American Patriot Financial (APFG) 10-Q 2007 Q3 Quarterly report

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 September 30, 2007

OR

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

For the transition period from                      to                       

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 x  NO o

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

Large accelerated filer o        Accelerated filer o        Non-accelerated filer x

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

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

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

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AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

The accompanying notes are an integral part of these consolidated financial statements. 

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AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

The accompanying notes are an integral part of these consolidated financial statements.

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AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

The accompanying notes are an integral part of these consolidated financial statements.

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AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

The accompanying notes are an integral part of these consolidated financial statements.

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

The accompanying notes are an integral part of these consolidated financial statements.

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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 whose business is conducted by its wholly-owned subsidiary, American Patriot Bank (the “Bank”). American Patriot Bank is engaged in the business of originating loans primarily within its lending area, Greeneville and Greene County in Tennessee. The Bank obtains deposits both inside and outside of its primary lending area. The Company was organized in October 2003. The Company had minimal assets, liabilities or operations until January, 2004, when it acquired the Bank in a Plan of Share Exchange whereby the stockholders exchanged their shares of ownership in the Bank for shares of ownership in the Company on a one-for-one basis. As a part of the Plan of Share Exchange, the Bank became a wholly owned subsidiary of the Company.

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 the 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 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 nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. 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, 2006. Certain amounts from prior period financial statements have been reclassified to conform to current period’s presentation.

Use of Estimates:

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 estimate is the allowance for loan losses. 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.

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Note 2.Stock Options and Awards

On July 1, 2005, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”). This statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), which the Company had followed until the adoption of SFAS No. 123R. The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of income. In anticipation of adopting SFAS No. 123R, on May 17, 2005 the Board of Directors approved that all non-vested employee stock options granted to become fully vested and exercisable as of that date in order to avoid recognition of compensation costs in the consolidated statement of income in future periods. Any stock options granted after May 17, 2005 are fully exercisable on the date granted. Accordingly, no compensation cost was recognized prior to the adoption of SFAS No. 123R on July 1, 2005. No additional options were granted during the period ended September 30, 2007, therefore, no compensation cost is recognized in the consolidated statement of income for the period ended September 30, 2007. The aggregate intrinsic value of options was $960,822 at September 30, 2007. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying option and the quoted market price of the Company’s common stock of $8.50 per common share for the 220,309 options that were in-the-money at September 30, 2007.

Note 3.Earnings Per Share of Common Stock

Basic earnings per share (EPS) of common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock is computed by dividing net income 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 nine months ended September 30, 2007, 19,000 options are excluded from the effect of dilutive securities because they are anti-dilutive; 19,000 options are similarly excluded from the effect of dilutive securities for the three and nine months ended September 30, 2006.

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The following is a reconciliation of the numerators and denominators used in the basic and diluted earnings per share computations for the three months and nine months ended September 30, 2007 and 2006:

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

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

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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.

Recent Accounting Pronouncements

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

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

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

In September 2006, the Financial Accounting Standards Board ratified a consensus opinion reached by the Emerging Issues Task Force on Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, (“EITF 06-04”) which requires employers that enter into endorsement split-dollar life insurance arrangements that provide an employee with a postretirement benefit to recognize a liability for the future benefits promised based on the substantive agreement made with the employer. Whether the accrual is based on a death benefit or on the future cost of maintaining the insurance would depend on what the employer has effectively agreed to provide during the employee’s retirement. The purchase of an endorsement-type life insurance policy does not qualify as a settlement of the liability.

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The consensus in EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Company intends to adopt EITF 06-4 effective January 1, 2008. The Company is currently evaluating the impact this guidance will have on the Company’s financial position and results of operation.

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

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this standard is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective as of the beginning of fiscal years beginning after November 15, 2007, with early adoption permitted under certain circumstances. The Company did not choose to early adopt this standard.

In March 2007, the EITF reached a final consensus on Issue No. 06-10 (“EITF 06-10”), “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements.”  EITF 06-10 requires employers to recognize a liability for the post-retirement benefit related to collateral assignment split-dollar life insurance arrangements in accordance with SFAS No. 106 or APB Opinion No. 12. EITF 06-10 also requires employers to recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. The provisions of EITF 06-10 are effective for the Company on January 1, 2008, with earlier application permitted, and are to be applied as a change in accounting principle either through a cumulative-effect adjustment to retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption; or as a change in accounting principle through retrospective application to all prior periods. The Company does not expect adoption of EITF 06-10 to have a significant impact on its consolidated financial statements, results of operations or liquidity.

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 “expect,” “anticipate,” “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 from the results anticipated, but not guaranteed, in this report, include (without limitation) economic and social conditions, competition for loans, mortgages, and other financial services and products, changes in interest rates, unforeseen changes in liquidity, results of operations, and 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.

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General

On January 23, 2004, American Patriot Financial Group, Inc. (formerly known as BG Financial Group, Inc.) (“Company”), a bank holding company, acquired all of the outstanding shares of American Patriot Bank (formerly known as Bank of Greeneville) (“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 Corporation 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. Recently 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 and was opened for business on July 9, 2007. These locations are centrally located and in high traffic/exposure areas. Automatic teller machines and overnight “deposit drops” are positioned to serve the Bank’s clients. Additional branches may be established as market opportunities surface.

Liquidity

At September 30, 2007, the Company had liquid assets of approximately $14.5 million in the form of cash and federal funds sold compared to approximately $15.5 million on December 31, 2006. Management believes that the liquid assets are adequate at September 30, 2007. Additional liquidity should be provided by the growth in deposit accounts and loan repayments. The Company also has the ability to purchase federal funds and is a member of the Federal Home Loan Bank of Cincinnati that will provide a credit line if necessary. Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material impact on the Company’s short term or long term liquidity.

Results of Operations

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

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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 income for the quarter ended September 30, 2007 was $2,092,362 compared to $1,720,152 for the same period in 2006, and total interest expense was $1,022,889 in 2007 compared to $753,621 in 2006 for the same period. Interest income for the nine months ended September 30, 2007 was $5,965,557, compared to $4,886,457 for the same period in 2006, and total interest expense was $2,826,012 in 2007 compared to $2,062,711 in 2006 for the same period. The Company pursues local deposits aggressively with attractive interest rates, which has resulted in compression of net interest margin. The Company benefited from a “catch up” interest payment of $121,082 received from a large loan previously in non accrual status during the nine months ended September 30, 2007. Based on the Company’s mix of interest earning assets and interest bearing liabilities, management believes that net interest margin should remain stable or begin to decrease slightly for the remainder of the year. If interest rates remain stable or continue to decline, net interest margin could decline due to competitive pricing of both loans and interest bearing deposits.

Provision for / Benefit from Loan Losses

The provision for (benefit from) loan losses represents a charge (or recovery) to 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 provision for loan losses during the three month and nine month period ended September 30, 2007 was $91,848 and $132,811, respectively. The benefit from loan losses during the three month period ended September 30, 2006 was $60,796, whereas there was a provision of $39,075 for the nine month period ended September 30, 2006. For the three months ended September 30, 2006, the Bank was able to record a benefit from loan loss provision due to excellent collection efforts on both consumer and commercial loans. During the three and nine months ended September 30, 2007, loan charge-offs were $101,522 and $181,483 respectively. The recoveries for the three and nine month periods ended September 30, 2007 were $10,520 and $36,481, respectively. The allowance for loan losses was $605,765 at September 30, 2007 as compared to $617,956 at December 31, 2006, a decrease of 2.0%. The allowance was .68% of loans at September 30, 2007. Management believes the allowance for loan losses at September 30, 2007 to be adequate and will increase during the year to match normal loan growth.

Provision for/Benefit from Income Taxes

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

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Noninterest Income

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

Noninterest Expense

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

Financial Condition

Total assets at September 30, 2007, were $111,830,124, an increase of $14,077,443 or 14.4% compared to 2006 year-end assets of $97,752,681. Deposits increased to $99,848,604 at September 30, 2007, an increase of $17,345,552 or 21.0% from $82,503,052 at December 31, 2006. The increase in deposits was mainly due to management’s more aggressive efforts to obtain local deposits. Premises and equipment increased to $5,610,076 at September 30, 2007 an increase of $1,810,557 or 47.7% from $3,799,519 at December 31, 2006. The purchase of a new branch located at 710 South Foothills Plaza Drive, Maryville, Tennessee, accounted for most of the increase in Premises and equipment. The Company places an emphasis on 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

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

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Restricted Equity Investments

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

Deposits

Total deposits, which are the principal source of funds for the Company, were $99,848,604 at September 30, 2007, compared to $82,503,052 at December 31, 2006, representing an increase of 21.0%. 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 established a line of credit with the Federal Home Loan Bank secured by a blanket-pledge of 1-4 family residential mortgage loans. At September 30, 2007 the Company had outstanding advances of $2,002,658 at the Federal Home Loan Bank.

Securitized Borrowings

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

Capital

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

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At September 30, 2007, both the Company’s and Bank’s capital ratios were in excess of the regulatory minimums. Those ratios are as follows:

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

Liability and Asset Management

The Company’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.

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 September 30, 2007, approximately 69% of the Company’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 by the Company. Because the majority of the Company’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 Company’s adjustable rate assets also mitigate interest rate sensitivity in a decreasing rate environment.

Off-Balance Sheet Arrangements

The Company, at September 30, 2007, had outstanding unused lines of credit and standby letters of credit that totaled approximately $18,230,734. 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 or, on a short-term basis, to purchase Federal funds from other banks and to borrow from the Federal Home Loan Bank. At September 30, 2007, the Company had established with correspondent banks the ability to purchase Federal funds if needed.

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

The information set forth on pages 11 through 17 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.

b)Changes in Internal Controls and Procedures

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

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PART II - OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

None.

Item 1A. RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission on April 17, 2007.

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

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

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

The aggregate proceeds of the shares sold were $11,059.

There were no underwriters and no underwriting discounts or commissions. All sales were for cash.

The Company believes that an exemption from registration of these shares was available to the Company in that the issuance thereof did not constitute a public offering of securities within the meaning of the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Securities Act.

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

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

(b)Not applicable.

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

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 and by other general restrictions on its dividends that are applicable to banks that are regulated by the FDIC and the Tennessee Department of Financial Institutions. In addition, the Federal Reserve Board may impose restrictions on the Company’s ability to pay dividends on its common stock. 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.

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Item 3.DEFAULTS UPON SENIOR SECURITIES

(a)None.

(b)None.

Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5.OTHER INFORMATION

(a)None.

(b)None.

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Item 6.EXHIBITS.

Index to Exhibits.

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

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

** Previously filed as an exhibit to American Patriot Bank’s Registration Statement on Form 10-SB, as filed with the Federal Deposit Insurance Corporation on April 27, 2002, and incorporated herein by reference.

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SIGNATURES

In accordance with the requirements of the Exchange Act, 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:	November 14, 2007	/s/ J. Robert Grubbs
		J. Robert Grubbs
		Chief Executive Officer
DATE:	November 14, 2007	/s/ T. Don Waddell
		T. Don Waddell
		Chief Financial Officer

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