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,
2012



OR



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



For the transition period from _____________________
to ________________



Commission file number 000-50771



AMERICAN PATRIOT FINANCIAL GROUP,
INC.



(Exact name 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



Not Applicable

(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 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.

YES xNO  ̈



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).

YES xNO  ̈



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



|Large accelerated filer  ̈                                           | Accelerated filer  ̈        
|------------------------------------------------------------------- | ---------------------------
|Non-accelerated filer  ̈ (Do not check if a small reporting company) | Smaller reporting company x



Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act.) YES oNO x



As of August 1, 2012, there were 2,389,391 shares of common
stock, $0.333 par value, issued and outstanding.











|         | PART I - FINANCIAL INFORMATION                                                                                   |  |   
|-------- | ---------------------------------------------------------------------------------------------------------------- |  | --
|         |                                                                                                                  |  |   
|Item 1.  | Financial Statements.                                                                                            |  | 3 
|         |                                                                                                                  |  |   
|         | The consolidated financial statements of the Registrant and its wholly owned subsidiary are as follows:          |  |   
|         |                                                                                                                  |  |   
|         | Consolidated Balance Sheets - June 30, 2012 (unaudited) and December 31, 2011.                                   |  | 3 
|         |                                                                                                                  |  |   
|         | Consolidated Statements of Operations - For the six months ended June 30, 2012 and 2011 (unaudited).             |  | 4 
|         |                                                                                                                  |  |   
|         | Consolidated Statements of Operations - For the three months ended June 30, 2012 and 2011 (unaudited).           |  | 5 
|         |                                                                                                                  |  |   
|         | Consolidated Statements of Comprehensive Loss - For the six months ended June 30, 2012 and 2011.                 |  | 6 
|         |                                                                                                                  |  |   
|         | Consolidated Statements of Changes in Stockholders' Equity - For the six months ended June 30, 2012 (unaudited). |  | 7 
|         |                                                                                                                  |  |   
|         | Consolidated Statements of Cash Flows - For the six months ended June 30, 2012 and 2011 (unaudited).             |  | 8 
|         |                                                                                                                  |  |   
|         | Notes to Consolidated Financial Statements.                                                                      |  | 10
|         |                                                                                                                  |  |   
|Item 2.  | Management's Discussion and Analysis of Financial Condition and Results of Operations.                           |  | 22
|         |                                                                                                                  |  |   
|Item 3.  | Quantitative and Qualitative Disclosures about Market Risk.                                                      |  | 32
|         |                                                                                                                  |  |   
|Item 4.  | Controls and Procedures.                                                                                         |  | 32
|         |                                                                                                                  |  |   
|         | PART II - OTHER INFORMATION                                                                                      |  |   
|         |                                                                                                                  |  |   
|Item 1.  | Legal Proceedings.                                                                                               |  | 34
|         |                                                                                                                  |  |   
|Item 1A. | Risk Factors.                                                                                                    |  | 34
|         |                                                                                                                  |  |   
|Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds.                                                     |  | 34
|         |                                                                                                                  |  |   
|Item 3.  | Defaults Upon Senior Securities.                                                                                 |  | 35
|         |                                                                                                                  |  |   
|Item 4.  | Mine Safety Disclosures.                                                                                         |  | 35
|         |                                                                                                                  |  |   
|Item 5.  | Other Information.                                                                                               |  | 35
|         |                                                                                                                  |  |   
|Item 6.  | Exhibits.                                                                                                        |  | 35



2







AMERICAN PATRIOT FINANCIAL GROUP, INC.
AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED BALANCE SHEETS



Part I. FINANCIAL INFORMATION

Item 1. Financial Statements



|                                                                                                                                                   |  | As of         |            |   | As of             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ----------------- | -
|                                                                                                                                                   |  | June 30, 2012 |            |   | December 31, 2011 |  
|                                                                                                                                                   |  | (Unaudited)   |            |   |                   |  
|ASSETS                                                                                                                                             |  |               |            |   |                   |  
|                                                                                                                                                   |  |               |            |   |                   |  
|Cash and due from banks                                                                                                                            |  | $             | 1,287,103  |   |                   | $
|Federal funds sold                                                                                                                                 |  |               | 2,447,809  |   |                   |  
|Interest-bearing deposits in banks                                                                                                                 |  |               | 6,495,614  |   |                   |  
|Cash and cash equivalents                                                                                                                          |  |               | 10,230,526 |   |                   |  
|Securities available for sale                                                                                                                      |  |               | 2,922,796  |   |                   |  
|Federal Home Loan Bank stock, at cost                                                                                                              |  |               | 296,500    |   |                   |  
|Loans, net of allowance for loan losses of $1,358,707 in 2012 and $1,636,074 in 2011                                                               |  |               | 54,871,758 |   |                   |  
|Premises and equipment, net                                                                                                                        |  |               | 3,070,176  |   |                   |  
|Accrued interest receivable                                                                                                                        |  |               | 185,842    |   |                   |  
|Foreclosed assets                                                                                                                                  |  |               | 12,442,046 |   |                   |  
|Cash surrender value of bank owned life insurance                                                                                                  |  |               | 2,667,449  |   |                   |  
|Other assets                                                                                                                                       |  |               | 98,135     |   |                   |  
|Total Assets                                                                                                                                       |  | $             | 86,785,228 |   |                   | $
|                                                                                                                                                   |  |               |            |   |                   |  
|LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                               |  |               |            |   |                   |  
|                                                                                                                                                   |  |               |            |   |                   |  
|LIABILITIES                                                                                                                                        |  |               |            |   |                   |  
|Deposits:                                                                                                                                          |  |               |            |   |                   |  
|Noninterest-bearing                                                                                                                                |  |               |            |   |                   |  
|Demand                                                                                                                                             |  | $             | 5,260,870  |   |                   | $
|Interest-bearing                                                                                                                                   |  |               |            |   |                   |  
|Money market, interest checking and savings                                                                                                        |  |               | 24,145,564 |   |                   |  
|Time deposits                                                                                                                                      |  |               | 54,796,473 |   |                   |  
|Total Deposits                                                                                                                                     |  |               | 84,202,907 |   |                   |  
|Accrued interest payable                                                                                                                           |  |               | 293,226    |   |                   |  
|Deferred tax liabilities, net                                                                                                                      |  |               | 15,308     |   |                   |  
|Other liabilities                                                                                                                                  |  |               | 488,153    |   |                   |  
|Notes payable                                                                                                                                      |  |               | 921,000    |   |                   |  
|Total Liabilities                                                                                                                                  |  |               | 85,920,594 |   |                   |  
|                                                                                                                                                   |  |               |            |   |                   |  
|STOCKHOLDERS’ EQUITY                                                                                                                               |  |               |            |   |                   |  
|Stock:                                                                                                                                             |  |               |            |   |                   |  
|Preferred stock, no par value; authorized 1,000,000 shares; issued and outstanding 247 shares at June 30, 2012 and 207 shares at December 31, 2011 |  |               | 236,074    |   |                   |  
|Common stock, $0.333 par value; authorized 6,000,000 shares; issued and outstanding 2,389,391 shares at June 30, 2012 and  December 31, 2011       |  |               | 796,337    |   |                   |  
|Additional paid-in capital                                                                                                                         |  |               | 7,167,260  |   |                   |  
|Retained deficit                                                                                                                                   |  |               | (7,359,704 | ) |                   |  
|Accumulated other comprehensive income                                                                                                             |  |               | 24,667     |   |                   |  
|Total Stockholders’ Equity                                                                                                                         |  |               | 864,634    |   |                   |  
|Total Liabilities and Stockholders’ Equity                                                                                                         |  | $             | 86,785,228 |   |                   | $



3







AMERICAN PATRIOT FINANCIAL GROUP, INC.
AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                    |  | Six Months Ended |          
|--------------------------------------------------- |  | ---------------- | ---------
|                                                    |  | June 30, 2012    |          
|                                                    |  |                  |          
|Interest and dividend income:                       |  |                  |          
|Loans, including fees                               |  | $                | 1,828,384
|Investment securities                               |  |                  | 25,714   
|Dividends on Federal Home Loan Bank stock           |  |                  | 6,496    
|Federal funds sold and other                        |  |                  | 22,970   
|Total interest and dividend income                  |  |                  | 1,883,564
|                                                    |  |                  |          
|                                                    |  |                  |          
|Interest expense:                                   |  |                  |          
|Deposits                                            |  |                  | 376,710  
|Borrowed funds                                      |  |                  | 32,480   
|Total interest expense                              |  |                  | 409,190  
|Net interest income before provisionfor loan losses |  |                  | 1,474,374
|                                                    |  |                  |          
|Provision for loan losses                           |  |                  | -        
|Net interest income after provisionfor loan losses  |  |                  | 1,474,374
|                                                    |  |                  |          
|Noninterest income:                                 |  |                  |          
|Service charges on deposit accounts                 |  |                  | 132,197  
|Fees from origination of mortgage loans sold        |  |                  | -        
|Other                                               |  |                  | 182,494  
|Total noninterest income                            |  |                  | 314,691  
|                                                    |  |                  |          
|Noninterest expense:                                |  |                  |          
|Salaries and employee benefits                      |  |                  | 721,819  
|Occupancy                                           |  |                  | 256,396  
|Advertising                                         |  |                  | 2,881    
|Data processing                                     |  |                  | 161,077  
|Legal and professional                              |  |                  | 156,632  
|Depository insurance                                |  |                  | 160,597  
|Foreclosed real estate, net                         |  |                  | 315,795  
|Other operating                                     |  |                  | 217,436  
|Total noninterest expense                           |  |                  | 1,992,633
|                                                    |  |                  |          
|Net loss before income taxes                        |  |                  | (203,568 
|                                                    |  |                  |          
|Income taxes                                        |  |                  | -        
|                                                    |  |                  |          
|Net loss                                            |  |                  | (203,568 
|Preferred stock dividend requirement                |  |                  | (6,746   
|Accretion on preferred stock discount               |  |                  | (7,285   
|                                                    |  |                  |          
|Net loss to Common Shareholders                     |  | $                | (217,599 
|                                                    |  |                  |          
|Basic net loss per common share                     |  | $                | (.09     
|Diluted net loss per common share                   |  | $                | (.09     



4







AMERICAN PATRIOT FINANCIAL GROUP, INC.
AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                    |  | Three Months Ended |          
|--------------------------------------------------- |  | ------------------ | ---------
|                                                    |  | June 30, 2012      |          
|                                                    |  |                    |          
|Interest and dividend income:                       |  |                    |          
|Loans, including fees                               |  | $                  | 873,598  
|Investment securities                               |  |                    | 12,529   
|Dividends on Federal Home Loan Bank stock           |  |                    | 3,133    
|Federal funds sold and other                        |  |                    | 10,635   
|Total interest and dividend income                  |  |                    | 899,895  
|                                                    |  |                    |          
|                                                    |  |                    |          
|Interest expense:                                   |  |                    |          
|Deposits                                            |  |                    | 173,765  
|Borrowed funds                                      |  |                    | 16,240   
|Total interest expense                              |  |                    | 190,005  
|Net interest income before provisionfor loan losses |  |                    | 709,890  
|                                                    |  |                    |          
|Provision (benefit) for loan losses                 |  |                    | -        
|Net interest income after provisionfor loan losses  |  |                    | 709,890  
|                                                    |  |                    |          
|Noninterest income:                                 |  |                    |          
|Customer service fees                               |  |                    | 64,623   
|Fees from origination of mortgage loans sold        |  |                    | -        
|Other                                               |  |                    | 28,259   
|Total noninterest income                            |  |                    | 92,882   
|                                                    |  |                    |          
|Noninterest expense:                                |  |                    |          
|Salaries and employee benefits                      |  |                    | 350,335  
|Occupancy                                           |  |                    | 121,100  
|Advertising                                         |  |                    | 1,110    
|Data processing                                     |  |                    | 78,325   
|Legal and professional                              |  |                    | 74,395   
|Depository insurance                                |  |                    | 80,543   
|Foreclosed real estate, net                         |  |                    | 229,689  
|Other operating                                     |  |                    | 92,480   
|Total noninterest expense                           |  |                    | 1,027,977
|                                                    |  |                    |          
|Net loss before income taxes                        |  |                    | (225,205 
|                                                    |  |                    |          
|Income taxes                                        |  |                    | -        
|                                                    |  |                    |          
|Net loss                                            |  |                    | (225,205 
|Preferred stock dividend requirement                |  |                    | (3,516   
|Accretion on preferred stock discount               |  |                    | (3,642   
|                                                    |  |                    |          
|Net loss to Common Shareholders                     |  | $                  | (232,363 
|                                                    |  |                    |          
|Basic net income (loss) per common share            |  | $                  | (.10     
|Diluted net income (loss) per common share          |  | $                  | (.10     



5







AMERICAN PATRIOT FINANCIAL GROUP, INC.
AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS

(Unaudited)



|                                                      |  | Three Months Ended |          |   | Six Months Ended |  
|----------------------------------------------------- |  | ------------------ | -------- | - | ---------------- | -
|                                                      |  | June 30,           |          |   | June 30,         |  
|                                                      |  | 2012               |          |   | 2011             |  
|                                                      |  |                    |          |   |                  |  
|Net loss                                              |  | $                  | (225,205 | ) |                  | $
|                                                      |  |                    |          |   |                  |  
|Other comprehensive income, net of tax:               |  |                    |          |   |                  |  
|Net unrealized gains on securities available for sale |  |                    | 5,388    |   |                  |  
|                                                      |  |                    |          |   |                  |  
|Comprehensive loss                                    |  | $                  | (219,817 | ) |                  | $



6







AMERICAN PATRIOT FINANCIAL GROUP, INC.
AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY - UNAUDITED

Six Months Ended June 30, 2012



|                                                                                               |  |           |         |  |        |   |         |            |  |   |           |  |  | Accumulated   |            |   |       |  
|---------------------------------------------------------------------------------------------- |  | --------- | ------- |  | ------ | - | ------- | ---------- |  | - | --------- |  |  | ------------- | ---------- | - | ----- | -
|                                                                                               |  |           |         |  |        |   |         | Additional |  |   |           |  |  | Other         |            |   |       |  
|                                                                                               |  | Preferred |         |  | Common |   |         | Paid-In    |  |   | Retained  |  |  | Comprehensive |            |   |       |  
|                                                                                               |  | Stock     |         |  | Stock  |   |         | Capital    |  |   | Deficit   |  |  | Income        |            |   | Total |  
|                                                                                               |  |           |         |  |        |   |         |            |  |   |           |  |  |               |            |   |       |  
|Balance, December 31, 2011                                                                     |  | $         | 188,789 |  |        | $ | 796,337 |            |  | $ | 7,167,260 |  |  | $             | (7,148,851 | ) |       | $
|                                                                                               |  |           |         |  |        |   |         |            |  |   |           |  |  |               |            |   |       |  
|Net loss                                                                                       |  |           | -       |  |        |   | -       |            |  |   | -         |  |  |               | (203,568   | ) |       |  
|Change in unrealized gains (losses) on securities available for sale, net of tax effect of $13 |  |           | -       |  |        |   | -       |            |  |   | -         |  |  |               | -          |   |       |  
|Issuance of preferred stock                                                                    |  |           | 40,000  |  |        |   | -       |            |  |   | -         |  |  |               | -          |   |       |  
|Accretion of discount on preferred stock - Series A                                            |  |           | 7,285   |  |        |   | -       |            |  |   | -         |  |  |               | (7,285     | ) |       |  
|                                                                                               |  |           |         |  |        |   |         |            |  |   |           |  |  |               |            |   |       |  
|Balance, June 30, 2012                                                                         |  | $         | 236,074 |  |        | $ | 796,337 |            |  | $ | 7,167,260 |  |  | $             | (7,359,704 | ) |       | $



7







AMERICAN PATRIOT FINANCIAL GROUP, INC.
AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                            |  | Six Months Ended |           
|--------------------------------------------------------------------------- |  | ---------------- | ----------
|                                                                            |  | June 30, 2012    |           
|                                                                            |  |                  |           
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |  |                  |           
|Net loss                                                                    |  | $                | (203,568  
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                  |           
|Provision for loan losses                                                   |  |                  | -         
|Write-down of foreclosed assets                                             |  |                  | 177,885   
|Depreciation                                                                |  |                  | 93,968    
|Realized net (gains) losses on sale of loans and other assets               |  |                  | (138,284  
|Amortization of securities                                                  |  |                  | 180       
|Increase in cash surrender value of bank owned life insurance               |  |                  | (50,361   
|Net change in:                                                              |  |                  |           
|Accrued interest receivable                                                 |  |                  | 9,021     
|Other assets                                                                |  |                  | 26,245    
|Other liabilities                                                           |  |                  | (172,026  
|Accrued interest payable                                                    |  |                  | 44,269    
|Net cash used in operating activities                                       |  |                  | (212,671  
|                                                                            |  |                  |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |  |                  |           
|Purchase of securities available for sale                                   |  |                  | (997,620  
|Proceeds from calls and maturities of securities                            |  |                  |           
|available for sale                                                          |  |                  | 1,052,296 
|Proceeds from sales of foreclosed assets                                    |  |                  | 491,687   
|Loan originations and principal collections, net                            |  |                  | 2,027,672 
|Proceeds from sales of premises and equipment                               |  |                  | 1,649,645 
|Additions to premises and equipment                                         |  |                  | (16,822   
|Net cash provided by investing activities                                   |  |                  | 4,206,858 
|                                                                            |  |                  |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |  |                  |           
|Net decrease in deposits (non-time deposits)                                |  |                  | (2,856,078
|Net decrease in time deposits                                               |  |                  | (4,276,936
|Proceeds from issuance of preferred stock                                   |  |                  | 40,000    
|Federal Home Loan Bank repayments                                           |  |                  | -         
|Net cash used in financing activities                                       |  |                  | (7,093,014



8







AMERICAN PATRIOT FINANCIAL GROUP, INC.
AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)

(Unaudited)



|                                                 |  | Six Months Ended |           
|------------------------------------------------ |  | ---------------- | ----------
|                                                 |  | June 30, 2012    |           
|                                                 |  |                  |           
|Net change in cash and cash equivalents          |  | $                | (3,098,827
|                                                 |  |                  |           
|Cash and cash equivalents at beginning of period |  |                  | 13,329,353
|                                                 |  |                  |           
|Cash and cash equivalents at end of period       |  | $                | 10,230,526
|                                                 |  |                  |           
|SUPPLEMENTARY CASH FLOW INFORMATION:             |  |                  |           
|Interest paid on deposits and borrowed funds     |  | $                | 364,921   
|                                                 |  |                  |           
|SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:    |  |                  |           
|Loans moved to foreclosed assets                 |  | $                | 2,602,844 



9







AMERICAN PATRIOT FINANCIAL GROUP, INC.
AND SUBSIDIARY

Greeneville, Tennessee

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



| | Note 1. | Summary of Significant Accounting Policies
| | ------- | ------------------------------------------



Nature of Business:



American Patriot Financial Group,
Inc. (the “Company”) is a bank holding company which owns all of the outstanding common stock of American Patriot Bank
(the “Bank”). The Bank provides a variety of financial services through its locations in Greeneville, Tennessee. The
Bank’s primary deposit products are demand deposits, savings accounts, and certificates of deposit. Its primary lending products
are commercial loans, real estate loans, and installment loans.



The following is a description
of the significant policies used in the preparation of the accompanying consolidated financial statements.



Basis of Presentation:



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



The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP")
for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated
by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes
required by accounting principles generally 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 fair presentation of the financial
position and results of operations for the periods presented have been included. Operating results for the three and six months
ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2011. Certain amounts from prior period financial statements have been reclassified
to conform to current period’s presentation.



Preferred Stock Issuance:



In accordance with its charter,
the Company has authorized and is offering and issuing up to 5,000 shares of series A Preferred Stock (preferred stock) at a price
of $1,000 per share. The preferred stock will accrue cumulative dividends at a rate of 6% per annum. Dividends will be payable
quarterly in arrears. However, the Bank and Company are currently prohibited from paying dividends. The shares have a liquidation
preference of $1,000 per share. The shares may be converted to common stock after three years following issuance at a $5.00 per
share conversion rate. The preferred stock is redeemable only at the option of the Company, subject to receipt of any required
regulatory approval, after the third anniversary date of the investment at 100% of the issuance price of $1,000 per share plus
any accrued and unpaid dividends. The preferred stock ranks senior to the Company's common stock, and no dividends on common stock
may be declared or paid until all accrued and unpaid dividends for all past dividend periods have been paid on the preferred stock.
The preferred stock is non-voting, other than certain class voting rights. For the six months ended June 30, 2012, the Company
issued forty shares of preferred stock.



10







Going Concern:



The Company continues to prepare
its consolidated financial statements on a going concern basis. For further information regarding this issue, refer to note 2 “Regulatory
Actions & Going Concern Considerations” of the Company’s Annual Report on Form 10-K for the year ended December
31, 2011, as filed with the Securities and Exchange Commission on April 9, 2012. The consolidated financial statements and notes
thereto are presented in accordance with the instructions for Form 10-K.



Use of Estimates:



The preparation of consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant management
accounting estimates are the allowance for loan losses and foreclosed assets.



The allowance for loan losses
is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s
ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision as more information becomes available.



Foreclosed assets are initially
evaluated at the time of foreclosure and periodically thereafter. Estimated fair values are principally based on independent appraisals,
adjusted for estimated selling costs. In some cases management may determine that the foreclosed asset is impaired below the appraised
value and, as a result, adjust the foreclosed asset below the appraised value, less estimated costs to sale.



| | Note 2. | Stock Options and Awards
| | ------- | ------------------------



No options were granted during
the six months ended June 30, 2012, and no compensation cost related to options is recognized in the consolidated statements of
operations for the six months ended June 30, 2012 or 2011. No intrinsic value exists at June 30, 2012, as the last price at which
the Company's common stock was traded and of which the Company is aware was $1.50 (in April 2011) which is below the exercise price
of the outstanding options.



11







| | Note 3. | Earnings (Loss) Per Share of Common Stock
| | ------- | -----------------------------------------



Basic earnings
(loss) per share (EPS) of common stock is computed by dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted earnings (loss) per share of common stock is computed by
dividing net income (loss) available to common shareholders by the weighted average number of common shares and potential dilutive
common shares outstanding during the period. Stock options are regarded as potential common shares. Potential common shares are
computed using the treasury stock method. For the three and six months ended June 30, 2012, 300 options are excluded from the effect
of dilutive securities because they are anti-dilutive; 31,550 options are similarly excluded from the effect of dilutive securities
for the three and six months ended June 30, 2011.



The following
is a reconciliation of the numerators and denominators used in the basic and diluted earnings (loss) per share computations for
the three and six months ended June 30, 2012 and 2011.



|                                                                        |  | Three Months Ended June 30, |         
|----------------------------------------------------------------------- |  | --------------------------- | --------
|                                                                        |  | 2012                        |         
|                                                                        |  | Income (Loss)               |         
|                                                                        |  | (Numerator)                 |         
|                                                                        |  |                             |         
|Basic EPS                                                               |  |                             |         
|Income (loss) available to common stockholders                          |  | $                           | (232,363
|                                                                        |  |                             |         
|Effect of dilutive securities Stock options outstanding                 |  |                             | -       
|                                                                        |  |                             |         
|Diluted EPS                                                             |  |                             |         
|Income (loss) available to common shareholders plus assumed conversions |  | $                           | (232,363



|                                                                        |  | Six Months Ended June 30, |         
|----------------------------------------------------------------------- |  | ------------------------- | --------
|                                                                        |  | 2012                      |         
|                                                                        |  | Income                    |         
|                                                                        |  | (Numerator)               |         
|                                                                        |  |                           |         
|Basic EPS                                                               |  |                           |         
|Income (loss) available to common stockholders                          |  | $                         | (217,599
|                                                                        |  |                           |         
|Effect of dilutive securities Stock options outstanding                 |  |                           | -       
|                                                                        |  |                           |         
|Diluted EPS                                                             |  |                           |         
|Income (loss) available to common shareholders plus assumed conversions |  | $                         | (217,599



12







| | Note 4. | Fair Value Disclosures
| | ------- | ----------------------



The Company uses fair value measurements
to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with
ASC Topic 820, Fair Value Measurements and Disclosures, the fair value of a financial instrument is the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates
may not be realized in an immediate settlement of the instrument.



ASC Topic 820 provides a consistent
definition of fair value, which focuses on exit price in an orderly transaction between market participants at the measurement
date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset
or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances,
determining the price at which willing market participants would transact at the measurement date under current market conditions
depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within
the range that is most representative of fair value under current market conditions.



ASC Topic 820 also establishes
a three-tier fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value, as follows:



Level 1 - Quoted
prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.



Level 2 - Significant
other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets, quoted
prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.



Level 3 - Significant
unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would
use in pricing an asset or liability.



A financial instrument’s
categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
There have been no changes in methodologies used at June 30, 2012 and December 31, 2011.



The following methods and assumptions
were used by the Company in estimating fair value disclosures for financial instruments:



Cash and cash equivalents:



The carrying amounts of cash
and due from banks, interest-bearing deposits in banks, and federal funds sold approximate fair values based on the short-term
nature of the assets.



Securities:



Fair values are estimated using
pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields,
interest rate volatilities, broker/dealer quotes, and credit spreads. Securities classified as available for sale are reported
at fair value utilizing Level 2 inputs.



13







The carrying value of Federal
Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.



Loans:



For variable-rate loans that
reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate
loans are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Loans for which it is
probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement
are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with
ASC Topic 310, Accounting by Creditors for Impairment of a Loan. The fair value of impaired loans is estimated using
several methods including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an
allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in
such loans. At June 30, 2012 and December 31, 2011, substantially all impaired loans were evaluated based on the fair value of
collateral. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of
collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised
value is not available or management determines the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.



Accrued interest:



The carrying amounts of accrued
interest approximate fair value.



Foreclosed assets:



Foreclosed assets, consisting
of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value, determined on the
basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted
for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate
held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustment
to the fair value are recorded as a component of foreclosed real estate expense. Foreclosed assets are included in Level 2 of the
valuation hierarchy when the fair value is based on an observable market price or a current appraised value. When an appraised
value is not available or management determines the foreclosed asset is impaired below the appraised value and there is no observable
market price, the Company records the foreclosed asset as nonrecurring Level 3.



Cash surrender value of bank
owned life insurance:



The carrying amounts of cash
surrender value of bank owned life insurance approximate their fair value. The carrying amount is based on information received
from the insurance carriers indicating the financial performance of the policies and the amount the Company would receive should
the policies be surrendered. The Company reflects these assets within Level 2 of the valuation hierarchy.



14









Deposits:



The fair value of deposits with
no stated maturity, such as noninterest-bearing demand deposits and NOW, money market, and savings accounts, is equal to the amount
payable on demand at the reporting date. The carrying amounts of variable-rate, fixed-term money market accounts and certificates
of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated
expected monthly maturities on time deposits.



Notes payable:



Fair values of notes payable
approximate carrying value as these amounts are due on demand.



The tables below present the
recorded amount of assets measured at fair value on a recurring basis.



|                                                        |  |            |           |  | Quoted Prices in |   |   | Significant |  |   | Significant  | 
|------------------------------------------------------- |  | ---------- | --------- |  | ---------------- | - | - | ----------- |  | - | ------------ | 
|                                                        |  | Balance as |           |  | Active Markets   |   |   | Other       |  |   | Other        | 
|                                                        |  | of         |           |  | for Identical    |   |   | Observable  |  |   | Unobservable | 
|                                                        |  | June 30,   |           |  | Assets           |   |   | Inputs      |  |   | Inputs       | 
|                                                        |  | 2012       |           |  | (Level 1)        |   |   | (Level 2)   |  |   | (Level 3)    | 
|                                                        |  |            |           |  |                  |   |   |             |  |   |              | 
|Securities available for sale:                          |  |            |           |  |                  |   |   |             |  |   |              | 
|Securities of U.S. Government agencies and corporations |  | $          | 2,005,205 |  |                  | $ | - |             |  | $ | 2,005,205    | 
|Mortgage-backed securities                              |  |            | 917,591   |  |                  |   | - |             |  |   | 917,591      | 
|                                                        |  |            |           |  |                  |   |   |             |  |   |              | 
|                                                        |  | $          | 2,922,796 |  |                  | $ | - |             |  | $ | 2,922,796    | 
|                                                        |  |            |           |  |                  |   |   |             |  |   |              | 
|Cash surrender value of life insurance                  |  | $          | 2,667,449 |  |                  | $ | - |             |  | $ | 2,667,449    | 



|                                                        |  |              |           |  | Quoted Prices in |   |   | Significant |  |   | Significant  | 
|------------------------------------------------------- |  | ------------ | --------- |  | ---------------- | - | - | ----------- |  | - | ------------ | 
|                                                        |  | Balance as   |           |  | Active Markets   |   |   | Other       |  |   | Other        | 
|                                                        |  | of           |           |  | for Identical    |   |   | Observable  |  |   | Unobservable | 
|                                                        |  | December 31, |           |  | Assets           |   |   | Inputs      |  |   | Inputs       | 
|                                                        |  | 2011         |           |  | (Level 1)        |   |   | (Level 2)   |  |   | (Level 3)    | 
|                                                        |  |              |           |  |                  |   |   |             |  |   |              | 
|Securities available for sale:                          |  |              |           |  |                  |   |   |             |  |   |              | 
|Securities of U.S. Government agencies and corporations |  | $            | 2,004,780 |  |                  | $ | - |             |  | $ | 2,004,780    | 
|Mortgage-backed securities                              |  |              | 973,253   |  |                  |   | - |             |  |   | 973,253      | 
|                                                        |  |              |           |  |                  |   |   |             |  |   |              | 
|                                                        |  | $            | 2,978,033 |  |                  | $ | - |             |  | $ | 2,978,033    | 
|                                                        |  |              |           |  |                  |   |   |             |  |   |              | 
|Cash surrender value of life insurance                  |  | $            | 2,617,088 |  |                  | $ | - |             |  | $ | 2,617,088    | 



15







The Company has no assets or liabilities whose
fair values are measured on a recurring basis using Level 3 inputs.



Certain assets and liabilities
are measured at fair value on a nonrecurring basis, which means the assets and liabilities are not measured at fair value on an
ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
The tables below present information about assets on the balance sheet at June 30, 2012 and December 31, 2011, for which a nonrecurring
change in fair value was recorded.



|                       |  |            |            |  | Quoted Prices in |   | Significant |  |            | Significant  | 
|---------------------- |  | ---------- | ---------- |  | ---------------- | - | ----------- |  | ---------- | ------------ | 
|                       |  | Balance as |            |  | Active Markets   |   | Other       |  |            | Other        | 
|                       |  | of         |            |  | for Identical    |   | Observable  |  |            | Unobservable | 
|                       |  | June 30,   |            |  | Assets           |   | Inputs      |  |            | Inputs       | 
|                       |  | 2012       |            |  | (Level 1)        |   | (Level 2)   |  |            | (Level 3)    | 
|                       |  |            |            |  |                  |   |             |  |            |              | 
|Impaired loans         |  | $          | 2,260,818  |  |                  | $ | -           |  | $          | 2,260,818    | 
|Foreclosed real estate |  |            | 12,442,046 |  |                  | - |             |  | 11,212,974 |              | 





|                       |  |              |            |  | Quoted Prices in |   |   | Significant |  |   | Significant  | 
|---------------------- |  | ------------ | ---------- |  | ---------------- | - | - | ----------- |  | - | ------------ | 
|                       |  | Balance as   |            |  | Active Markets   |   |   | Other       |  |   | Other        | 
|                       |  | of           |            |  | for Identical    |   |   | Observable  |  |   | Unobservable | 
|                       |  | December 31, |            |  | Assets           |   |   | Inputs      |  |   | Inputs       | 
|                       |  | 2011         |            |  | (Level 1)        |   |   | (Level 2)   |  |   | (Level 3)    | 
|                       |  |              |            |  |                  |   |   |             |  |   |              | 
|Impaired loans         |  | $            | 965,988    |  |                  | $ | - |             |  | $ | 965,988      | 
|Foreclosed real estate |  |              | 10,500,411 |  |                  |   | - |             |  |   | 9,297,479    | 



Loans include impaired loans
held for investment for which an allowance for loan losses has been calculated based upon the fair value of the collateral at June
30, 2012 and December 31, 2011.



The carrying amount and estimated
fair value of the Company's financial instruments at June 30, 2012 and December 31, 2011, are as follows:



|                                       |  | June 30, 2012 |            |  | December 31, 2011 |  
|-------------------------------------- |  | ------------- | ---------- |  | ----------------- | -
|                                       |  | Carrying      |            |  | Fair              |  
|                                       |  | Amount        |            |  | Value             |  
|Financial Assets:                      |  |               |            |  |                   |  
|                                       |  |               |            |  |                   |  
|Cash and cash equivalents              |  | $             | 10,230,526 |  |                   | $
|Securities available for sale          |  |               | 2,922,796  |  |                   |  
|Federal Home Loan Bank stock           |  |               | 296,500    |  |                   |  
|Loans, net                             |  |               | 54,871,758 |  |                   |  
|Accrued interest receivable            |  |               | 185,842    |  |                   |  
|Cash surrender value of life insurance |  |               | 2,667,449  |  |                   |  
|                                       |  |               |            |  |                   |  
|Financial Liabilities:                 |  |               |            |  |                   |  
|Deposits                               |  |               | 84,202,907 |  |                   |  
|Accrued interest payable               |  |               | 293,226    |  |                   |  
|Notes payable                          |  |               | 921,000    |  |                   |  



16







Note 5.	Securities
Available for Sale



| |  | The amortized cost and estimated fair value of securities classified as available for sale at June
30, 2012 and December 31, 2011 are as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------



|                                                        |  | June 30, 2012 |          
|------------------------------------------------------- |  | ------------- | ---------
|                                                        |  |               |          
|                                                        |  | Amortized     |          
|                                                        |  | Cost          |          
|Securities Available for Sale:                          |  |               |          
|                                                        |  |               |          
|Securities of U.S. Government agencies and corporations |  | $             | 1,997,621
|                                                        |  |               |          
|Mortgage-backed and related securities (1)              |  |               | 885,200  
|                                                        |  |               |          
|                                                        |  | $             | 2,882,821





|                                                        |  | December 31, 2011 |          
|------------------------------------------------------- |  | ----------------- | ---------
|                                                        |  |                   |          
|                                                        |  | Amortized         |          
|                                                        |  | Cost              |          
|Securities Available for Sale:                          |  |                   |          
|                                                        |  |                   |          
|Securities of U.S. Government agencies and corporations |  | $                 | 2,000,000
|                                                        |  |                   |          
|Mortgage-backed and related securities (1)              |  |                   | 938,092  
|                                                        |  |                   |          
|                                                        |  | $                 | 2,938,092



(1) Collateralized
by residential mortgages and guaranteed by U.S. Government sponsored entities.



U.S. Government sponsored enterprises
include entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal Home Loan Banks.



| |  | The securities have maturity dates of five to twenty-eight years.
| |  | -----------------------------------------------------------------



| |  | The Bank has pledged securities with book values of approximately $2,883,000 and $2,938,000 (which
approximates market values) to secure deposits of public and private funds as of June 30, 2012 and December 31, 2011, respectively.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





17







| |  | Upon acquisition of a security, the Company determines the appropriate impairment model that is
applicable. If the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests
in securitized financial assets impairment model. If the security is not a beneficial interest in securitized financial assets,
the Company uses the debt and equity securities impairment model. The Company conducts periodic reviews to evaluate each security
to determine whether an other-than-temporary impairment has occurred. The Company does not have any securities that have been classified
as other-than-temporarily-impaired at June 30, 2012.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Note 6. | Loans and Allowance for Loan Losses
| | ------- | -----------------------------------



| |  | A summary of the balances of loans follows:
| |  | -------------------------------------------



|                                    |  | June 30, |            |   | December 31, |  
|----------------------------------- |  | -------- | ---------- | - | ------------ | -
|                                    |  | 2012     |            |   | 2011         |  
|                                    |  |          |            |   |              |  
|Mortgage loans on real estate:      |  |          |            |   |              |  
|Residential 1-4 family              |  | $        | 29,578,854 |   |              | $
|Nonresidential & multifamily        |  |          | 15,205,525 |   |              |  
|Construction and development        |  |          | 2,345,812  |   |              |  
|                                    |  |          | 47,130,191 |   |              |  
|                                    |  |          |            |   |              |  
|Commercial loans                    |  |          | 7,984,255  |   |              |  
|                                    |  |          |            |   |              |  
|Consumer loans                      |  |          | 1,116,019  |   |              |  
|                                    |  |          |            |   |              |  
|Total loans                         |  |          | 56,230,465 |   |              |  
|                                    |  |          |            |   |              |  
|Less:                               |  |          |            |   |              |  
|Estimated allowance for loan losses |  |          | (1,358,707 | ) |              |  
|                                    |  |          |            |   |              |  
|Loans, net                          |  | $        | 54,871,758 |   |              | $



| |  | An analysis of the allowance for loan losses follows:
| |  | -----------------------------------------------------



|                                           |  | Six Months     |           |   | Year Ended   |  
|------------------------------------------ |  | -------------- | --------- | - | ------------ | -
|                                           |  | Ended June 30, |           |   | December 31, |  
|                                           |  | 2012           |           |   | 2011         |  
|                                           |  |                |           |   |              |  
|Balance, beginning                         |  | $              | 1,636,074 |   |              | $
|Provision for loan losses                  |  |                | -         |   |              |  
|Recoveries of loans previously charged-off |  |                | 24,052    |   |              |  
|                                           |  |                | 1,660,126 |   |              |  
|Loans charged-off                          |  |                | (301,419  | ) |              |  
|Balance, ending                            |  | $              | 1,358,707 |   |              | $





18







| |  | The following table details the changes in the allowance for loan losses during the six months
ended June 30, 2012:
| |  | -------------------------------------------------------------------------------------------------------------------



|                        |  |             |          |   | Nonresidential |   |         | Construction |  |   |            |   |  |          |         |   |             |   |         |       | 
|----------------------- |  | ----------- | -------- | - | -------------- | - | ------- | ------------ |  | - | ---------- | - |  | -------- | ------- | - | ----------- | - | ------- | ----- | 
|                        |  | Residential |          |   | and            |   |         | and          |  |   |            |   |  |          |         |   |             |   |         |       | 
|                        |  | 1-4 Family  |          |   | Multifamily    |   |         | Development  |  |   | Commercial |   |  | Consumer |         |   | Unallocated |   |         | Total | 
|                        |  |             |          |   |                |   |         |              |  |   |            |   |  |          |         |   |             |   |         |       | 
|Balance, beginning      |  | $           | 653,647  |   |                | $ | 91,284  |              |  | $ | 411,000    |   |  | $        | 154,850 |   |             | $ | 30,625  |       | 
|Charge-offs             |  |             | (198,058 | ) |                |   | (7,569  | )            |  |   | (79,117    | ) |  |          | (252    | ) |             |   | (16,423 | )     | 
|Recoveries              |  |             | 9,636    |   |                |   | -       |              |  |   | 765        |   |  |          | 1,633   |   |             |   | 12,018  |       | 
|Provision for loan loss |  |             | 126,175  |   |                |   | 209,269 |              |  |   | (130,633   | ) |  |          | (41,698 | ) |             |   | 10,528  |       | 
|                        |  |             |          |   |                |   |         |              |  |   |            |   |  |          |         |   |             |   |         |       | 
|Balance, ending         |  | $           | 591,400  |   |                | $ | 292,984 |              |  | $ | 202,015    |   |  | $        | 114,533 |   |             | $ | 36,748  |       | 



| |  | The allocation of the allowance for loan losses and recorded investment in loans by portfolio segment
are as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------



|                                                                             |  | June 30, 2012 |           
|---------------------------------------------------------------------------- |  | ------------- | ----------
|                                                                             |  |               |           
|                                                                             |  | Residential   |           
|                                                                             |  | 1-4 Family    |           
|                                                                             |  |               |           
|Specified
    reserves  impaired loans                                       |  | $             | 192,191   
|                                                                             |  |               |           
|General
    reserves                                                         |  |               | 399,209   
|                                                                             |  |               |           
|Total
    reserves                                                           |  | $             | 591,400   
|                                                                             |  |               |           
|Unpaid
    principal balance of impaired loans                               |  | $             | 3,256,606 
|                                                                             |  |               |           
|Recorded investment in
    loans individually evaluated for impairment:      |  |               |           
|With a valuation allowance                                                   |  | $             | 738,952   
|Without
    a valuation allowance                                            |  |               | 2,517,654 
|                                                                             |  |               |           
|Total recorded investment
    in loans individually evaluated for impairment |  |               | 3,256,606 
|                                                                             |  |               |           
|Loans
    collectively evaluated for impairment                              |  |               | 26,322,248
|                                                                             |  |               |           
|Total
    loans                                                              |  | $             | 29,578,854
|                                                                             |  |               |           
|Average
    investment in impaired loans                                     |  | $             | 3,214,174 
|                                                                             |  |               |           
|Interest
    income recognized on impaired loans                             |  | $             | 77,690    





19







|                                                                         |  | December 31, 2011 |           
|------------------------------------------------------------------------ |  | ----------------- | ----------
|                                                                         |  |                   |           
|                                                                         |  | Residential       |           
|                                                                         |  | 1-4 Family        |           
|                                                                         |  |                   |           
|Specified reserves impaired loans                                        |  | $                 | 184,883   
|                                                                         |  |                   |           
|General reserves                                                         |  |                   | 468,764   
|                                                                         |  |                   |           
|Total reserves                                                           |  | $                 | 653,647   
|                                                                         |  |                   |           
|Unpaid principal balance of impaired loans                               |  | $                 | 3,223,809 
|                                                                         |  |                   |           
|Recorded investment in loans individually evaluated for impairment:      |  |                   |           
|With a valuation allowance                                               |  | $                 | 1,074,743 
|Without a valuation allowance                                            |  |                   | 2,107,131 
|                                                                         |  |                   |           
|Total recorded investment in loans individually evaluated for impairment |  |                   | 3,181,874 
|                                                                         |  |                   |           
|Loans collectively evaluated for impairment                              |  |                   | 29,847,251
|                                                                         |  |                   |           
|Total loans                                                              |  | $                 | 33,029,125
|                                                                         |  |                   |           
|Average investment in impaired loans                                     |  | $                 | 4,331,927 
|                                                                         |  |                   |           
|Interest income recognized on impaired loans                             |  | $                 | 88,860    



The Company follows the loan
impairment accounting guidance in ASC Topic 310. A loan is considered impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual
terms of the loan. Impaired loans include nonperforming commercial loans and loans modified in troubled debt restructurings where
concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in
interest rates, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collections.



The following tables present
an aged analysis of past due financing receivables as follows:



|                                |  | June 30, 2012 |          
|------------------------------- |  | ------------- | ---------
|                                |  |               |          
|                                |  | 30-89 Days    |          
|                                |  | Past Due and  |          
|                                |  | Accruing      |          
|                                |  |               |          
|Residential 1-4 family          |  | $             | 1,918,778
|Nonresidential and  multifamily |  |               | 320,630  
|Construction and development    |  |               | 71,229   
|Commercial                      |  |               | 451,350  
|Consumer                        |  |               | 73,321   
|                                |  |               |          
|Total                           |  | $             | 2,835,308



20







|                                  |  | December 31, 2011 |          
|--------------------------------- |  | ----------------- | ---------
|                                  |  |                   |          
|                                  |  | 30-89 Days        |          
|                                  |  | Past Due and      |          
|                                  |  | Accruing          |          
|                                  |  |                   |          
|Residential 1-4 family            |  | $                 | 2,015,559
|Nonresidential and  multifamily   |  |                   | 332,167  
|Construction and land development |  |                   | 57,214   
|Commercial                        |  |                   | 723,152  
|Consumer                          |  |                   | 31,678   
|                                  |  |                   |          
|Total                             |  | $                 | 3,159,770



Credit quality indicators:



Federal regulations require
us to review and classify our assets on a regular basis. There are three classifications for problem assets: substandard, doubtful,
and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility
that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard
assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss”
is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations
also provide for a “special mention” category, described as assets which do not currently expose an institution to
a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving close
attention. Loan officers are initially responsible for assigning loan grades which are reviewed and verified by the Bank’s
loan review officer. The loan review officer is also responsible for performing quarterly loan reviews on all watchlist and loan
relationships greater than $250,000. An annual loan review is performed on all loan relationships greater than $150,000 but less
than $250,000, fifty percent of all loans between $50,000 and $150,000, twenty-five percent of loans between $25,000 and $50,000
and a random sample of other loans. When we classify an asset as substandard or doubtful, we may establish a specific allowance
for loan losses.





During an examination by the FDIC and the TDFI that began on
July 2, 2012, substandard classified loans increased by $1,788,939 due to newly found deterioration, with only 2 relations above
$500,000. The rest were primarily 1-4 family loans which typically have an average lower than $500,000. The following tables show
the aggregate amount of our classified loans:



|                               |  | June 30, 2012 |           
|------------------------------ |  | ------------- | ----------
|                               |  |               |           
|                               |  | Pass          |           
|                               |  |               |           
|Residential 1-4 family         |  | $             | 26,322,248
|Nonresidential and multifamily |  |               | 10,487,192
|Construction and development   |  |               | 2,179,476 
|Commercial                     |  |               | 7,215,848 
|Consumer                       |  |               | 1,073,925 
|                               |  |               |           
|Total                          |  | $             | 47,278,689



21







|                               |  | December 31, 2011 |           
|------------------------------ |  | ----------------- | ----------
|                               |  |                   |           
|                               |  | Pass              |           
|                               |  |                   |           
|Residential 1-4 family         |  | $                 | 29,562,774
|Nonresidential and multifamily |  |                   | 12,517,280
|Construction and development   |  |                   | 2,457,147 
|Commercial                     |  |                   | 7,401,704 
|Consumer                       |  |                   | 1,086,169 
|                               |  |                   |           
|Total                          |  | $                 | 53,025,074



A modification of a loan constitutes
a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. By granting the concession,
the Company expects to increase the probability of collection by more than would be expected had a concession not been granted.
The Company’s determination of whether a modification is a TDR considers the facts and circumstances surrounding each respective
modification.



No loans were modified in a
TDR during the six months ended June 30, 2012. In addition, the Bank has not had any loans modified in a TDR from July 1, 2011,
through June 30, 2012, that subsequently defaulted during the six months ended June 30, 2012.



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



Impact of Inflation



The consolidated financial
statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted
in the United States and practices within the banking industry that require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due
to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects
of general levels of inflation.



Critical Accounting Estimates



The Company follows
generally accepted accounting principles that are recognized in the United States, along with general practices within the banking
industry. In connection with the application of those principles and practices, we have made judgments and 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 of operation. Other estimates relate to the valuation of assets acquired in connection with foreclosures or in satisfaction
of loans, and realization of deferred tax assets.



22







Recent Accounting Pronouncements



In June 2011,
the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.”  The provisions of ASU No. 2011-05
allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. 
In both options, an entity is required to present each component of net income along with total net income, each component of other
comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  Under
either method, entities are required to present on the face of the financial statements reclassification adjustments for items
that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income
and the components of other comprehensive income are presented.  ASU No. 2011-05 also eliminates the option to present
the components of other comprehensive income as part of the statement of changes in shareholders’ equity but does not change
the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified
to net income.  ASU No. 2011-05 was effective for the Company’s interim reporting period beginning on or after
January 1, 2012, with retrospective application required.  In December 2011, the FASB issued ASU No. 2011-12,
“Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No. 2011-05.”  The provisions of ASU No. 2011-12 defer
indefinitely the requirement for entities to present reclassification adjustments out of accumulated other comprehensive income
by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. 
ASU No. 2011-12, which shares the same effective date as ASU No. 2011-05, does not defer the requirement for entities
to present components of comprehensive income in either a single continuous statement of comprehensive income or in two separate
but consecutive statements.  The Company adopted the provisions of ASU No. 2011-05 and ASU No. 2011-12 in the first
quarter of 2012 which resulted in a new statement of comprehensive income beginning with the interim period ended March 31,
2012.  The adoption of ASU No. 2011-05 and ASU No. 2011-12 had no impact on the Company’s consolidated statements
of operations and condition.



In December 2011,
the FASB issued ASU No. 2011-11, “Disclosures About Offsetting Assets and Liabilities.”  This project began
as an attempt to converge the offsetting requirements under U.S. GAAP and IFRS.  However, as the Boards were not able
to reach a converged solution with regards to offsetting requirements, the Boards developed convergent disclosure requirements
to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS.  The new disclosure requirements
mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement
of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. 
ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or
similar arrangements.  ASU No. 2011-11 is effective for interim and annual reporting periods beginning on or after January 1,
2013.  As the provisions of ASU No. 2011-11 only impact the disclosure requirements related to the offsetting of assets
and liabilities, the Company does not expect that the adoption will have no impact on the Company’s consolidated financial
statements.



Other than disclosures
contained within these statements, the Company has determined that all other recently issued accounting pronouncements will not
have a material impact on its consolidated financial statements or do not apply to its operations.



23







Forward-Looking Statements



Management’s
discussion of the Company and management’s analysis of the Company’s operations and prospects, and other matters, may
include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions
of federal and state securities laws. Although the Company believes that the assumptions underlying such forward-looking statements
contained in this Report are reasonable, any of the assumptions could be inaccurate and, accordingly, there can be no assurance
that the forward-looking statements included herein will prove to be accurate. The use of such words as “may”, “will”,
“anticipate”, “assume”, “should”, “indicate”, “attempt”, “would”,
“believe”, “contemplate”, “expect”, “seek”, “estimate”, “continue”,
“plan”, “point to”, “project”, “predict”, “could”, “intend”,
“target”, “potential”, “forecast,” and comparable terms should be understood by the reader
to indicate that the statement is “forward-looking” and thus subject to change in a manner that can be unpredictable.
Factors that could cause actual results to differ materially from the results anticipated, but not guaranteed, in this Report,
include those factors included in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December
31, 2011, as updated in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, and include (without
limitation) deterioration in the financial condition of borrowers resulting in significant increases in loan losses, and provisions
for those losses, economic and social conditions, competition for loans, mortgages, and other financial services and products,
declining real estate values results of regulatory examinations and/or efforts to comply with the requirements of regulatory proceedings,
including the obligation to raise additional capital, the inability to comply with regulatory requirements, including those resulting
from recently proposed changes to capital calculation methodologies and required capital maintenance levels, changes in interest
rates, unforeseen changes in liquidity, results of operations, and financial conditions affecting the Company’s customers,
and other risks that cannot be accurately quantified or completely identified. Many factors affecting the Company’s financial
condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition
from other providers of financial services simply cannot be predicted. Because these factors are unpredictable and beyond the Company’s
control, earnings may fluctuate from period to period. The purpose of this type of information is to provide readers with information
relevant to understanding and assessing the financial condition and results of operations of the Company, and not to predict the
future or to guarantee results. The Company is unable to predict the types of circumstances, conditions and factors that can cause
anticipated results to change. The Company undertakes no obligation to publish revised forward-looking statements to reflect the
occurrence of changed or unanticipated events, circumstances or results.



General



On January 23, 2004,
American Patriot Financial Group, Inc. (the “Company”), a bank holding company, acquired all of the outstanding shares
of American Patriot Bank (the “Bank”) in a one for one stock exchange. The Bank is a Tennessee-chartered, FDIC-insured,
non-Member commercial bank offering a wide range of banking services, including checking, savings, and money market deposit accounts,
certificates of deposit and loans for consumers, commercial and real estate purposes, and is the principal business of the Company.
The main office of the Company is located at 3095 East Andrew Johnson Highway, Greeneville, Greene County, Tennessee, which is
also the main office of the Bank. This location is a 2.66 acre lot, on which there is a fully operational modular bank unit. Other
full service branch banking offices of the Bank are located at 506 Asheville Highway and 208 West Summer Street, Greeneville, Greene
County, Tennessee. During 2007 the Bank purchased property in Maryville, Tennessee at 710 South Foothills Plaza Drive. This location
is a 1.17 acre lot, on which there is a 3,272 square foot fully operational brick bank building with drive through facilities that
was opened for business on July 9, 2007. The Maryville property was sold to First State Bank on February 29, 2012 and the loans
and deposits of this branch were transferred to the Bank’s Greeneville branches. The Bank’s current locations are centrally
located and are in high traffic/exposure areas. Automatic teller machines and overnight "deposit drops" are positioned
to serve the Bank's clients.



Liquidity



At June 30, 2012, the
Company had liquid assets of approximately $13.2 million in the form of cash and cash equivalents, federal funds sold and securities
available for sale compared to approximately $16.3 million at December 31, 2011. Management believes that the liquid assets are
adequate at June 30, 2012. Additional liquidity should be provided by loan repayments; however, the restrictions on the Bank’s
ability to accept, rollover or renew brokered deposits and the rates that the Bank may pay on other deposits stemming from the
Bank’s regulatory enforcement matters may negatively impact the Bank’s ability to grow or retain its deposits. The
Company also has the ability to purchase federal funds. Management has taken a pro-active approach to develop a larger local deposit
base to help reduce any risk of over reliance on non-core funding including brokered deposits.



24







Results of Operations



The Company recorded
a net loss to common shareholders of ($232,363) or ($.10) per common share for the quarter ended June 30, 2012, compared to a net
loss to common shareholders of ($638,448) or ($.27) per common share for the quarter ended June 30, 2011. The Company had a net
loss to common shareholders for the six months ended June 30, 2012 of ($217,599) as compared to a net loss to common shareholders
of ($927,081) for the same period in 2011. During the three and six months ended June 30, 2012, the Company did not record a provision
for loan losses, compared to provision benefit of $2,126 and provision expense of $2,134 for the three and six months periods ended
June 30, 2011, respectively (See additional discussion at Provision for Loan Losses).



Net Interest Income/Margin



Net interest income
represents the amount by which interest earned on various assets exceeds interest paid on deposits and other interest-bearing liabilities
and is the most significant component of the Company’s earnings. Interest and dividend income for the quarter ended June
30, 2012, was $899,895 compared to $939,663 for the same period in 2011. Total interest expense was $190,005 for the quarter ended
June 30, 2012, compared to $311,728 for the same period in 2011. Net interest income before provision for loan losses increased
$81,955 and $200,759 for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. Net
interest margin for the three months ended June 30, 2012 was 4.03% compared to 2.98% for the same period in 2011.Interest
income for the six months ended June 30, 2012, was $1,883,564 compared to $1,929,448 for the same period in 2011 and total interest
expense was $409,190 for the six months ended June 30, 2012 compared to $655,833 for the same period in 2011. Net interest margin
was 4.05% for the first six months of 2012 compared to 2.98% for the comparable period in 2011 or a 107 basis point increase. The
improvement in our net interest margin was a result of a net increase in the yield on interest-earning assets of approximately
66 basis points in conjunction with a decrease in rates paid on interest-bearing liabilities of 41 basis points. The increase in
yields on interest-earning assets is attributable to the impact from certain previously non-performing loans returning to performing
status and selling the Maryville facility and holding these proceeds in interest-bearing balances. The decrease in yield on interest-bearing
liabilities is due to the extended low interest rate environment which has enabled us to lower deposit rates as higher yielding
deposits mature.



Provision for Loan Losses



The provision for loan
losses represents a charge to operations necessary to establish an allowance for possible loan losses, which in management's evaluation,
is adequate to provide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. The
Company did not record a provision for loan losses for the three-month and six-month periods ended June 30, 2012, respectively,
as compared to a $2,126 benefit and $2,134 of expense for the same three month and six month periods ended June 30, 2011. During
the three and six months ended June 30, 2012, loan charge-offs were $288,534 and $301,419, respectively. The recoveries for the
three and six month periods ended June 30, 2012 were $6,760 and $24,052, respectively. The allowance for loan losses was $1,358,707
at June 30, 2012 as compared to $1,636,074 at December 31, 2011, a decrease of 17.0%. The allowance was 2.4% of total loans at
June 30, 2012 as compared to 2.8% at March 31, 2012 and 2.7% at December 31, 2011.



25







Management believes
that the allowance for loan losses is adequate at June 30, 2012. However, there can be no assurance that additional provisions
for loan losses will not be required in the future, including as a result of possible changes in the economic assumptions underlying
management’s estimates and judgments, adverse developments in the economy, and the residential real estate market in particular,
or changes in the circumstances of particular borrowers. Management intends to continue to pursue aggressive strategies for problem
loan resolution, and is committed to maintain loan loss reserves at levels sufficient to absorb losses recognized in the pursuit
of this strategy.



Provision for / Benefit from Income
Taxes



The Company had no
expense or benefit from income taxes for the three and six months ended June 30, 2012, or for the three and six months ended June
30, 2011. The tax benefit created by the net loss during the periods presented was offset by additional deferred tax asset valuation.



Noninterest Income



The Company’s
noninterest income consists of service charges on deposit accounts and other fees and commissions. Total noninterest income for
the three and six months ended June 30, 2012, was $92,882 and $314,691, respectively, compared to $86,858 and $166,938 for the
same periods in 2011. Service charges on deposit accounts decreased $12,470 and $19,282 for the three and six months ended June
30, 2012, respectively, compared to the same periods in 2011. The primary cause of the decline in service charges between 2012
and 2011 was related to declines in NSF and overdraft fees. In addition, a reduction in NSF charges is being noted nationwide as
a result of the current economy and reduced consumer spending. These fees are primarily activity driven and related to transaction
based checking accounts. The Bank noted a significant decline in checking account customers when comparing the three and six month
periods ended June 30, 2012 against the same periods of 2011. The sharp increase in other noninterest income for the three and
six months ended June 30, 2012, compared to the same periods in 2011 is due to a gain of approximately $130,000 related to the
sale of fixed assets, primarily the Maryville, TN branch building and real estate that was sold in February 2012.



Noninterest Expense



Noninterest expenses
totaled $1,027,977 and $1,992,633 for the three and six months ended June 30, 2012, as compared to $1,348,655 and $2,352,040 for
the same periods in 2011.   Salaries and benefits decreased $60,430 and $56,994 for the three and six months ended June
30, 2012, as compared to the same periods in 2011.  Occupancy expenses decreased $21,036 and $37,347 for the three and six
months ended June 30, 2012, as compared to the same periods in 2011 mostly due to a reduction in costs associated with the Maryville,
TN branch that was sold in February 2012. Legal and professional fees decreased $114,591 and $136,085 for the three and six months
ended June 30, 2012, as compared to the same periods in 2011. Legal and professional fees for the three and six month periods ended
June 30, 2011, were elevated due to ongoing legal costs associated with the legal proceedings noted in Part II-Other Information,
Item 1 of this filing. Subsequently, the Company's insurance provider reimbursed the Company for legal fees incurred and began
covering legal fees resulting in the decrease for the three and six month periods ended June 30, 2012. Other noninterest expenses
decreased $124,621 and $128,981 for the three and six months ended June 30, 2012 compared to the same periods in 2011. Most of
the decrease in other noninterest expense can be attributed to lower FDIC premiums, lower foreclosed real estate expenses and a
reduction in losses on sales of foreclosed assets. Foreclosed real estate expense decreased $43,852 and $65,284 for the three and
six months ended June 30, 2012 compared to the same periods in 2011, as the Bank has begun to see some stabilization in real estate
values. Foreclosed real estate expense is composed of three types of charges: maintenance costs, valuation adjustments based on
new appraisal values and gains or losses on disposition. At June 30, 2012, the Company had $12.4 million in foreclosed assets compared
to $7.2 million at June 30, 2011 and $10.5 million at December 31, 2011. While foreclosed real estate expenses have improved period
in 2012 as compared to 2011, the Company anticipates these charges will remain at elevated levels throughout 2012 as it anticipates
that balances of foreclosed assets will remain at elevated levels for the remainder of 2012.



26







Financial Condition



Total assets at June
30, 2012, were $86,785,228, a decrease of $7,424,305 or 7.9% compared to 2011 year-end assets of $94,209,533. Deposits decreased
to $84,202,907 at June 30, 2012, a decrease of $7,133,014 or 7.8% from $91,335,921 at December 31, 2011. Contributing factors to
the decline in the deposits result primarily from the sale of the Maryville facility on February 29, 2012 to First State Bank.
As a result, total deposits in Maryville declined by $6,121,378 since December 31, 2011 with the biggest component of this decline
comprised of time deposits retail which reduced by $4,599,229. Although the Greeneville market continued to experience deposit
growth throughout the first quarter of 2012, total deposits declined  $1,011,636  during the second quarter of 2012 from
the anticipated settlement of a large estate and  closure of a money market account that exceeded FDIC insurance as well as
press releases received in The Greeneville Sun and Knoxville News Sentinelrelated to the Bank’s filing of the first
quarter 10-Q.  The Company is taking measures to maintain liquidity by offering as attractive rates to customers as possible
given our market rate cap limitation currently imposed on us. Premises and equipment decreased to $3,070,176 at June 30, 2012,
a decrease of $1,596,455 or 34.2% from $4,666,631 at December 31, 2011, primarily as a result of the sale of the Maryville branch
for $1,519,303 and minimal fixed asset purchases coupled with normal depreciation charges. Other significant additions noted as
of June 30, 2012, when compared to December 31, 2011 relate to foreclosed assets. Foreclosed assets increased $1,941,635, or 18.5%,
from $10,500,411 at December 31, 2011 to $12,442,046 at June 30, 2012.



The Company places
an emphasis on an integrated approach to its balance sheet management. Significant balance sheet components of loans and sources
of funds are managed in an integrated manner with the management of interest rate risk, liquidity, and capital. These components
are discussed below.



Loans



Total loans outstanding
were $54,871,758 at June 30, 2012, compared to $59,502,274 at December 31, 2011. The decrease in loan volume is largely attributable
to management’s strategy to decrease concentrations in certain loan types, particularly real estate construction and development
loans, and the movement of real estate loans to foreclosed assets following completion of foreclosure. Management is monitoring
the portfolio closely and believes it has identified and properly reserved for all major problem credits in the portfolio. In the
event that a loan is ninety days or more past due, the accrual of income is generally discontinued when the full collection of
principal and interest is in doubt unless the obligations are both well secured and in the process of collection. At June 30, 2012,
there were $1,242,964 in loans not accruing interest, compared to $6,061,143 at December 31, 2011. The improvement in non-accrual
loans is attributable to approximately $2.6 million of loans moving to foreclosed assets and $2.2 million of loans previously on
non-accrual that moved to performing status after a sustained period of performance in accordance with modified contractual loan
terms.



27







The following
is a summary of information pertaining to impaired loans:



|                                                       |  | June 30, |           |  | December 31, |  
|------------------------------------------------------ |  | -------- | --------- |  | ------------ | -
|                                                       |  | 2012     |           |  | 2012         |  
|                                                       |  |          |           |  |              |  
|Impaired loans without a specific valuation allowance  |  | $        | 5,397,754 |  |              | $
|Impaired loans with a specific valuation allowance     |  | $        | 2,636,886 |  |              |  
|Total specifically evaluated impaired loans            |  | $        | 8,034,640 |  |              | $
|Specific valuation allowance related to impaired loans |  | $        | 376,068   |  |              | $



At June 30, 2012, the
evaluation for impairment was completed on all loans classified substandard and doubtful, regardless of size.



There are no commitments
to lend additional funds to any of the impaired borrowers. As of June 30, 2012, the Company has identified loans aggregating $8,034,640
as being impaired of which $1,242,964 are nonperforming as it relates to payment of interest. The increase in impaired loans between
December 31, 2011 and June 30, 2012 is due to additional loans being identified as impaired during the second quarter of 2012.



Nonperforming Assets



At June 30, 2012, the
Company had $13.7 million in nonperforming assets compared to $16.6 million at December 31, 2011. Included in nonperforming assets
at June 30, 2012, were $1.24 million in nonperforming loans and $12.4 million in foreclosed assets. The continued elevated levels
of nonperforming asset balances that the Company continues to experience is primarily related to a weakened real estate market
in the Company’s primary markets. The Company elected to rent several properties held as foreclosed assets and in the first
quarter realized gross income of $198,291 with respect to these properties. This helped to offset maintenance expenses related
to foreclosed assets and created a net income for the Bank in the second quarter from OREO of $33,229. This is expected to increase
in the third quarter as more properties have been placed on the rental market. Properties are rented on a month to month basis
unless they are rented with an option to buy, in which the terms of the option are for less than one year. No properties are rented
for any term longer than 12 months. The day to day oversight of the properties remains with the Bank staff assigned to the special
assets area of the Bank, except where third parties have been contracted on a month to month basis to manage specialty properties
such as a mobile home community. As per accounting rules, the income and expense of these properties are netted out and shown as
“other real estate owned” expenses on the general ledger of the Bank. Individual income and expense records are maintained
by the Bank’s accounting department on each property. Management believes that foreclosures going forward will be related
to smaller loans with the level of nonperforming loans remaining at present levels as foreclosed properties migrate to foreclosed
assets. The Company has begun to experience sales of foreclosed assets and believes that as the real estate market improves, the
level of foreclosed assets will begin to decline as more properties are sold during the second half of 2012.



Restricted Equity Investments



Federal Home Loan Bank
(“FHLB”) stock at June 30, 2012, had an amortized cost and market value of $296,500, the same as at December 31, 2011.
As a member of the FHLB, the Company is required to maintain stock in an amount equal to a minimum of .15% of total assets and
4% of outstanding FHLB advances. FHLB stock is carried at cost. FHLB stock is maintained by the Company at par value of one hundred
dollars per share



28











Securities Available for Sale





Securities have been
classified in the balance sheet according to management’s intent as securities available for sale. The amortized cost and
approximate fair value of securities at June 30, 2012, are as follows:



|                                                            |  | June 30, 2012  |          
|----------------------------------------------------------- |  | -------------- | ---------
|                                                            |  | Amortized Cost |          
|                                                            |  |                |          
|Securities Available for Sale:                              |  |                |          
|                                                            |  |                |          
|Securities of U.S. Government agencies
    and corporations |  | $              | 1,997,621
|                                                            |  |                |          
|Mortgage-backed and related
    securities                  |  |                | 885,200  
|                                                            |  |                |          
|                                                            |  | $              | 2,882,821



At June 30, 2012, securities
with book values of approximately $2,883,000 were pledged to secure deposits of public and private funds and a federal funds line
of credit with the First National Bankers Bank, Alabama.



Deposits and Other Funding



Total deposits, which
are the principal source of funds for the Company, were $84,202,907 at June 30, 2012, compared to $91,335,921 at December 31, 2011,
representing a decrease of 7.8%. Contributing factors to the decline in the deposits result primarily from the sale of the Maryville
facility on February 29, 2012 to First State Bank. As a result, total deposits in Maryville declined by $6,121,378 since December
31, 2011 with the biggest component of this decline comprised of time deposits retail which reduced by $4,599,229. Although the
Greeneville market continued to experience deposit growth throughout the first quarter of 2012, total deposits declined $1,011,636
during the second quarter of 2012 from the anticipated settlement of a large estate and closure of a money market account that
exceeded FDIC insurance as well as press releases received in The Greeneville Sun and Knoxville News Sentinelrelated to
the Bank’s filing of the first quarter 10-Q.  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, money market
demand accounts, NOW accounts, certificates of deposit and individual retirement accounts are offered to customers. The Company
also had $900,000 in short-term borrowings from Jefferson Federal Bank which matured on February 28, 2011 and is secured by 100%
of the Bank’s common stock. Because the loan is now in default, the lender could foreclose on its collateral, the stock of
the Bank, and accordingly acquire the Bank at any time. A demand letter of payment dated July 14, 2011, has been received by the
Bank. Further, there are $21,000 in loans due to two directors and one former director that are due on demand.



Because, among other
reasons, the Bank is “significantly undercapitalized” under the prompt corrective action provisions of the Federal
Deposit Insurance Corporation Improvement Act and subject to minimum capital requirements in the Order (as defined below), it may
not accept, renew or rollover brokered deposits. It is also prohibited from paying interest on deposits at rates higher than certain
nationally prescribed rates. These limitations could place pressure on the Bank’s liquidity as it may be unable to retain
deposits as they mature.



29







Capital and Regulatory Matters



Pursuant to the terms
of the Cease and Desist Order (the “Order”) that the Bank entered into with the FDIC during the second quarter of 2009,
as more fully described below, the Bank is required to develop and implement a capital plan that increases the Bank’s Tier
1 capital ratio, Tier 1 risk-based capital ratio and Total risk-based capital ratio to 8%, 10% and 11%, respectively.  Numerous
capital plans have been submitted to the FDIC and the Tennessee Department of Financial Institutions (the “TDFI”) for
approval, but none have been approved by the FDIC or the TDFI.  In the event a capital plan is approved, the Bank must immediately
initiate measures to effect compliance with the capital plan within 30 days after the FDIC and the TDFI respond to the capital
plan.



As a result of the
Bank’s capital ratios falling below minimum regulatory amounts, the Bank is considered “significantly undercapitalized”
and it is subject to the provisions of Section 38 of the Federal Deposit Insurance Act, which among other things: (i) restricts
payment of capital distributions and management fees; (ii) requires that the FDIC monitor the condition of the Bank; (iii) requires
submission of a capital restoration plan within 45 days; (iv) restricts the growth of the Bank's assets; and (v) requires prior
approval of certain expansion proposals, many of which restrictions or obligations, including the requirement to submit a capital
restoration plan, the Bank was already subject to as a result of the Order.



In August 2010, the
FDIC notified the Bank that, due to the Bank’s “significantly undercapitalized” status, it intended to issue
the Bank a prompt corrective action directive requiring the Bank to submit an acceptable capital restoration plan on or before
August 31, 2010 providing that, among other things, at a minimum the Bank shall restore and maintain its capital to the level of
“adequately capitalized.”  This directive was issued on August 17, 2010.  In the event that the
Bank does not increase its Tier 1 capital in accordance with the requirements of this directive, the Bank will be required under
the directive to take any necessary action to result in the Bank’s acquisition by another depository institution holding
company or merge with another insured depository institution.  Numerous capital restoration plans have been submitted,
however none have been accepted by the FDIC because the FDIC was unable to determine that the capital restoration plans were based
on realistic assumptions or were likely to succeed in restoring the Bank’s capital. In order to secure the approval of the
FDIC of the Bank’s capital restoration plan, the Company executed on May 6, 2011, a Capital Maintenance Commitment and
Guaranty (the “Commitment”) with the FDIC, which was declined. The Bank is in process of resubmitting a revised Capital
Maintenance Commitment and Guaranty.  Pursuant to the Commitment, the Company will be required to provide the FDIC assurance
in the form of a financial commitment and guaranty that the Bank will comply with the Bank’s capital restoration plan until
the Bank has been adequately capitalized on average during each of four consecutive quarters and, in the event the Bank fails to
so comply, to pay to the Bank the lesser of five percent of the Bank's total assets at the time the Bank was undercapitalized,
or the amount which is necessary to bring the Bank into compliance with all capital standards applicable to the Bank at the time
it failed to comply. In our most recent capital restoration plan, we have stated that our primary focus regarding improving our
capital is on the sale or merger of our Company or the Bank. Secondarily, we are trying to raise sufficient amounts of capital
necessary to capitalize the Bank at or above those levels required in the Order. If we are unable to find a merger partner or anyone
to buy us, and we are also unable to raise sufficient capital to meet the capital commitments the Bank has made to the TDFI and
the FDIC, we may be closed by the FDIC.



If the Bank is unable
to raise capital to the levels required by the directive or, thereafter, to take action necessary to be acquired or merge with
another insured depository institution, the FDIC could place the Bank into receivership.  The directive also imposes
certain limitations on the Bank’s operations, many of which the Bank is already subject to under the terms of the Order or
as a result of the Bank falling below “adequately capitalized” at June 30, 2009, including limitations on the Bank’s
ability to pay dividends, to pay management fees to the Company, to grow the Bank’s asset base, to make acquisitions, establish
new branches or engage in new lines of business, to pay board and committee fees, to accept, renew or rollover brokered deposits
and to pay interest rates on deposits above prescribed national rates.  The terms of the directive require that the directive
shall remain effective until the Bank has been “adequately capitalized” on average for four consecutive quarters.



30







The Bank and the Company
are currently evaluating their respective capital options and the Company is actively seeking another company with which to merge
or by which to be acquired.



Equity capital at June
30, 2012, was $864,634 a decrease of $163,547 from $1,028,181 at December 31, 2011, due to a net loss of $(203,568), changes in
unrealized gains/losses on securities available for sale of $21 and the sales of 40 shares of Series A preferred stock to Warner
Realty, Inc. at a purchase price of $1,000 per share for an aggregate purchase price of $40,000. The proceeds from these sales
of preferred stock were used to pay operating expenses of the Company.



At June 30, 2012, the
Bank’s required minimum ratios were less than the required regulatory minimum ratios. The Bank, accordingly, falls within
the category of “significantly undercapitalized” within the FDIC’s prompt corrective action provisions. In addition
to the limitations on the Bank’s activities mandated by the Order and the prompt corrective action directive, the Bank, because
it is significantly undercapitalized, is also now subject to determinations by the FDIC to require the Bank to be recapitalized,
to restrict transactions with affiliates, and restrict interest paid on deposits. The Bank’s and Bank Holding Company’s
(BHC) actual capital ratios at June 30, 2012 and required ratios under the Order, follow:



|                                |  | Required Minimum Ratio |      |   | To
                                                                                                  be Well Capitalized |  |       | Requirements Under
                                                                                                                                                                                                                 the Order |  |  | Bank  |   |  | BHC |     
|------------------------------- |  | ---------------------- | ---- | - | ------------------------------------------------------------------------------------------------------------------------ |  | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----- | - |  | --- | ----
|                                |  |                        |      |   |                                                                                                                          |  |       |                                                                                                                                                                                                                                               |  |  |       |   |  |     |     
|Tier 1 leverage ratio           |  |                        | 4.00 | % |                                                                                                                          |  | 5.00  | %                                                                                                                                                                                                                                             |  |  | 8.00  | % |  |     | 2.13
|Tier 1 risk-based capital ratio |  |                        | 4.00 | % |                                                                                                                          |  | 6.00  | %                                                                                                                                                                                                                                             |  |  | 10.00 | % |  |     | 2.78
|Total risk-based capital ratio  |  |                        | 8.00 | % |                                                                                                                          |  | 10.00 | %                                                                                                                                                                                                                                             |  |  | 11.00 | % |  |     | 4.04



If the Bank’s
Tier 1 leverage ratio falls below 2%, the Bank will be deemed to be “critically undercapitalized.” Critically undercapitalized
institutions are subject to appointment of a receiver or conservator generally within 90 days of the date on which the institution
became critically undercapitalized.



Liability and Asset Management



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



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



31







Like any forecasting
technique, interest rate simulation modeling is based on a large number of assumptions. In this case, the assumptions relate primarily
to loan and deposit growth, asset and liability prepayments, interest rates and balance sheet management strategies. Management
believes that both individually and in the aggregate the assumptions are reasonable. Nevertheless, the simulation modeling process
produces only a sophisticated estimate, not a precise calculation of exposure.



At June 30, 2012,
approximately 65% of the institution’s gross loans had adjustable rates. Based on the asset/liability modeling, management
believes that these loans reprice at a faster pace than liabilities held at the institution. Because the majority of the institution’s
liabilities are 12 months and under and the gap in repricing is asset sensitive, management believes that a rising rate environment
would have a positive impact on the Company’s net interest margin. Floors in the majority of the institution’s adjustable
rate assets also mitigate interest rate sensitivity in a decreasing rate environment but would likely delay any improvement in
net interest income in a rising rate environment as the underlying loans would not reprice until the floor was exceeded.



Off-Balance Sheet Arrangements



The Company, at June
30, 2012, had outstanding unused lines of credit and standby letters of credit that totaled approximately $5,255,000. These commitments
have fixed maturity dates and many will mature without being drawn upon, meaning that the total commitment does not necessarily
represent the future cash requirements. The Company has the ability to liquidate federal funds sold and available for sale securities,
or, on a short-term basis, to purchase federal funds from a correspondent bank. At June 30, 2012, the Company had established with
a correspondent bank the ability to purchase federal funds if needed up to $1,600,000.



Item 3.  Quantitative and Qualitative Disclosures about
Market Risk



The information set forth on pages 22 through
32 of Item 2, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”, is incorporated
herein by reference.



Item 4.  Controls and Procedures



| | a) | Evaluation
                                                                                 of Disclosure Controls and Procedures
| | -- | ---------------------------------------------------------------------------------------------------------------------------------



The Company maintains
disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by
it 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’s rules and forms and that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer.  The Company carried out an evaluation, under
the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered
by this report.  Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure control and procedures were effective.

32







| | b) | Changes in
                                                                                 Internal Controls and Procedures
| | -- | ----------------------------------------------------------------------------------------------------------------------------



There were no changes
in our internal controls over financial reporting during the quarter ended June 30, 2012, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.



33







PART II - OTHER INFORMATION



| | Item 1. | LEGAL PROCEEDINGS
| | ------- | -----------------



At June 30, 2012, the Company and Bank were
defendants in a complaint filed in the Blount County Circuit Court on March 2, 2012. The plaintiffs have alleged intentional interference
with a contract pursuant to Tennessee code, common law intentional interference with a contract, civil conspiracy and fraud relating
to commitments to fund a loan to the plaintiffs. The plaintiffs are seeking compensatory damages, treble damages, punitive damages,
reasonable attorney's fees and court costs. No amount of damages is specified in the complaint. The Company’s legal counsel
is not able to provide an assessment regarding the potential outcome of the case or an estimate, or range of estimates, of potential
damages; therefore, the Bank has not accrued a liability with respect to this lawsuit. The Company and Bank have aggregate insurance
coverage of $3,000,000 which management believes is adequate to cover potential awards. Further, management believes they have
strong defenses to all claims and intends to vigorously defend this lawsuit.



At June 30, 2012, the
Company and the Bank were also defendants in a complaint filed on May 19, 2009 by Robert A. Clemmer and Richard A Pearson in the
Blount County Chancery Court. The plaintiffs have alleged breach of contract, promissory estoppels and negligent misrepresentation
relating to commitments to fund various loans to certain plaintiffs. The plaintiffs were originally seeking compensatory damages
of $3,600,000, punitive damages of $14,400,000 and treble damages; however, the plaintiffs have changed counsel and their new counsel
has filed an amended complaint. The plaintiffs are now seeking injunctive relief and monetary damages in an unspecified amount.
The case is in the discovery phase and the Company’s legal counsel is not able to provide an assessment regarding the potential
outcome of the case or an estimate, or range of estimates, of potential damages; therefore the Bank has not accrued a liability
with respect to this lawsuit. The Company and the Bank have aggregate insurance coverage of $3,000,000 which management believes
is adequate to cover potential awards. Further, management believes they have strong defenses to all claims and intends to vigorously
defend this lawsuit.



| | Item 1A. | RISK FACTORS
| | -------- | ------------



Other than as set forth
in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, there were no material changes to the
Company’s risk factors as previously disclosed in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2011.



| | Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
| | ------- | -----------------------------------------------------------



| | (a) | On March 1, 2012 and May 30, 2012, the Company sold 25
and 15 shares of Series A Preferred Stock to Warner Realty, Inc. at a purchase price of $1,000 per share for an aggregate purchase
price of $25,000 and $15,000. The sales were made pursuant to an exemption from registration set forth in Section 3(a)(11) of
the Securities Act of 1933, as amended, as securities offered and sold only to persons resident within Tennessee, where the Company
is incorporated by and doing business within Tennessee. There were no underwriting discounts or commissions paid to underwriters
by the Company with respect to the sale of the preferred stock. The proceeds of the sale of preferred stock were used to pay operating
expenses.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Not applicable.
| | --- | ---------------



34







| | (c) | No repurchases of Company securities were made during
the quarter ended June 30, 2012.
| | --- | --------------------------------------------------------------------------------------



The Company's ability to pay
dividends is derived from the income of the Bank. The Bank's ability to declare and pay dividends is limited by its obligations
to maintain sufficient capital by the terms of the Order and by other general restrictions on its dividends that are applicable
to banks that are regulated by the FDIC and the TDFI. In addition, the Federal Reserve Board has imposed restrictions on the Company
prohibiting it from paying any dividends on its common or preferred stock without the prior approval of the Federal Reserve Bank
of Atlanta. As a result, the Company cannot assure its shareholders that it will declare or pay dividends on shares of its common
stock in the future and the Company has never paid dividends in the past.



On July 22, 2008, the Board
of Directors of American Patriot Bank entered into a resolution with the Federal Reserve Bank of Atlanta which states that American
Patriot Financial Group, Inc. will not declare or pay dividends (common or preferred) to its shareholders without the prior written
approval of the Federal Reserve Bank. American Patriot Financial Group, Inc. is to submit its request to the Federal Reserve Bank
30 days prior to the date on which it wishes to declare or pay the dividends.



| | Item 3. | DEFAULTS UPON SENIOR SECURITIES
| | ------- | -------------------------------



| | (a) | None.
| | --- | -----



| | (b) | At June 30, 2012, the amount of dividends in arrears on the Company’s Series A Preferred
Stock was $28,260.
| | --- | -----------------------------------------------------------------------------------------------------------



| | Item 4. | MINE
SAFETY DISCLOSURES
| | ------- | -----------------------



Not applicable.



| | Item 5. | OTHER
INFORMATION
| | ------- | -----------------



| | (a) | None.
| | --- | -----
| |     |      

| | (b) | None.
| | --- | -----



| | Item 6. | EXHIBITS
| | ------- | --------



Index to Exhibits.



|Exhibit No. |                                                                                                                             | Description
|----------- | --------------------------------------------------------------------------------------------------------------------------- | -----------
|3.1         | Charter of American Patriot Financial Group, Inc. (Restated for SEC filing purposes) (1)                                   
|3.2         | Bylaws of American Patriot Financial Group, Inc. (2)                                                                       
|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 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2        | Certification pursuant to Rule 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



35







|101 | Interactive Data File*                                                                                                                                                                  
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                         
|    | (1) Previously filed as an exhibit to the Annual Report on Form 10-K/A filed by American Patriot Financial Group, Inc. with the Commission on April 30, 2012.                           
|    |                                                                                                                                                                                         
|    | (2) Previously filed as an exhibit to a Current Report on Form 8-K filed by American Patriot Financial Group, Inc. (f/k/a BG Financial Group, Inc.) with the Commission on May 21, 2004.
|    |                                                                                                                                                                                         
|    | *            To be filed by amendment.                                                                                                                                                  



36







SIGNATURES



Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.



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



37