American Patriot Financial 10Q 2011 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, 2011

¨	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 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 x NO o

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 o	Accelerated filer o
Non-accelerated filer o (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 o NOx

As of November 1, 2011, there were 2,389,391 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, 2011 (unaudited) and December 31, 2010.	3

	Consolidated Statements of Operations - For the nine months ended September 30, 2011 and 2010 (unaudited).	4

	Consolidated Statements of Operations – For the three months ended September 30, 2011 and 2010 (unaudited).	5

	Consolidated Statements of Changes in Stockholders' Equity - For the nine months ended September 30, 2011 (unaudited).	6

	Consolidated Statements of Cash Flows - For the nine months ended September 30, 2011 and 2010 (unaudited).	7

	Notes to Consolidated Financial Statements.	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	33

Item 4.	Controls and Procedures.	34

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	35

Item 1A.	Risk Factors.	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	35

Item 3.	Defaults upon Senior Securities.	36

Item 4.	(Removed and Reserved).	36

Item 5.	Other Information.	36

Item 6.	Exhibits.	36

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED BALANCE SHEETS

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

	As of			As of
	September 30, 2011			December 31, 2010
	(Unaudited)
ASSETS

Cash and due from banks	$	1,429,026		$	1,499,054
Federal funds sold		2,511,095			1,609,482
Interest-bearing deposits in banks		8,913,185			8,182,239
Cash and cash equivalents		12,853,306			11,290,775
Securities available for sale		2,985,605			2,916,717
Federal Home Loan Bank stock, at cost		296,500			296,500
Loans, net of allowance for loan losses of $2,101,258 in 2011 and $2,956,010 in 2010		60,842,336			73,759,525
Premises and equipment, net		4,695,194			4,807,200
Accrued interest receivable		188,164			358,298
Deferred tax assets, net		-			29,912
Foreclosed assets		9,793,180			3,885,396
Cash surrender value of bank owned life insurance		2,591,834			2,570,228
Other assets		179,184			174,415
Total Assets	$	94,425,303		$	100,088,966

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits:
Noninterest-bearing
Demand	$	5,119,883		$	5,275,302
Interest-bearing
Money market, interest checking and savings		24,343,439			23,056,505
Time deposits		61,891,525			65,322,512
Total Deposits		91,354,847			93,654,319
Accrued interest payable		261,827			307,285
Other liabilities		676,112			438,612
Federal Home Loan Bank and other borrowings		921,000			3,545,906
Total Liabilities		93,213,786			97,946,122

STOCKHOLDERS’ EQUITY
Stock:
Preferred stock, no par value; authorized 1,000,000shares; issued and outstanding 207 shares at September 30, 2011 and December 31, 2010		185,147			174,220
Common stock, $0.333 par value; authorized 6,000,000 shares; issued and outstanding 2,389,391shares at September 30, 2011 and December 31, 2010		796,337			796,337
Additional paid-in capital		7,167,260			7,167,260
Retained deficit		(6,954,300	)		(5,946,761	)
Accumulated other comprehensive income		17,073			(48,212	)
Total Stockholders’ Equity		1,211,517			2,142,844
Total Liabilities and Stockholders’ Equity	$	94,425,303		$	100,088,966

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

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Nine Months Ended
	September 30, 2011			September 30, 2010
Interest and dividend income:
Loans, including fees	$	2,913,873		$	3,969,548
Investment securities		44,237			37,938
Dividends on Federal Home Loan Bank stock		9,610			9,979
Federal funds sold and other		52,016			21,769
Total interest and dividend income		3,019,736			4,039,234


Interest expense:
Deposits		841,802			1,346,834
Borrowed funds		89,983			156,209
Total interest expense		931,785			1,503,043
Net interest income before provision for loan losses		2,087,951			2,536,191

Provision for loan losses		11,549			1,141,080
Net interest income after provision for loan losses		2,076,402			1,395,111

Noninterest income:
Service charges on deposit accounts		229,637			281,641
Fees from origination of mortgage loans sold		6,483			14,472
Other		34,901			560,057
Total noninterest income		271,021			856,170

Noninterest expense:
Salaries and employee benefits		1,178,129			1,110,743
Occupancy		429,249			431,674
Advertising		9,800			14,806
Data processing		230,396			232,294
Legal and professional		387,648			423,454
Depository insurance		273,373			352,890
Foreclosed real estate, net		467,860			704,560
Other operating		367,580			361,990
Total noninterest expense		3,344,035			3,632,411

Net loss before income taxes		(996,612	)		(1,381,130	)

Income tax benefit		-			-

Net loss	$	(996,612	)	$	(1,381,130	)
Preferred stock dividend		9,281			6,073
Accretion on preferred stock dividend		10,927			7,285

Net Loss to Common Shareholders	$	(1,016,820	)	$	(1,394,488	)

Basic net loss per common share	$	(.43	)	$	(.58	)
Diluted net loss per common share	$	(.43	)	$	(.58	)

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

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	September 30, 2011			September 30, 2010
Interest and dividend income:
Loans, including fees	$	1,056,755		$	1,235,537
Investment securities		14,919			13,193
Dividends on Federal Home Loan Bank stock		2,957			3,326
Federal funds sold and other		15,657			8,080
Total interest and dividend income		1,090,288			1,260,136

Interest expense:
Deposits		258,907			396,490
Borrowed funds		17,045			60,014
Total interest expense		275,952			456,504
Net interest income before provision for loan losses		814,336			803,632

Provision for loan losses		9,415			293,179
Net interest income after provision for loan losses		804,921			510,453

Noninterest income:
Service charges on deposit accounts		78,158			87,709
Fees from origination of mortgage loans sold		-			5,224
Other		25,925			499,755
Total noninterest income		104,083			592,688

Noninterest expense:
Salaries and employee benefits		399,316			356,073
Occupancy		135,506			143,502
Advertising		1,722			4,233
Data processing		73,422			71,802
Legal and professional		94,931			170,380
Depository insurance		64,018			111,876
Foreclosed real estate, net		86,781			173,429
Other operating		136,299			130,924
Total noninterest expense		991,995			1,162,219

Net loss before income taxes		(82,991	)		(59,078	)

Income tax benefit		-			-

Net loss	$	(82,991	)	$	(59,078	)
Preferred stock dividend		3,106			2,889
Accretion on preferred stock dividend		3,642			3,642

Net Loss to Common Shareholders	$	(89,739	)	$	(65,609	)

Basic net loss per common share	$	(.04	)	$	(.03	)
Diluted net loss per common share	$	(.04	)	$	(.03	)

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

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED

Nine Months Ended September 30, 2011

													Accumulated
								Additional					Other
	Comprehensive			Preferred		Common		Paid-In		Retained			Comprehensive
	Loss			Stock		Stock		Capital		Deficit			Income (Loss)			Total


Balance, December 31, 2010				$	174,220	$	796,337	$	7,167,260	$	(5,946,761	)	$	(48,212	)	$	2,142,844

Comprehensive loss:
Net loss	$	(996,612	)		-		-		-		(996,612	)		-			(996,612	)
Other comprehensive income:
Unrealized holding gains (losses) on securities available for sale, net of tax effect of $40,508		65,285			-		-		-		-			65,285			65,285

Total comprehensive loss	$	(931,327	)

Accretion of discount on preferred stock -Series A					10,927		-		-		(10,927	)		-			-

Balance, September 30, 2011				$	185,147	$	796,337	$	7,167,260	$	(6,954,300	)	$	17,073		$	1,211,517

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

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30, 2011			September 30, 2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(996,612	)	$	(1,381,130	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Provision for loan losses		11,549			1,141,080
Depreciation		183,766			201,605
Write-down of foreclosed assets		294,793			187,824
Realized loss on sales of foreclosed assets		30,076			112,513
Increase in cash surrender value of bank owned life insurance		(21,606	)		(79,234	)
Net change in:
Accrued interest receivable		170,134			(141,401	)
Other assets		(4,913	)		412,643
Other liabilities		226,905			60,851
Accrued interest payable		(45,458	)		(314,745	)

Net cash (used in) provided by operating activities		(151,366	)		200,006

CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Purchases		(2,496,124	)		(500,000	)
Maturities, prepayments and calls		2,533,172			1,000,000
Proceeds from sale of foreclosed assets		457,565			881,875
Loan originations and principal collections, net		6,215,422			11,128,551
Additions to premises and equipment		(71,760	)		(14,846	)

Net cash provided by investing activities		6,638,275			12,495,580

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in non-time deposits		1,131,515			(4,418,457	)
Net change in time deposits		(3,430,987	)		(6,731,459	)
Issuance of stock		-			148,294
Repayments of other borrowings		-			(107,000	)
Federal Home Loan Bank repayments		(2,624,906	)		(1,860,243	)

Net cash used in financing activities		(4,924,378	)		(12,968,865	)

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

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

	Nine Months Ended
	September 30, 2011		September 30, 2010

Net change in cash and cash equivalents	$	1,562,531	$	(273,279	)

Cash and cash equivalents at beginning of period		11,290,775		10,214,016

Cash and cash equivalents at end of period	$	12,853,306	$	9,940,737

SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid on deposits and borrowed funds	$	977,243	$	1,817,788

SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Loans moved to foreclosed/repossessed assets	$	6,690,218	$	2,055,695

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

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 and Maryville, Tennessee and surrounding areas. 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 nine months ended September 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010. 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 at a $5.00 per share conversion rate. The preferred stock is redeemable only at the option of the Company, subject to 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. No shares of preferred stock have been issued for the nine months ended September 30, 2011.

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, 2010, as filed with the Securities and Exchange Commission on March 31, 2011. 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 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.

Note 2.

Stock Options and Awards

No options were granted during the nine months ended September 30, 2011, and no compensation cost related to options is recognized in the consolidated statements of operations for the nine months ended September 30, 2011 or 2010. No intrinsic value exists at September 30, 2011, as the market price of the Company's common stock of $1.50 per common share is below the exercise price of the outstanding options.

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 nine months ended September 30, 2011, 15,550 options are excluded from the effect of dilutive securities because they are anti-dilutive; 31,650 options are similarly excluded from the effect of dilutive securities for the three and nine months ended September 30, 2010.

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 nine months ended September 30, 2011 and 2010.

	Three Months Ended September 30,
	2011					2010
	Income (Loss)			Shares		Income (Loss)			Shares
	(Numerator)			(Denominator)		(Numerator)			(Denominator)

Basic EPS
Income (loss) available to common stockholders	$	(89,739	)		2,389,391	$	(65,609	)		2,389,391

Effect of dilutive securities Stock options outstanding		-			-		-			-

Diluted EPS
Income (loss) available to common shareholders plus assumed conversions	$	(89,739	)		2,389,391	$	(65,609	)		2,389,391

	Nine Months Ended September 30,
	2011					2010
	Income			Shares		Income			Shares
	(Numerator)			(Denominator)		(Numerator)			(Denominator)

Basic EPS
Income (loss) available to common stockholders	$	(1,016,820	)		2,389,391	$	(1,394,488	)		2,389,391

Effect of dilutive securities Stock options outstanding		-			-		-			-

Diluted EPS
Income (loss) available to common shareholders plus assumed conversions	$	(1,016,820	)		2,389,391	$	(1,394,488	)		2,389,391

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 the Fair Value Measurements and Disclosures ASC Topic 820, 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.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments. There have been no changes in the methodologies used at September 30, 2011 and December 31, 2010.

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.

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 September 30, 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, is 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.

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.

Federal Home Loan Bank and other borrowings:

Fair values of Federal Home Loan Bank and other borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

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

			Quoted Prices in		Significant		Significant
	Balance as		Active Markets		Other		Other
	of		for Identical		Observable		Unobservable
	September 30,		Assets		Inputs		Inputs
	2011		(Level 1)		(Level 2)		(Level 3)

Securities available for sale:
Securities of U.S.
Government agencies and corporations	$	1,996,630	$	-	$	1,996,630	$	-
Mortgage-backed securities		988,975		-		988,975		-

	$	2,985,605	$	-	$	2,985,605	$	-

Cash surrender value of life insurance	$	2,591,834	$	-	$	2,591,834	$	-

			Quoted Prices in		Significant		Significant
	Balance as		Active Markets		Other		Other
	of		for Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
	2010		(Level 1)		(Level 2)		(Level 3)

Securities available for sale:
Securities of U.S.
Government agencies and corporations	$	2,445,450	$	-	$	2,445,450	$	-
Mortgage-backed securities		471,267		-		471,267		-

	$	2,916,717	$	-	$	2,916,717	$	-

Cash surrender value of life insurance	$	2,570,228	$	-	$	2,570,228	$	-

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 and liabilities for which a nonrecurring change in fair value was recorded.

Quoted Prices in

Significant

Balance as

Active Markets

Other

for Identical

Observable

Unobservable

September 30,

Assets

Inputs

2011

(Level 1)

(Level 2)

(Level 3)

Impaired loans

1,270,990

Foreclosed real estate

9,793,180

Quoted Prices in

Significant

Balance as

Active Markets

Other

for Identical

Observable

Unobservable

December 31,

Assets

Inputs

2010

(Level 1)

(Level 2)

(Level 3)

Impaired loans

4,434,890

Foreclosed real estate

3,885,396

3,498,552

386,844

Impaired loans include impaired loans held for investment for which an allowance for loan losses has been calculated based upon the fair value of the loans at September 30, 2011.

The carrying amount and estimated fair value of the Company's financial instruments are as follows:

	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

Financial Assets:
Cash and cash equivalents	$	12,853,306	$	12,853,306	$	11,290,775	$	11,290,775
Securities available for sale		2,985,605		2,985,605		2,916,717		2,916,717
Federal Home Loan Bank stock		296,500		296,500		296,500		296,500
Loans, net		60,842,336		60,943,741		73,759,525		73,740,093
Accrued interest receivable		188,164		188,164		358,298		358,298
Cash surrender value of life insurance		2,591,834		2,591,834		2,570,228		2,570,228

Financial Liabilities:
Deposits		91,354,847		91,488,083		93,654,319		93,842,636
Accrued interest payable		261,827		261,827		307,285		307,285
Federal Home Loan Bank and other borrowings		921,000		921,000		3,545,906		3,582,568

Note 5.

Securities Available for Sale

The amortized cost and estimated fair value of securities classified as available for sale and held to maturity at September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Securities Available for Sale:

Securities of U.S.
Government agencies and corporations	$	2,000,000	$	1,540	$	(4,910	)	$	1,996,630

Mortgage-backed and related securities (1)		957,937		31,038		-			988,975

	$	2,957,937	$	32,578	$	(4,910	)	$	2,985,605

	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Securities Available for Sale:

Securities of U.S.
Government agencies and corporations	$	2,500,000	$	-	$	(54,550	)	$	2,445,450

Mortgage-backed and related securities (1)		494,841		-		(23,574	)		471,267

	$	2,994,841	$	-	$	(78,124	)	$	2,916,717

(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 carrying values of approximately $2,986,000 and $2,423,000 (which approximates market values) to secure deposits of public and private funds as of September 30, 2011 and December 31, 2010.

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 September 30, 2011.

Note 6.

Loans and Allowance for Loan Losses

A summary of the balances of loans follows:

	September 30,			December 31,
	2011			2010

Mortgage loans on real estate:
Residential 1-4 Family	$	33,634,049		$	37,907,120
Nonresidential & Multifamily		16,300,972			21,222,784
Construction and development		3,134,919			5,415,167
		53,069,940			64,545,071

Commercial loans		8,692,202			10,805,289

Consumer loans		1,181,452			1,365,175

Total loans		62,943,594			76,715,535

Less:
Estimated allowance for loan losses		(2,101,258	)		(2,956,010	)

Loans, net	$	60,842,336		$	73,759,525

An analysis of the allowance for loan losses follows:

	Nine Months Ended		Year Ended
	September 30,		December 31,
	2011		2010

Balance, beginning	$	2,956,010	$	3,082,659
Provision for loan losses		11,549		1,382,685
Recoveries of loans previously charged-off		116,787		133,795

		3,084,346		4,599,139
Loans charged-off		983,088		1,643,129

Balance, ending	$	2,101,258	$	2,956,010

The following table details the changes in the allowance for loan losses during the nine months ended September 30, 2011 by class of loans:

	Residential			Nonresidential and			Construction and
	1-4 Family			Multifamily			Development			Commercial			Consumer			Unallocated		Total

Balance, beginning of period	$	948,868		$	460,801		$	853,849		$	651,319		$	41,173		$	-	$	2,956,010
Charge-offs		(183,547	)		(288,512	)		(446,873	)		(31,511	)		(32,645	)		-		(983,088	)
Recoveries		14,956			937			980			80,993			18,921			-		116,787
Provision charged to operations		43,969			(47,315	)		46,039			(234,564	)		(6,018	)		209,438		11,549

Balance, net of period	$	824,246		$	125,911		$	453,995		$	466,237		$	21,431		$	209,438	$	2,101,258

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

	September 30, 2011
			Nonresidential		Construction
	Residential		and		and
	1-4 Family		Multifamily		Development		Commercial		Consumer		Unallocated		Total

Specified Reserves Impaired loans	$	335,562	$	-	$	29,000	$	449,084	$	-	$	-	$	813,646

General Reserves		488,684		125,911		424,995		17,153		21,431		209,438		1,287,612

Total	$	824,246	$	125,911	$	453,995	$	466,237	$	21,431	$	209,438	$	2,101,258

Loans individually evaluated for impairment:

With a valuation allowance	$	1,225,424	$	-	$	105,128	$	754,084	$	-	$	-	$	2,084,636
Without a valuation
allowance		1,936,089		3,711,476		186,964		80,910		15,432		-		5,930,871

Total loans individually evaluated for impairment		3,161,513		3,711,476		292,092		834,994		15,432		-		8,015,507
Loans collectively evaluated for impairment		30,472,536		12,589,496		2,842,827		7,857,208		1,166,020		-		54,928,087

Total	$	33,634,049	$	16,300,972	$	3,134,919	$	8,692,202	$	1,181,452	$	-	$	62,943,594

Valuation allowance related to impaired loans	$	335,562	$	-	$	29,000	$	449,084	$	-	$	-	$	813,646

Average investment in impaired loans	$	3,236,746	$	3,726,792	$	347,447	$	881,736	$	15,548	$	-	$	8,208,269


Interest income recognized on impaired loans	$	83,698	$	100,547	$	9,041	$	1,673	$	593	$	-	$	195,552

	December 31, 2010
			Nonresidential		Construction
	Residential		and		and
	1-4 Family		Multifamily		Development		Commercial		Consumer		Unallocated		Total

Specified Reserves Impaired loans	$	198,774	$	271,500	$	422,771	$	487,294	$	-	$	-	$	1,380,339

General Reserves		750,094		189,301		431,078		164,025		41,173		-		1,575,671

Total	$	948,868	$	460,801	$	853,849	$	651,319	$	41,173	$	-	$	2,956,010

Loans individually evaluated for impairment:
With a valuation allowance	$	1,941,917	$	2,063,412	$	1,008,317	$	801,583	$	-	$	-	$	5,815,229
Without a valuation allowance		3,031,169		2,753,053		241,842		835,902		144,336		-		7,006,302

Total loans individually evaluated for impairment		4,973,086		4,816,465		1,250,159		1,637,485		144,336		-		12,821,531

Loans collectively evaluated for impairment		32,934,034		16,406,319		4,165,008		9,167,804		1,220,839		-		63,894,004

Total	$	37,907,120	$	21,222,784	$	5,415,167	$	10,805,289	$	1,365,175	$	-	$	76,715,535

Valuation allowance related to impaired loans	$	198,774	$	271,500	$	422,771	$	487,294	$	-	$	-	$	1,380,339

The following is a summary of information pertaining to average investment and interest income recognized on impaired loans as of December 31, 2010:


Average investment in impaired loans	$	12,882,436
Interest income recognized on impaired loans	$	291,023

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 is a summary of non-performing loans evaluated by class as follows:

	September 30,		December 31,
	2011		2010

Non Accrual Loans:
Residential 1-4 family	$	3,502,662	$	3,464,994
Nonresidential and multifamily		3,073,972		4,528,590
Construction and land development		292,092		1,080,586
Commercial		834,994		1,182,141
Consumer		15,432		13,383

Total	$	7,719,152	$	10,269,694

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

	September 30, 2011
			Past Due
	30-89 Days		90 Days
	Past Due and		Or More				Total		Current		Total
	Accruing		and Accruing		Non-Accrual		Past Due		Loans		Loans

Residential 1-4 family	$	1,104,628	$	199,764	$	3,502,662	$	4,807,054	$	28,826,995	$	33,634,049
Nonresidential and multifamily		305,112		-		3,073,972		3,379,084		12,921,888		16,300,972
Construction and land development		59,683		-		292,092		351,775		2,783,144		3,134,919
Commercial		791,927		-		834,994		1,626,921		7,065,281		8,692,202
Consumer		16,658		-		15,432		32,090		1,149,362		1,181,452

Total	$	2,278,008	$	199,764	$	7,719,152	$	10,196,924	$	52,746,670	$	62,943,594

	December 31, 2010

			Past Due
	30-89 Days		90 Days
	Past Due and		Or More				Total		Current		Total
	Accruing		and Accruing		Non-Accrual		Past Due		Loans		Loans

Residential 1-4 family	$	1,757,199	$	679,036	$	3,464,994	$	5,901,229	$	32,005,891	$	37,907,120
Nonresidential and multifamily		99,091		346,479		4,528,590		4,974,160		16,248,624		21,222,784
Construction and land development		207,985		362,251		1,080,586		1,650,822		3,764,345		5,415,167
Commercial		172,853		493,778		1,182,141		1,848,772		8,956,517		10,805,289
Consumer		31,403		14,077		13,383		58,863		1,306,312		1,365,175

Total	$	2,268,531	$	1,895,621	$	10,269,694	$	14,433,846	$	62,281,689	$	76,715,535

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. When we classify an asset as substandard or doubtful, we may establish a specific allowance for loan losses.

The following tables show the aggregate amount of our classified loans as follows:

	September 30, 2011
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total

Residential 1-4 family	$	30,188,059	$	284,477	$	3,161,513	$	-	$	-	$	33,634,049
Nonresidential and multifamily		11,934,047		655,449		3,711,476		-		-		16,300,972
Construction and development		2,428,941		413,886		292,092		-		-		3,134,919
Commercial		7,841,881		15,327		834,994		-		-		8,692,202
Consumer		1,166,020		-		15,432		-		-		1,181,452

Total	$	53,558,948	$	1,369,139	$	8,015,507	$	-	$	-	$	62,943,594

	December 31, 2010
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total

Residential 1-4 family	$	31,712,951	$	723,775	$	5,470,394	$	-	$	-	$	37,907,120
Nonresidential and multifamily		16,230,470		-		4,992,314		-		-		21,222,784
Construction and development		4,007,095		157,913		1,250,159		-		-		5,415,167
Commercial		9,006,658		117,831		1,680,800		-		-		10,805,289
Consumer		1,340,535		8,620		16,020		-		-		1,365,175

Total	$	62,297,709	$	1,008,139	$	13,409,687	$	-	$	-	$	76,715,535

As a result of adopting the amendments in ASU 2011-02 during this quarter, the Company reassessed all restructurings that occurred on or after January 1, 2011 for identification as troubled debt restructuring ("TDR"). 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.

The following presents information related to loans modified in a TDR during the nine months ended September 30, 2011.

	Nine Months Ended September 30, 2011
			Pre-Modification		Post-Modification
	Number of		Outstanding		Outstanding
	Loans		Recorded Investment		Recorded Investment

Residential 1-4 family		6	$	1,101,184	$	1,101,184
Nonresidential and multifamily		3		1,092,437		1,092,437
Construction and development		1		179,604		179,604
Commercial		-		-		-
Consumer		-		-		-

		10	$	2,373,225	$	2,373,225

The following are loans modified in a TDR from October 1, 2010 through September 30, 2011 that subsequently defaulted during the nine months ended September 30, 2011.

	Nine Months Ended September 30, 2011
			Outstanding Recorded
	Number of Loans		Investment at Default

Residential 1-4 family		-	$	-
Nonresidential and multifamily		-		-
Construction and development		-		-
Commercial		-		-
Consumer		-		-

		-	$	-

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 January 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (ASU 2011-01). The FASB determined that certain provisions relating to TDRs should be deferred until additional guidance and clarification on the definition of a TDR is issued.

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-02). ASU 2011-02 amends Accounting Standards Codification (“ASC”) Topic 310 — Receivables, by clarifying guidance for creditors in determining whether a concession has been granted and whether a debtor is experiencing financial difficulties. The amendments are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. ASU 2011-02 also makes disclosure requirements deferred under ASU 2011-01 effective for interim and annual periods beginning on or after June 15, 2011. The adoption of ASU 2011-02 did not have a significant impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (ASU 2011-03), intended to improve financial reporting of repurchase agreements and refocus the assessment of effective control on a transferor’s contractual rights and obligations rather than practical ability to perform those rights and obligations. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The Company is evaluating the effect, if any, the adoption of ASU 2011-03 will have on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 represents the converged guidance of the FASB and the International Accounting Standards Board (“IASB”) on fair value measurement. A variety of measures are included in the update intended to either clarify existing fair value measurement requirements, change particular principles requirements for measuring fair value or for disclosing information about fair value measurements. For many of requirements, the FASB does not intend to change the application of existing requirements under ASC Topic 820, Fair Value Measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and early application is not permitted. The Company is evaluating the impact adoption of ASU 2011-04 will have on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05), intended to increase the prominence of items reported in other comprehensive income and to facilitate convergence of accounting guidance in this area with that of the IASB. The amendments require that all non-owner changes in stockholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. Amendments under ASU 2011-05 for public entities should be applied retrospectively for fiscal years, and interim periods within those years, beginning December 15, 2011. The Company is evaluating the impact adoption of ASU 2011-05 will have on its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-08). ASU 2011-08 amends Topic 350, Intangibles – Goodwill and Other, to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial 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.

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, 2010 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, results of regulatory examinations and/or efforts to comply with the requirements of regulatory proceedings, including the obligation to raise additional capital, 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. 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 or existing branch locations may be sold or closed if in the opinion of the Company such closure or sale is appropriate.

Liquidity

At September 30, 2011, the Company had liquid assets of approximately $15.8 million in the form of cash and cash equivalents, federal funds sold and securities available for sale compared to approximately $14.2 million at December 31, 2010. Management believes that the liquid assets are adequate at September 30, 2011. 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 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.

Results of Operations

The Company had a net loss to common shareholders of $(89,739) or $(.04) per share for the quarter ended September 30, 2011 compared to a net loss of $(65,609) or $(.03) per share for the quarter ended September 30, 2010. The Company had a net loss to common shareholders for the nine months ended September 30, 2011 of $(1,016,820) or $(.43) per share as compared to a net loss of $(1,394,488) or ($.58) per share for the same period in 2010.

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, 2011 was $1,090,288 compared to $1,260,136 for the same period in 2010, and total interest expense was $275,952 in the third quarter of 2011 compared to $456,504 in 2010 for the same period. Interest income for the nine months ended September 30, 2011 was $3,019,736, compared to $4,039,234 for the same period in 2010, and total interest expense was $931,785 in the first nine months of 2011 compared to $1,503,043 in 2010 for the same period. Net interest margin, calculated as the ratio of net interest income to average earning assets, for the three months ended September 30, 2011 was 4.09% compared to 3.53% for the same period in 2010. The net interest margin for the nine months ended September 30, 2011 was 3.31%, compared to 2.81% for the same period in 2010. If interest rates remain stable, net interest margin should continue to expand. However, rate floors in many of our variable rate loans would initially slow or eliminate any increase in net interest margin if rates were to increase. Despite the improvement in net interest margin, continued elevated levels of nonaccrual loans has in the prior quarters, and will in the future, continue to negatively impact our net interest margin. Net interest income before provision for loan losses increased by $10,704 for the three months ended September 30, 2011, while decreasing $448,240 for the nine months ended September 30, 2011, compared to the comparable periods in 2010. Net interest income for the three and nine months ended September 30, 2011 was negatively impacted as the Company continued to reduce its loan portfolio at a faster pace than the reduction in average outstanding deposits and repricing of deposit rates.

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 provision for loan losses for the three month and nine month periods ended September 30, 2011 was $9,415 and $11,549, respectively, as compared to $510,453 and $1,395,111 for the same three month and nine month periods ended September 30, 2010. During the three and nine months ended September 30, 2011, loan charge-offs were $462,027 and $983,088, respectively. The recoveries for the three and nine month periods ended September 30, 2011 were $10,997 and $116,787, respectively. The allowance for loan losses was $2,101,258 at September 30, 2011 as compared to $2,956,010 at December 31, 2010, a decrease of 28.9%. The allowance was 3.3% of gross loans at September 30, 2011 as compared to 3.4% at September 30, 2010 and 3.9% at December 31, 2010. Both loans individually evaluated for impairment and loans collectively evaluated for impairment have declined during 2011, resulting in management’s determination that a reduction in the allowance for loan losses and provision expense for the period to date was appropriate.

Management feels that the allowance for loan losses is adequate at September 30, 2011. 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 (Benefit) for/from Income Taxes

The Company had no expense or benefit from income taxes for the three and nine months ended September 30, 2011, or for the three and nine months ended September 30, 2010. The tax benefit created by the net loss during the quarter and year to date was offset by additional deferred tax asset valuation. For additional information regarding the Company’s deferred tax asset valuation, please see the Company’s 2010 Form 10-K.

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 nine months ended September 30, 2011 was $104,083 and $271,021, respectively, compared to $592,688 and $856,170 for the same periods in 2010. Service charges on deposit accounts decreased $9,551 and $52,004 for the three and nine months ended September 30, 2011, respectively, compared to the same periods in 2010. The primary cause of the decline in service charges between 2010 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 relate to transaction based checking accounts. The Bank noted a significant decline in checking account customers when comparing the first nine months of 2011 to the first nine months of 2010, and a corresponding decrease in NSF and overdraft transactions during the first nine months of 2011, as compared to the first nine months of 2010. The sharp decrease in other noninterest income for the nine months ended September 30, 2011, compared to the same period in 2010 is due from an insurance recovery of $467,196 received in September 2010.

Noninterest Expense

Noninterest expenses totaled $991,995 and $3,344,035 for the three and nine months ended September 30, 2011, as compared to $1,162,219 and $3,632,411 for the same periods in 2010. Salaries and benefits increased $43,243 and $67,386 for the three and nine months ended September 30, 2011, respectively, when compared to the same periods in 2010. The increase in salaries and benefits for the three and nine months ended September 30, 2011 is due to the hiring of a senior level management position. Legal and professional fees decreased $75,449 and $35,806 for the three and nine months ended September 30, 2011, as compared to the same periods in 2010. The decrease in legal and professional fees is due to the Bank being reimbursed by their insurance provider for legal fees incurred related to two lawsuits that the Company and Bank are parties to. For additional information regarding these lawsuits, please see Legal Proceedings in Part II – OTHER INFORMATION of this report. Management continues to incur expenses to meet the demands of regulatory requirements, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the terms of the Bank’s Consent Order with the FDIC, including strategic plan development. The Company has also incurred significant noninterest expenses in other operating expenses primarily as a result of collection, workout and OREO expenses, ATM expenses, and FDIC insurance and state banking assessments. Depository insurance expenses decreased $47,858 and $79,517 for the three and nine months ended September 30, 2011, respectively, when compared to the same periods in 2010, due to the FDIC’s revision of its assessment methodology implemented in third quarter 2011 and continued reduction in deposits and average assets. Foreclosed real estate expenses declined $86,648 and $236,700 for the three and nine months ended September 30, 2011, respectively, when compared to the same periods in 2010, as the Bank has begun to see some stabilization in real estate values. Combined, operating expenses relating to all noninterest expenses decreased $170,224 and $288,376 for the three and nine months ended September 30, 2011, respectively, compared to the same periods in 2010. The Company anticipates that foreclosed real estate charges will remain at elevated levels throughout 2011 and into 2012 as it anticipates that balances of foreclosed assets will remain at elevated levels for the remainder of 2011 and into 2012.

Financial Condition

Total assets at September 30, 2011, were $94,425,303, a decrease of $5,663,663 or 5.7% compared to 2010 year-end assets of $100,088,966. Deposits decreased to $91,354,847 at September 30, 2011, a decrease of $2,299,472 or 2.5% from $93,654,319 at December 31, 2010. Premises and equipment decreased to $4,695,194 at September 30, 2011 a decrease of $112,006, or 2.3%, from $4,807,200 at December 31, 2010, primarily as a result of minimal fixed asset purchases coupled with normal depreciation charges. Other significant changes noted as of September 30, 2011 when compared to December 31, 2010 relate to foreclosed assets which increased by $5.9 million or 152.1% to $9.8 million at September 30, 2011 compared to $3.9 million at December 31, 2010. The Company anticipates that foreclosed real estate assets and related charges will remain at elevated levels throughout 2011 and into 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

Net loans outstanding totaled $60,842,336 at September 30, 2011 compared to $73,759,525 at December 31, 2010, a decrease of $12,917,189 or 17.5%. The decrease in loans outstanding is largely attributable to management’s strategy to decrease concentrations in certain loan types, particularly residential real estate and construction and development loans, and the movement of $6,690,218 to foreclosed assets during 2011. 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 September 30, 2011 there was $7,719,152 in loans not accruing interest as compared to $10,269,694 at December 31, 2010. Although reduced from December 31, 2010 levels as a result of some of these loans being foreclosed on and transferred to foreclosed real estate, the level of nonaccrual loans remains elevated over historical levels as a result of the continued weakened real estate market in the Company’s market areas, particularly its Blount County market. Within this segment of the loan portfolio, the Company makes loans to home builders and developers and sub-dividers of land. These borrowers have experienced stress due to a combination of declining residential real estate demand and resulting price and collateral value declines. Further, housing starts in the Company’s market areas continue to lag historical levels.

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

	September 30,		December 31,
	2011		2010

Impaired loans without a specific valuation allowance	$	5,930,871	$	7,006,302

Impaired loans with a specific valuation allowance		2,084,636		5,815,229

Total specifically evaluated impaired loans	$	8,015,507	$	12,821,531

Specific valuation allowance related to impaired loans	$	813,646	$	1,380,339

At September 30, 2011, 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 our impaired borrowers. As of September 30, 2011, the Company has identified loans aggregating $8,015,507 as being impaired, of which $7,719,152 are non-performing as it relates to payment of interest. The significant improvement in non-performing loans with interest payments since December 31, 2010, is partially due to two large relationships being restructured in which the borrowers are now able to meet the new terms along with an increased level of foreclosures. The foreclosures have resulted in a decrease in specific allowance as the allowance is taken against the property at time of foreclosure. The continuation of improved collections and concentration on workout loans has contributed to the decrease of impaired loans and the increase of troubled debt now on repayment plans. While the current economic conditions in Greene and Blount counties continue to place stress on borrowers, the number of new impaired loans has decreased as the loans with credit quality issues have been identified through credit review in previous quarters.

Nonperforming Assets

At September 30, 2011 the Company had $17.5 million in nonperforming assets compared to $15.6 million on June 30, 2011 and $14.2 million on December 31, 2010. Of the $17.5 million, $2.8 million are paying interest and $9.8 million are in other real estate owned. The continued elevated levels of nonperforming asset balances are primarily related to increased efforts of collection on problem loans in the current economic market. While the third quarter of 2011 did see an acceleration of the Company’s efforts to dispose of OREO, the Company believes OREO will continue to increase in the fourth quarter due to foreclosure proceedings on certain non-performing loans; however, total non-performing assets are expected to stabilize.

Restricted Equity Investments

Federal Home Loan Bank (“FHLB”) stock at September 30, 2011 had an amortized cost and market value of $296,500 and remained unchanged from December 31, 2010. 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. FHLB stock is maintained by the Company at par value of one hundred dollars per share.

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 September 30, 2011 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Debt securities available for sale:

Securities of U.S. Government Agencies and Operations	$	2,000,000	$	1,540	$	(4,910	)	$	1,996,630
Mortgage-Backed and Related Securities		957,937		31,038		-			988,975

	$	2,957,937	$	32,578	$	(4,910	)	$	2,985,605

At September 30, 2011, securities with a carrying value of $2,986,000 were pledged to secure deposits of public and private funds and a federal funds line of credit with First National Bankers Bank, Alabama.

Deposits and Other Funding

Total deposits, which are the principal source of funds for the Company, were $91,354,847 at September 30, 2011, compared to $93,654,319 at December 31, 2010, representing a decrease of 2.5%. 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. At September 30, 2011 the Company had no outstanding advances at the Federal Home Loan Bank compared with $2,624,906 at December 31, 2010. At September 30, 2011 and December 31, 2010, the Company 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 FDICIA 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.

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. The capital plan has been submitted to the FDIC and the Tennessee Department of Financial Institutions (the “TDFI”) for approval, but has not yet been approved by the FDIC or the TDFI. Once 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 order to secure the approval of the FDIC of the Bank’s capital 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 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 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.

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 September 30, 2011 was $1,211,517, a decrease of $931,327 from $2,142,844 at December 31, 2010, due to a net loss of $996,612 offset in part by the change in unrealized gains on available for sale securities of $65,285.

At September 30, 2011, the Bank’s Tier 1 leverage ratio, Tier 1 risk-based capital ratio and Total risk-based capital ratio were less than the required minimum ratios and the Bank, accordingly, now 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, restrict interest paid on deposits and to require changes in the directorate and/or senior management. The Bank’s respective ratios at September 30, 2011 were as follows:

	Required Minimum Ratio			To be Well Capitalized			Requirements Under the Order			Bank
Tier 1 Leverage ratio		4.00	%		5.00	%		8.00	%		2.28	%
Tier 1 risk-based capital ratio		4.00	%		6.00	%		10.00	%		3.04	%
Total risk-based capital ratio		8.00	%		10.00	%		11.00	%		4.30	%

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.

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, 2011, approximately 65.2 % 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. However, there is increasing pressure to adjust the floor rates downward in the adjustable rate portfolio as customers become more cost conscious and competition becomes more aggressive.

Off-Balance Sheet Arrangements

At September 30, 2011, the Company had outstanding unused lines of credit and standby letters of credit that totaled approximately $4.8 million. 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 another bank and to borrow from the Federal Home Loan Bank. At September 30, 2011, the Company had established with a correspondent bank the ability to purchase federal funds if needed.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information set forth on pages 23 through 33 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

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.

Changes in Internal Controls and Procedures

There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

At September 30, 2011, the Company and the Bank were defendants in a complaint filed in the Blount County Chancery Court on May 19, 2009 by Robert A. Clemmer and Richard A Pearson. The plaintiffs have alleged breach of contract, promissory estoppels and negligent misrepresentation relating to commitments to fund various loans to certain plaintiffs. The plaintiffs are seeking compensatory damages of $3,600,000, punitive damages of $14,400,000 and treble damages. 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.

At September 30, 2011, the Company and the Bank were also defendants in a complaint filed in the Blount County Circuit Court on August 20, 2010 by Billy R. Clemmer, Jennifer Clemmer and BRC Construction Inc. The plaintiffs have alleged breach of contract, negligent misrepresentation, intentional misrepresentation and violations of the Tennessee Consumer Protection Act relating to a commitment to fund a loan to the plaintiffs. The plaintiffs are seeking compensatory damages of $500,000, punitive damages of $1,000,000 and treble damages. 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

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, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)

None.

(b)

Not applicable.

(c)

No repurchases of Company securities were made during the quarter ended September 30, 2011.

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 the prompt corrective action directive issued by the FDIC 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 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 and the Company has never paid dividends in the past.

Item 3. Defaults upon Senior Securities

(a) None.

(b) None.

Item 4. (Removed and Reserved).

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.
3.2*		Bylaws of American Patriot Financial Group, Inc.
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
101		Interactive Date File

* 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.

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: November 14, 2011	/s/ James Randal Hall
	James Randal Hall
	Chief Executive Officer

DATE: November 14, 2011	/s/ T. Don Waddell
	T. Don Waddell
	Chief Financial Officer

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American Patriot Financial (APFG) Inactive 10-Q2011 Q3 Quarterly report

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