| Service charges on deposit accounts                                  |       | 143,972                          |       | 63,510 |   |
| Fees from origination of mortgage loans sold                         |       | 13,781                           |       | 26,959 |   |
| Investment sales commissions                                         |       | 14,726                           |       | 41,904 |   |
| Other                                                                |       | 4,672                            |       | 5,545 |   |
| Total noninterest income                                             |       | 177,151                          |       | 137,918 |   |
|                                                                 |       |                             |       |   |   |
| **Noninterest  expense:**                                            |       |                             |       |   |   |
| Salaries and employee benefits                                       |       | 545,045                          |       | 446,525 |   |
| Occupancy                                                            |       | 135,351                          |       | 126,706 |   |
| Advertising                                                          |       | 29,812                           |       | 23,099 |   |
| Data processing                                                      |       | 67,905                           |       | 56,541 |   |
| Legal and professional                                               |       | 130,360                          |       | 101,675 |   |
| Other operating                                                      |       | 178,168                          |       | 161,129 |   |
| Total noninterest expense                                            |       | 1,086,641                        |       | 915,675 |   |
| **Income before income taxes**                                       |       | 233,776                          |       | (91,767 | ) |
|                                                                 |       |                             |       |   |   |
| Income tax  expense (benefit)                                        |       | 92,797                           |       | (44,803 | ) |
|                                                                 |       |                             |       |   |   |
| **Net income (loss)**                                                |       | $                                | 140,979    |   | $ | (46,964 | ) |
|                                                                 |       |                             |       |   |   |
| Basic earnings  (loss) per common share                              |       | $                                | .06        |   | $ | (.02 | ) |
| Diluted earnings (loss)  per common share                            |       | $                                | .06        |   | $ | (.02 | ) |

 

The accompanyingnotes are an integral part of these consolidated financial statements

5

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                                   | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                   | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006** | ** ** |
| ** **                                                                                   |       |                           |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                   |       |                           |       |   |   |
| Net income                                                                                   |       | $                              | 242,070    |   | $ | 118,380 |   |
| Adjustments to reconcile net income to net cash (used  in) provided by operating activities: |       |                           |       |   |   |
| Provision for loan losses                                                                    |       | 40,963                         |       | 99,871 |   |
| Depreciation                                                                                 |       | 121,739                        |       | 131,447 |   |
| Write-down of foreclosed assets                                                              |       | 28,430                         |       | — |   |
| Realized loss (gain) on sales of foreclosed repossessed  assets                              |       | (1,900                         | )          | 11,418 |   |
| Deferred income tax expense                                                                  |       | 12,239                         |       | 14,128 |   |
| Net change in:                                                                               |       |                           |       |   |   |
| Accrued interest receivable                                                                  |       | (264,899                       | )          | 422 |   |
| Other assets                                                                                 |       | (25,342                        | )          | 32,174 |   |
| Other liabilities                                                                            |       | 22,764                         |       | (9,759 | ) |
| Accrued interest payable                                                                     |       | (204,751                       | )          | 93,431 |   |
| Net cash (used in) provided by operating activities                                          |       | (28,687                        | )          | 491,512 |   |
|                                                                                         |       |                           |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                   |       |                           |       |   |   |
| ** **                                                                                   |       |                           |       |   |   |
| Federal Home Loan Bank stock purchases                                                       |       | —                         |       | (6,900 | ) |
| Purchase of life insurance                                                                   |       | (1,600,000                     | )          | — |   |
| Proceeds from sales of foreclosed/repossessed assets                                         |       | 34,900                         |       | 68,775 |   |
| Loan originations and principal collections, net                                             |       | (5,671,246                     | )          | (4,517,046 | ) |
| Additions to premises and equipment                                                          |       | (1,822,811                     | )          | (182,212 | ) |
| Net cash used in investing activities                                                        |       | (9,059,157                     | )          | (4,637,383 | ) |
|                                                                                         |       |                           |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                   |       |                           |       |   |   |
| Net change in deposits (non-time deposits)                                                   |       | 2,777,372                      |       | 6,620,427 |   |
| Net change in time deposits                                                                  |       | 6,926,417                      |       | (4,397,270 | ) |
| Federal Home Loan Bank advances                                                              |       | —                         |       | 75,000 |   |
| Repayment of securitized borrowings                                                          |       | (3,099,091                     | )          | — |   |
| Federal Home Loan Bank repayments                                                            |       | (321,451                       | )          | (92,234 | ) |
| Net cash provided by financing activities                                                    |       | 6,283,247                      |       | 2,205,923 |   |
|                                                                                         |       |                           |       |   |   |
| Net change in  cash and cash equivalents                                                     |       | (2,804,597                     | )          | (1,939,948 | ) |
|                                                                                         |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of period                                            |       | 15,488,412                     |       | 18,273,842 |   |
|                                                                                         |       |                           |       |   |   |
| Cash and cash  equivalents at end of period                                                  |       | $                              | 12,683,815 |   | $ | 16,333,894 |   |
|                                                                                         |       |                           |       |   |   |
| **SUPPLEMENTARY  CASH FLOW INFORMATION:**                                                    |       |                           |       |   |   |
| Interest paid on deposits and borrowed funds                                                 |       | $                              | 2,007,873  |   | $ | 1,215,659 |   |
| Income taxes  paid                                                                           |       | $                              | 182,000    |   | $ | — |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

6

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| ** **                                                                       | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                       | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006** | ** ** |
| **SUPPLEMENTAL  SCHEDULE OF NON-CASH ACTIVITIES:**                               |       |                           |       |   |   |
| Foreclosed/repossessed assets sold during the period  and financed through loans |       | $                              | 20,000     |   | $ | 147,741 |   |
| Loans moved to  foreclosed/repossessed assets                                    |       | $                              | 61,429     |   | $ | 177,288 |   |

 

 

The accompanyingnotes are an integral part of these consolidated financial statements

7

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

**Greeneville,Tennessee**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

**Note 1.   Summary of Significant Accounting Policies**

*Nature of Business*:

American PatriotFinancial Group, Inc. (the “Company”) is a bank holding company whose businessis conducted by its wholly-owned subsidiary, American Patriot Bank (the “Bank”).  American Patriot Bank is engaged in thebusiness of originating loans primarily within its lending area, Greenevilleand Greene County in Tennessee.  The Bankobtains deposits both inside and outside of its primary lending area.  The Company was organized in October2003.  The Company had minimal assets,liabilities or operations until January, 2004, when it acquired the Bank in aPlan of Share Exchange whereby the stockholders exchanged their shares ofownership in the Bank for shares of ownership in the Company on a one-for-onebasis.  As a part of the Plan of ShareExchange, the Bank became a wholly owned subsidiary of the Company.

The following is adescription of the significant policies used in the preparation of theaccompanying consolidated financial statements.

*Basisof Presentation:*

These consolidatedfinancial statements include the accounts of the American Patriot Financial Group,Inc. and its wholly owned subsidiary, American Patriot Bank.  Significant intercompany transactions andaccounts are eliminated in consolidation.

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States for interimfinancial information and in accordance with the instructions to Form 10-Q andArticle 10 of Regulation S-X as promulgated by the Securities and ExchangeCommission (“SEC”).  Accordingly, they donot include all the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation of the financial position and results of operations for theperiods presented have been included. Operating results for the three and six months ended June 30, 2007 arenot necessarily indicative of the results that may be expected for the yearending December 31, 2007.  For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.  Certain amounts fromprior period financial statements have been reclassified to conform to currentperiod’s presentation.

*Use ofEstimates:*

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities as of the balance sheet dateand the reported amounts of revenues and expenses during the reportingperiod.  Actual results could differ fromthose estimates.  The most significantmanagement accounting estimate is the allowance for loan losses.  The allowance for loan losses is evaluated ona regular 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.  Thisevaluation is inherently subjective as it requires estimates that aresusceptible to significant revision as more information becomes available.

8

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**Note 2.****            Stock Options andAwards**

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”).  This statement supercedes APB Opinion No. 25,“Accounting for Stock Issued to Employees” (APB 25), which the Company hadfollowed until the adoption of SFAS No. 123R.  The revised statement addresses the accounting for share-based paymenttransactions with employees and other third parties, eliminates the ability toaccount for share-based compensation transactions using APB 25 and requiresthat the compensation costs relating to such transactions be recognized in theconsolidated statement of income.   Inanticipation of adopting SFAS No. 123R, on May 17, 2005 the Board of Directorsapproved that all non-vested employee stock options granted to become fullyvested and exercisable as of that date in order to avoid recognition ofcompensation costs in the consolidated statement of income in futureperiods.  Any stock options granted afterMay 17, 2005 are fully exercisable on the date granted.  Accordingly, no compensation cost wasrecognized prior to the adoption of SFAS No. 123R on July 1, 2005.  No additional options were granted during theperiod ended June 30, 2007, therefore, no compensation cost is recognized inthe consolidated statement of income for the period ended June 30, 2007.  The aggregate intrinsic value of options was$1,089,839 at June 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 $9.00 per common share for the 223,629 options that werein-the-money at June 30, 2007.

**Note 3.   Earnings Per Share of Common Stock**

Basicearnings per share (EPS) of common stock is computed by dividing net income bythe weighted average number of common shares outstanding during theperiod.  Diluted earnings per share ofcommon stock is computed by dividing net income by the weighted average numberof common shares and potential dilutive common shares outstanding during theperiod.  Stock options are regarded aspotential common shares.  Potentialcommon shares are computed using the treasury stock method.  For the three months ended June 30, 2007,19,000 options are excluded from the effect of dilutive securities because theyare anti-dilutive; 85,344 options are similarly excluded from the effect ofdilutive securities for the three months ended June 30, 2006.

9

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The following is areconciliation of the numerators and denominators used in the basic and dilutedearnings per share computations for the three months and six months ended June30, 2007 and 2006:
| ** **                                                        | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | **Income  (Numerator) **                       | ** ** | **Shares  (Denominator) ** | ** ** | **Income  (Numerator) ** | ** ** | **Shares  (Denominator) ** | ** ** |
|                                                              |       |                                                |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                                                |       |   |   |   |   |   |   |
| Income available to common stockholders                           |       | $                                              | 140,979    |   | 2,310,771 |   | $  | (46,964 | ) | 2,310,771 |   |
|                                                              |       |                                                |       |   |   |   |   |   |   |
| Effect of  dilutive securities Stock options outstanding          |       | —                                              |       | 121,008 |   | — |   | 132,031 |   |
|                                                              |       |                                                |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                                |       |   |   |   |   |   |   |
| Income available to common shareholders plus assumed  conversions |       | $                                              | 140,979    |   | 2,431,779 |   | $  | (46,964 | ) | 2,442,802 |   |

 

 
| ** **                                                        | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                        | ** ** | **2007**                      | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | **Income  (Numerator) ** | ** ** | **Shares  (Denominator) ** | ** ** | **Income  (Numerator) ** | ** ** | **Shares  (Denominator) ** | ** ** |
|                                                              |       |                          |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                          |       |   |   |   |   |   |   |
| Income available to common stockholders                           |       | $                        | 242,070    |   | 2,310,771 |   | $  | 118,380 |   | 2,310,771 |   |
|                                                              |       |                          |       |   |   |   |   |   |   |
| Effect of  dilutive securities Stock options outstanding          |       | —                        |       | 120,319 |   | — |   | 139,685 |   |
|                                                              |       |                          |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                          |       |   |   |   |   |   |   |
| Income available to common shareholders plus assumed  conversions |       | $                        | 242,070    |   | 2,431,090 |   | $  | 118,380 |   | 2,450,456 |   |

 

10

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

**Impactof Inflation**

The consolidatedfinancial statements and related financial data presented herein have beenprepared in accordance with accounting principles generally accepted in theUnited States and practices within the banking industry that require themeasurement of financial position and operating results in terms of historicaldollars without considering the changes in the relative purchasing power ofmoney 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 have a more significant impact on afinancial institution’s performance than the effects of general levels ofinflation.

**CriticalAccounting Estimates**

The Company follows generallyaccepted accounting principles that are recognized in the United States, alongwith general practices within the banking industry.  In connection with the application of thoseprinciples and practices, we have made judgments and estimates which, in thecase of our allowance for loan and lease losses (ALLL), are material to thedetermination of our financial position and results of operation.  Other estimates relate to the valuation ofassets acquired in connection with foreclosures or in satisfaction of loans,and realization of deferred tax assets.

**RecentAccounting Pronouncements**

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 a death benefit or on the future cost ofmaintaining the insurance would depend on what the employer has effectivelyagreed to provide during the employee’s retirement.  The purchase of an endorsement-type lifeinsurance policy does not qualify as a settlement of the liability.

Theconsensus in EIFT 06-4 is effective for fiscal years beginning after December15, 2007.  The Company intends to adoptEIFT 06-4 effective January 1, 2008.  TheCompany is currently evaluating the impact this guidance will have on theCompany’s financial 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* (“EIFT 06-05”).  EIFT 06-5 is effective for the fiscal yearsbeginning after December 15, 2006.  EIFT06-5 pertains to companies with life insurance asset on a company’s balancesheet.  The Company adopted this EIFTeffective January 1, 2007 and it did not have a material impact on the Company’sfinancial position and results of operations.

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue 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.

11

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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 ofthe beginning of an entity’s first fiscal year that begins after September 15,2006.  The Company adopted SFAS 156 onJanuary 1, 2007.  The adoption of SFAS156 did not have any material impact on the Company’s consolidated financialcondition or results of operations.

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

In September, 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value and expands disclosures about fair valuemeasurements.  SFAS 157 will be appliedprospectively and is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years.  SFAS 157 is not expected to have a materialimpact on the Company’s consolidated financial statements.

In December 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (revised 2004), *Share-Based Payment* (“SFAS No. 123R”), which revised SFASNo. 123, *Accounting for Stock-Based Compensation*.  This statement supercedes APB Opinion No. 25,*Accounting for Stock Issued to Employees*.  The revised statement addresses theaccounting for share-based payment transactions with employees and other thirdparties, eliminates the ability to account for share-based compensationtransactions using APB 25 and requires that the compensation costs relating tosuch transactions be recognized in the consolidated statement of income.  The revised statement was effective as of thefirst interim or annual period beginning after September 15, 2005.  In anticipation of adopting SFAS No. 123R, theCompany elected to immediately vest all remaining stock options during 2005 toavoid the recognition of compensation costs in the consolidated statement ofincome in future periods.

**Forward-LookingStatements**

Management’s discussion of the Company andmanagement’s analysis of the Company’s operations and prospects, and other matters,may include forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995 and other provisions of federal andstate securities laws.  Although theCompany believes that the assumptions underlying such forward-lookingstatements contained in this Report are reasonable, any of the assumptionscould be inaccurate and, accordingly, there can be no assurance that theforward-looking statements included herein will prove to be accurate.  The use of such words as “expect,” “anticipate,”“forecast,” and comparable terms should be understood by the reader to indicatethat the statement is “forward-looking” and thus subject to change in a mannerthat can be unpredictable.  Factors thatcould cause actual results to differ from the results anticipated, but notguaranteed, in this Report, include (without limitation) economic and socialconditions, competition for loans, mortgages, and other financial services andproducts, changes in interest rates, unforeseen changes in liquidity, resultsof operations, and financial conditions affecting the Company’s customers, andother risks that cannot be accurately quantified or completely identified.  Many factors affecting the Company’sfinancial 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.  Thepurpose of this type of information is to provide readers with informationrelevant to understanding and assessing the financial condition and results ofoperations of the Company, and not to predict the future or to guaranteeresults.  The Company is unable topredict the types of circumstances, conditions and factors that can causeanticipated results to change.  TheCompany undertakes no obligation to publish revised forward-looking statementsto reflect the occurrence of changed or unanticipated events, circumstances orresults.

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**General**

On January 23, 2004,American Patriot Financial Group, Inc. (formerly known as BG Financial Group,Inc.) (“Company”), a bank holding company, acquired all of the outstandingshares of American Patriot Bank (formerly known as Bank of Greeneville) (“Bank”)in a one for one stock exchange.  TheBank is a Tennessee-chartered, FDIC-insured, non-Member commercial bankoffering a wide range of banking services, including checking, savings, andmoney market deposit accounts, certificates of deposit and loans for consumers,commercial and real estate purposes, and is the principal business of theCompany. The main office of the Corporation is located at 3095 East AndrewJohnson Highway, Greeneville, Greene County, Tennessee, which is also the mainoffice of the Bank.  This location is a2.66 acre lot, on which there is a fully operational modular bank unit.  Other full service branch banking offices ofthe Bank are located at 506 Asheville Highway and 208 West Summer Street,Greeneville, Greene County, Tennessee. Recently the Bank purchased property in Maryville, Tennessee at 710South Foothills Plaza Drive.  This locationis a 1.17 acre lot, on which there is a 3,272 square foot fully operationalbrick bank building with drive through facilities and was opened for businesson July 9, 2007.  These locations arecentrally located and in high traffic/exposure areas.  Automatic teller machines and overnight “depositdrops” are positioned to serve the Bank’s clients.  Additional branches may be established asmarket opportunities surface.

**Liquidity**

At June 30, 2007, the Company had liquid assets ofapproximately $12.7 million in the form of cash and federal funds sold comparedto approximately $15.5 million on December 31, 2006.  Management believes that the liquid assetsare adequate at June 30, 2007. Additional liquidity should be provided by thegrowth in deposit accounts and loan repayments. 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 notaware of any trends, events or uncertainties that are reasonably likely to havea material impact on the Company’s short term or long term liquidity.

**Resultsof Operations**

The Company had net income of $140,979 or $.06 pershare for the quarter ended June 30, 2007 compared to a net loss of $(46,964)or $(.02) per share for the quarter ended June 30, 2006.  Net income for the six months ended June 30,2007 was $242,070 as compared to a net income of $118,380 for the same periodin 2006. Most of the net loss during the quarter ended June 30, 2006 isattributable to additional provision for loan losses made during the period forpotential consumer loan losses, and additional specific reserves for commercialloans. During the quarter ended June 20, 2007, the Company recorded a benefitof $(63,401), while recording a provision of $150,368 for the same period in2006.

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*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 forthe quarter ended June 30, 2007 was $2,037,639 compared to $1,516,451 for thesame period in 2006, and total interest expense was $957,774 in 2007 comparedto $680,093 in 2006 for the same period. Interest income for the six months ended June 30, 2007 was $3,873,195,compared to $3,166,305 for the same period in 2006, and total interest expensewas $1,803,123 in 2007 compared to $1,309,090 in 2006 for the same period.  The Company pursues local depositsaggressively with attractive interest rates, which has resulted in compressionof net interest margin.  The Companybenefited from a “catch up” interest payment of $121,082 received from a largeloan previously in non accrual status during the six months ended June 30,2007. Based on the Company’s mix of interest earning assets and interestbearing liabilities, management believes that net interest margin should remainstable or begin to decrease slightly for the remainder of the year.  This assumption is based on a continuedrising interest rate environment.  Ifinterest rates remain stable or begin to decline, net interest margin coulddecline due to competitive pricing of both loans and interest bearing deposits.

*Provision for / Benefit from Loan Losses*

The provision for(benefit from) loan losses represents a charge (or recovery) to operationsnecessary to establish an allowance for possible loan losses, which inmanagement’s evaluation, is adequate to provide coverage for estimated losseson outstanding loans and to provide for uncertainties in the economy. Thebenefit from loan losses during the three month period ended June 30, 2007 was$(63,401), whereas there was a provision of $40,963 for the six month periodended June 30, 2007, as compared to the provision for loan losses of $150,368and $99,871 for the same periods in 2006. For the three months ended June30, 2007, 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 six months ended June 30, 2007, loan charge-offs were $54,267 and$79,961 respectively.  The recoveries forthe three and six month periods ended June 30, 2007 were $17,996 and $25,961,respectively.  The allowance for loanlosses was $604,918 at June 30, 2007 as compared to $617,956 at December 31,2006, a decrease of 2.1%.  The allowancewas .73% of loans at June 30, 2007. Management believes the allowance for loan losses at June 30, 2007 to beadequate and will increase during the year to match normal loan growth.

*Provision (Benefit) for/from Income Taxes*

The Company’s provision for income tax expense forthe three and six months ended June 30, 2007 was $92,797 and $153,744,respectively when compared to the benefit from $(44,803) and the provision for$61,682 for the same periods in 2006. Management believes the provision for income taxes for the period endedJune 30, 2007 to be adequate.

*Noninterest Income*

The Company’s noninterestincome consists of service charges on deposit accounts and other fees andcommissions.  Total noninterest incomefor three and six months ended June 30, 2007 was $177,151 and $346,511,respectively when compared to $137,918 and $263,807 for the same periods in2006.  The main reason for the increasefor the six month period ended June 30, 2006, was an increase in servicecharges on deposit accounts. Management projects that other fees andcommissions and service charges will increase in 2007.

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*Noninterest Expense*

Noninterest expenses totaled$1,086,641 and $1,979,806 for the three and six months ended June 30, 2007, ascompared to $915,675 and $1,841,089 for the same periods in 2006.   Salaries and benefits increased $98,520 forthe three months ended June 30, 2007, while the six months ended June 30, 2006increased $126,216, as compared to the same periods in 2006.   The increase was mainly due the addition ofkey management personnel in anticipation of opening the branch bank inMaryville, Tennessee.  The Maryvillebranch opened on July 9, 2007. Legal and professional fees increased $28,685for the three months ended June 30, 2007, while decreasing $5,601 for the sixmonths ended June 30, 2007, as compared to the same periods in 2006.  Management continues to incur additionalexpenses to meet the demands of regulatory requirements and strategic plandevelopment.   Other operating expensesincreased $17,039 for the three months ended June 30, 2007, while decreasing$26,362 for the six months ended June 30, 2007, when compared to the sameperiods in 2006.  Most of the otheroperating expense increase can be attributed to increases in occupancy expensesand data processing expense.

**Financial Condition**

Totalassets at June 30, 2007, were $104,096,011, an increase of $6,343,330 or 6.5%compared to 2006 year-end assets of $97,752,681.  Deposits increased to $92,206,841 at June 30,2007, an increase of $9,703,789 or 11.8% from $82,503,052 at December 31,2006.  The increase in deposits wasmainly due to management’s more aggressive efforts to obtain local deposits.Premises and equipment increased to $5,500,591 at June 30, 2007 an increase of$1,701,072 or 44.8% from $3,799,519 at December 31, 2006.  The purchase of a new branch located at 710South Foothills Plaza Drive, Maryville, Tennessee, accounted for $1,483,258 ofthe increase in Premises and equipment.  The Company places an emphasis on anintegrated approach to its balance sheet management.  Significant balance sheet components of loansand sources of funds are managed in an integrated manner with the management ofinterest rate risk, liquidity, and capital. These components are discussed below

*Loans*

Netloans outstanding totaled $82,628,681 at June 30, 2007 compared to $77,059,828at December 31, 2006.  Commercial andreal estate loan growth accounted for almost all of the approximately $5.6million increase for the first two quarters of 2007. Management feels theoverall quality of loans remains solid. In the event that a loan is 90 days or more past due the accrual ofincome 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 June 30, 2007,total loans 90 days or more past due and still accruing interest were $0, whiletotal loans in non-accrual status were $898,373.  At December 31, 2006, total loans 90 days ormore past due and still accruing interest were $0, while total loans innon-accrual status were $1,531,621.

*RestrictedEquity Investments*

Federal Home Loan Bank (FHLB) stock at June 30, 2007had an amortized cost and market value of $258,800 as compared to an amortizedcost and a market value of $258,800 at December 31, 2006.   As a member of the FHLB, the Company isrequired to maintain stock in an amount equal to .15% of total assets.  Federal Home Loan Bank stock is carried atcost.  Federal Home Loan Bank stock ismaintained by the Company at par value of one hundred dollars per share.

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*Deposits*

Total deposits, which are the principal source offunds for the Company, were $92,206,841 at June 30, 2007, compared to$82,503,052 at December 31, 2006, representing an increase of 11.8%.  The Company has targeted local consumers,professional and commercial businesses as its central clientele, therefore,deposit instruments in the form of demand deposits, savings accounts, moneymarket demand accounts, NOW accounts, certificates of deposit and individualretirement accounts are offered to customers.  The Company established a line of credit with the Federal Home Loan Banksecured by a blanket-pledge of 1-4 family residential mortgage loans.   At June 30, 2007 the Company had outstandingadvances of $2,046,708 at the Federal Home Loan Bank.

*Securitized Borrowings*

Securitized borrowings were $0 at June 30, 2007,compared to $3,099,091 at December 31, 2006. Certain loans amounting to $3,099,091 at December 31, 2006 wereparticipated with other banks, but contained prohibited language according toSFAS No. 140. Prior to Statement No. 140, it was not uncommon for participationagreements to contain covenants that restricted the extent of control that apurchasing institution could exercise over loans purchased from anotherinstitution.  Under previous guidance,such constraints did not prohibit sale accounting from being used by theseller.  However, under Statement No.140, such constraints do prohibit sale accounting from being used and thus, thesold portion is accounted for as a secured borrowing on the seller’s financialstatements.  This situation arose when asoftware update (GulfPak) was installed by the Bank.  The update contained the prohibited languageaccording to Statement No. 140.  The Bankwas unaware of this change until discovered in April 2007.  This language was corrected and agreed to byall banks participating in the various loans.

*Capital*

Equity capital at June 30,2007 was $9,078,598, an increase of $242,070 from $8,836,528 at December 31,2006, due to a net profit of $242,070 for the first six months of 2007.

AtJune 30, 2007, both the Company’s and Bank’s capital ratios were in excess ofthe regulatory minimums.  Those ratiosare as follows:
| ** **                       | ** ** | **Required  Minimum  Ratio** | ** ** | **To be  Well  Capitalized** | ** ** | **Bank** | ** ** | **Company** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------------|------------|----------|------------|-------------|------------|
| Tier 1 Leverage  ratio           |       | 4.00                         | %          | 5.00                              | %          | 8.85     | %          | 8.85        | %          |
| Tier 1  risk-based capital ratio |       | 4.00                         | %          | 6.00                              | %          | 10.41    | %          | 10.41       | %          |
| Total risk-based  capital ratio  |       | 8.00                         | %          | 10.00                             | %          | 11.11    | %          | 11.11       | %          |

 

16

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*Liability and Asset Management*

TheCompany’s Asset/Liability Committee (“ALCO”) actively measures and managesinterest rate risk using a process developed by the Company.  The ALCO is also responsible for implementingthe Company’s asset/liability management policies, overseeing the formulationand implementation of strategies to improve balance sheet positioning andearnings, and reviewing the Company’s interest rate sensitivity position.

Theprimary tool that management uses to measure short-term interest rate risk is anet interest income simulation model prepared by an independent correspondentinstitution.  These simulations estimatethe impact that various changes in the overall level of interest rates overone- and two-year time horizons would have on net interest income.  The results help the Company developstrategies for managing exposures to interest rate risk.

Likeany forecasting technique, interest rate simulation modeling is based on alarge number of assumptions.  In thiscase, the assumptions relate primarily to loan and deposit growth, asset andliability prepayments, interest rates and balance sheet managementstrategies.  Management believes thatboth individually and in the aggregate the assumptions are reasonable.  Nevertheless, the simulation modeling processproduces only a sophisticated estimate, not a precise calculation of exposure.

AtJune 30, 2007, approximately 67% of the Company’s gross loans had adjustablerates.  Based on the asset/liabilitymodeling, management believes that these loans reprice at a faster pace thanliabilities held by the Company.  Becausethe majority of the Company’s liabilities are 12 months and under and the gapin repricing is asset sensitive, management believes that a rising rateenvironment would have a positive impact on the Company’s net interestmargin.  Floors in the majority of theCompany’s adjustable rate assets also mitigate interest rate sensitivity in adecreasing rate environment.

*Off-BalanceSheet Arrangements*

The Company, at June 30, 2007, had outstandingunused lines of credit and standby letters of credit that totaled approximately$13,299,631.  These commitments havefixed maturity dates and many will mature without being drawn upon, meaningthat the total commitment does not necessarily represent the future cashrequirements.  The Company has theability to liquidate Federal funds sold or, on a short-term basis, to purchaseFederal funds from other banks and to borrow from the Federal Home LoanBank.  At June 30, 2007, the Company hadestablished with correspondent banks the ability to purchase Federal funds ifneeded.

**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

The information set forthon pages 11 through 17 of Item 2, “MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS is incorporated herein byreference.

**Item4.  Controls and Procedures**

a)  Evaluation of Disclosure Controls andProcedures

The Companymaintains disclosure controls and procedures, as defined in Rule 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “ExchangeAct”), that are designed to ensure that information required to be disclosed byit in the reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time period specified in the SEC’srules and forms and that such information is accumulated and communicated tothe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer.  The Company carriedout an evaluation, under the supervision and with the participation of itsmanagement, including its Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of its disclosure controls andprocedures as of the end of the period covered by this report.  Based on the evaluation of these disclosurecontrols and procedures, the Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure control and procedures wereeffective.

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b) Changes inInternal Controls and Procedures

There were nochanges in our internal controls over financial reporting during the quarterended June 30, 2007, that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II - OTHER INFORMATION**

**Item1.     LEGAL PROCEEDINGS**

None.

**Item 1A.  RISK FACTORS**

There have been no material changes to our riskfactors as previously disclosed in Part I, Item 1A of our Annual Report on Form10-K for the fiscal year ended December 31, 2006, as filed with the Securitiesand Exchange Commission on April 17, 2007.

**Item 2.     UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

(a)     None.

(b)    Not applicable.

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

The Company’sability to pay dividends is derived from the income of the Bank.  The Bank’s ability to declare and paydividends is limited by its obligations to maintain sufficient capital and byother general restrictions on its dividends that are applicable to banks thatare regulated by the FDIC and the Department of Financial Institutions.  In addition, the Federal Reserve Board mayimpose restrictions on the Company’s ability to pay dividends on its commonstock.  As a result, the Company cannotassure its shareholders that it will declare or pay dividends on shares of itscommon stock in the future.

**Item 3.     DEFAULTSUPON SENIOR SECURITIES**

(a)     None.

(b) None.

**Item 4.     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

(a)     The annual meeting of the Company’s shareholders washeld June 6, 2007.

(b)    The following members of the board ofdirectors were each re-elected as Class III directors to serve for an additionalthree-year term or until their respective successors are duly elected andqualified:

William J. Smead

Roger A. Woolsey

The term of officefor the following members of the board of directors continued after themeeting:  J. Robert Grubbs and Leonard B.Lawson (Class I); Don E. Claiborne and Wendy C. Warner (Class II).

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(c)        (1)    Thefollowing directors were elected by the following tabulation:
| **Name **   | ** ** | **Number of  Shares  Voting ** | ** ** | **For ** | ** ** | **Against ** | ** ** | **Abstain ** | ** ** | **Broker  Non-Votes ** | ** ** |
|------------------|------------|------------------------------------------|------------|---------------|------------|-------------------|------------|-------------------|------------|-----------------------------|------------|
|             |       |                                     |       |          |       |              |       |              |       |                        |       |
| William J. Smead |       | 1,244,324                                |       | 1,233,934     |       | 10,390            |       | 0                 |       | 0                           |       |
| Roger A. Woolsey |       | 1,244,324                                |       | 1,233,934     |       | 10,390            |       | 0                 |       | 0                           |       |

 

(2)          The ratification of an amendment to theCompany’s charter to change the name of the Company to American PatriotFinancial Group, Inc. was as follows:
| **Number of  Shares Voting** | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|----------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-----------------------|------------|
|                                   |       |      |       |        |       |        |       |                  |       |
| 1,244,324                              |       | 1,198,069 |       | 14,940      |       | 31,315      |       | 0                     |       |

 

(d)   None.

**Item 5.    OTHERINFORMATION**

(a)        On June 1, 2007, the Bank entered a Change of ControlAgreement with Mr. Grubbs, which provides that Mr. Grubbs willreceive a payment in the event of a change of control of the Company, equal to$1.00 less than three times his average annual compensation for the most recentfive years preceding a change of control.

On June 1, 2007, the Bank entered an Employment Terms Agreement withMr. Simmerly and the agreement was amended and the Company was added as a partyto the agreement on July 2, 2007. Pursuant to this agreement, Mr. Simmerly will receive annualcompensation of $150,000 base salary, and be eligible to participate in anincentive program providing an earning potential equivalent of up to 40% ofannual base salary, based on corporate performance goals. He will also receivedirector fees, currently consisting of a $6,000 annual retainer and $500 perboard meeting attended, and will be provided an automobile that is owned by theBank. Mr. Simmerly will also participate in the Company’s stock appreciationrights plan.

Also on June 1, 2007, the Bank entered a Change of Control Agreementwith Mr. Simmerly, which provides that Mr. Simmerly will receive a payment inthe event of a change of control of the Company, equal to $1.00 less than threetimes his average annual compensation for the most recent five years precedinga change of control.

(b)   None.

20

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**Item6.    EXHIBITS.**

Index to 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.,  as amended (restated for SEC electronic filing purposes only).                                                    |
| 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                                                                                              |
| 10.3        |       | Change of Control Agreement between American Patriot  Bank and J. Robert Grubbs dated June 1, 2007.                                                                   |
| 10.4        |       | Employment Terms Agreement between American Patriot  Bank, American Patriot Financial Group, Inc. and Jerry A. Simmerly dated June  1, 2007 and amended July 2, 2007. |
| 10.5        |       | Change of Control Agreement between American Patriot  Bank and Jerry A. Simmerly dated June 1, 2007.                                                                  |
| 31.1        |       | Certification pursuant to Rule 13a-14a/15d-14(a)                                                                                                                      |
| 31.2        |       | Certification pursuant to Rule 13a-14a/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                                                                                        |

 

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*Previously filed as an exhibit to a Form 8-K filed by American PatriotFinancial Group, Inc. (formerly known as BG Financial Group, Inc.) with theSecurities and Exchange Commission on May 21, 2004, and incorporated herein byreference.

**Previouslyfiled as an exhibit to American Patriot Bank’s (formerly known as Bank ofGreeneville) Registration Statement on Form 10-SB, as filed with the FederalDeposit Insurance Corporation on April 27, 2002, and incorporated herein byreference.

21

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***SIGNATURES***

In accordance with therequirements of the Exchange Act, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

AMERICAN PATRIOTFINANCIAL GROUP, INC.(Registrant)
| DATE:  | August 14, 2007 |                                    | /s/ J. Robert Grubbs |
|--------|-----------------|-----------------------------------------|----------------------|
|   |            | J. Robert Grubbs                        |
|   |            | Chairman &  Chief Executive Officer |
|   |            |                                    |
|   |            |                                    |
| DATE:  | August 14, 2007 |                                    | /s/ T. Don Waddell   |
|   |            | T. Don Waddell                          |
|   |            | Chief Financial  Officer                |
|        |                 |                                         |                      |  |

 

22

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