Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION********WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

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

 

**For thequarterly period ended September 30, 2008**

 

**OR**

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

 

**For thetransition period from                  to                  **

 

**Commissionfile number   000-50771**

 

**AMERICANPATRIOT FINANCIAL GROUP, INC.**

(Exactname of registrant as specified in its charter)

 

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

 

Registrant’stelephone number, including area code:  **(423)636-1555**

 

**NotApplicable**

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

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.  YES x  NO o

 

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

 

Large accelerated filer o                  Acceleratedfiler o                  Non-acceleratedfiler x                  Smallerreporting company o

 

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

 

As of November 1, 2008, there were 2,389,391shares of common stock, $0.333 par value, issued and outstanding.

 

 

 

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| **PART I - FINANCIAL INFORMATION** |
|-----------------------------------------|
| ** **                              | ** ** |
| **Item 1.**                             | **Financial Statements.** | 3 |
|                                    |   |   |
|                                    | The consolidated financial statements of the  Registrant and its wholly owned subsidiary are as follows: |   |
|                                    |   |   |
|                                    | Consolidated  Balance Sheets – September 30, 2008 (unaudited) and December 31,  2007. | 3 |
|                                    |   |   |
|                                    | Consolidated  Statements of Income - For the nine months ended September 30, 2008 and  2007 (unaudited). | 4 |
|                                    |   |   |
|                                    | Consolidated Statements of Income - For the three  months ended September 30, 2008 and 2007 (unaudited). | 5 |
|                                    |   |   |
|                                    | Consolidated Statements of Cash Flows - For the nine  months ended September 30, 2008 and 2007 (unaudited). | 6 |
|                                    |   |   |
|                                    | Notes to Consolidated Financial Statements. | 8 |
|                                    |   |   |
| **Item 2.**                             | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations.** | 11 |
|                                    |   |   |
| **Item 3.**                             | **Quantitative  and Qualitative Disclosures About Market Risk.** | 18 |
|                                    |   |   |
| **Item 4.**                             | **Controls and  Procedures.** | 18 |
|                                    |   |
| **PART II  - OTHER INFORMATION**   |
|                                    |   |
| **Item 1.**                             | **Legal Proceedings.** | 19 |
|                                    |   |   |
| **Item 1A.**                            | **Risk Factors.** | 19 |
|                                    |   |   |
| **Item 2.**                             | **Unregistered  Sales of Equity Securities and Use of Proceeds.** | 19 |
|                                    |   |   |
| **Item 3.**                             | **Defaults Upon  Senior Securities.** | 19 |
|                                    |   |   |
| **Item 4.**                             | **Submission of  Matters to a Vote of Security Holders.** | 19 |
|                                    |   |   |
| **Item 5.**                             | **Other Information.** | 19 |
|                                    |   |   |
| **Item 6.**                             | **Exhibits.** | 20 |

 

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

**Greeneville, Tennessee**

**CONSOLIDATED BALANCE SHEETS**

 

**Part I. FINANCIALINFORMATION**

 

**Item 1. Financial Statements**

 
| ** **                                                                                                                                                                        | ** ** | **As of**                   | ** **  | **As of**                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **September 30, 2008** | ** **  | **December 31, 2007** | ** ** |
| ** **                                                                                                                                                                        | ** ** | **(Unaudited)**                  | ** **  | ** **                      | ** ** |
| **ASSETS**                                                                                                                                                                        |       |                             |        |                            |       |
|                                                                                                                                                                              |       |                             |        |                            |       |
| Cash and due  from banks                                                                                                                                                          |       | $                                | 2,617,452   |                            | $          | 4,462,015 |   |
| Federal funds  sold                                                                                                                                                               |       | 3,299,672                        |        | 10,607,427                      |       |
| Cash and cash  equivalents                                                                                                                                                        |       | 5,917,124                        |        | 15,069,442                      |       |
| Federal Home  Loan Bank stock, at cost                                                                                                                                            |       | 291,200                          |        | 258,800                         |       |
| Loans, net of  estimated allowance for loan losses of $984,400 in 2008 and $1,094,083 in  2007                                                                                    |       | 101,637,551                      |        | 91,848,845                      |       |
| Premises and  equipment, net                                                                                                                                                      |       | 5,394,186                        |        | 5,571,514                       |       |
| Accrued interest  receivable                                                                                                                                                      |       | 500,940                          |        | 548,410                         |       |
| Deferred tax  assets, net                                                                                                                                                         |       | 300,892                          |        | 319,297                         |       |
| Foreclosed  assets                                                                                                                                                                |       | 390,897                          |        | 475,366                         |       |
| Cash surrender  value of bank owned life insurance                                                                                                                                |       | 2,326,660                        |        | 2,246,146                       |       |
| Other assets                                                                                                                                                                      |       | 165,481                          |        | 196,503                         |       |
| Total Assets                                                                                                                                                                      |       | $                                | 116,924,931 |                            | $          | 116,534,323 |   |
|                                                                                                                                                                              |       |                             |        |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                     |       |                             |        |                            |       |
|                                                                                                                                                                              |       |                             |        |                            |       |
| **LIABILITIES**                                                                                                                                                                   |       |                             |        |                            |       |
| Deposits:                                                                                                                                                                         |       |                             |        |                            |       |
| Noninterest-bearing  demand                                                                                                                                                       |       | $                                | 8,226,644   |                            | $          | 12,352,954 |   |
| Interest-bearing                                                                                                                                                                  |       |                             |        |                            |       |
| Money market,  interest checking and savings                                                                                                                                      |       | 26,929,064                       |        | 31,787,128                      |       |
| Time deposits                                                                                                                                                                     |       | 66,051,846                       |        | 60,889,257                      |       |
| Total Deposits                                                                                                                                                                    |       | 101,207,554                      |        | 105,029,339                     |       |
| Accrued interest  payable                                                                                                                                                         |       | 417,714                          |        | 813,069                         |       |
| Other  liabilities                                                                                                                                                                |       | 472,124                          |        | 108,887                         |       |
| Federal Home  Loan Bank advances                                                                                                                                                  |       | 5,615,718                        |        | 1,926,026                       |       |
| Total  Liabilities                                                                                                                                                                |       | 107,713,110                      |        | 107,877,321                     |       |
|                                                                                                                                                                              |       |                             |        |                            |       |
| **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 2,389,391  shares at September 30, 2008 and 2,314,391 shares at December 31,  2007 |       | 796,337                          |        | 771,362                         |       |
| Additional  paid-in capital                                                                                                                                                       |       | 7,167,260                        |        | 6,942,260                       |       |
| Retained  earnings                                                                                                                                                                |       | 1,248,224                        |        | 943,380                         |       |
| Total  Stockholders’ Equity                                                                                                                                                  |       | 9,211,821                        |        | 8,657,002                       |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                                  |       | $                                | 116,924,931 |                            | $          | 116,534,323 |   |

 

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

 

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Nine ****Months**** Ended** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                            | ** ** | **September 30, 2008**        | ** ** | **September 30, 2007** | ** ** |
| ** **                                                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
| **Interest  and dividend income:**                                    | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Loans, including  fees                                                |       | $                                       | 5,467,220  |   | $ | 5,540,497 |   |
| Dividends on  Federal Home Loan Bank stock                            |       | 10,501                                  |       | 12,502 |   |
| Federal funds  sold and other                                         |       | 76,912                                  |       | 412,558 |   |
| Total interest  and dividend income                                   |       | 5,554,633                               |       | 5,965,557 |   |
|                                                                  |       |                                    |       |   |   |
| **Interest  expense:**                                                | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Deposits                                                              |       | 2,510,844                               |       | 2,770,043 |   |
| Borrowed funds                                                        |       | 88,135                                  |       | 55,969 |   |
| Total interest  expense                                               |       | 2,598,979                               |       | 2,826,012 |   |
| Net interest  income before provision for  (benefit from) loan losses |       | 2,955,654                               |       | 3,139,545 |   |
| ** **                                                            | ** ** | ** **                              | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**                         |       | (125,510                                | )          | 132,811 |   |
| Net interest  income after provision for (benefit from) loan losses   | ** ** | 3,081,164                               | ** ** | 3,006,734 | ** ** |
|                                                                  |       |                                    |       |   |   |
| **Noninterest  income:**                                              |       |                                    |       |   |   |
| Service charges  on deposit accounts                                  |       | 398,401                                 |       | 409,871 |   |
| Fees from  origination of mortgage loans sold                         |       | 16,632                                  |       | 64,337 |   |
| Investment sales  commissions                                         |       | 9,734                                   |       | 54,326 |   |
| Other                                                                 |       | 104,102                                 |       | 17,657 |   |
| Total  noninterest income                                             |       | 528,869                                 |       | 546,191 |   |
|                                                                  |       |                                    |       |   |   |
| **Noninterest  expense:**                                             |       |                                    |       |   |   |
| Salaries and  employee benefits                                       |       | 1,535,040                               |       | 1,649,589 |   |
| Occupancy                                                             |       | 452,869                                 |       | 439,463 |   |
| Advertising                                                           |       | 95,909                                  |       | 87,165 |   |
| Data processing                                                       |       | 245,083                                 |       | 200,849 |   |
| Legal and  professional                                               |       | 299,222                                 |       | 318,751 |   |
| Other operating                                                       |       | 517,357                                 |       | 485,488 |   |
| Total  noninterest expense                                            |       | 3,145,480                               |       | 3,181,305 |   |
| **Income  before income taxes**                                       |       | 464,553                                 |       | 371,620 |   |
|                                                                  |       |                                    |       |   |   |
| Income tax  expense                                                   |       | 159,709                                 |       | 133,161 |   |
|                                                                  |       |                                    |       |   |   |
| **Net  income**                                                       |       | $                                       | 304,844    |   | $ | 238,459 |   |
|                                                                  |       |                                    |       |   |   |
| Basic earnings  per common share                                      |       | $                                       | .13        |   | $ | .10 |   |
| Diluted earnings  per common share                                    |       | $                                       | .13        |   | $ | .10 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                             | ** ** | **Three ****Months**** Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                             | ** ** | **September 30, 2008**         | ** ** | **September 30, 2007** | ** ** |
| ** **                                             | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Interest  and dividend income:**                     | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Loans, including  fees                                 |       | $                                        | 1,781,071  |   | $ | 1,955,874 |   |
| Dividends on  Federal Home Loan Bank stock             |       | 10,384                                   |       | 4,240 |   |
| Federal funds  sold and other                          |       | 16,425                                   |       | 132,248 |   |
| Total interest  and dividend income                    |       | 1,807,880                                |       | 2,092,362 |   |
|                                                   |       |                                     |       |   |   |
| **Interest  expense:**                                 | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Deposits                                               |       | 753,632                                  |       | 1,004,963 |   |
| Borrowed funds                                         |       | 47,617                                   |       | 17,926 |   |
| Total interest  expense                                |       | 801,249                                  |       | 1,022,889 |   |
| Net interest  income before provision for  loan losses |       | 1,006,631                                |       | 1,069,473 |   |
| ** **                                             | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Provision  for loan losses**                         |       | 12,089                                   |       | 91,848 |   |
| Net interest  income after provision for loan losses   | ** ** | 994,542                                  | ** ** | 977,625 | ** ** |
|                                                   |       |                                     |       |   |   |
| **Noninterest  income:**                               |       |                                     |       |   |   |
| Service charges  on deposit accounts                   |       | 131,556                                  |       | 138,407 |   |
| Fees from  origination of mortgage loans sold          |       | 9,760                                    |       | 16,232 |   |
| Investment sales  commissions                          |       | —                                   |       | 37,949 |   |
| Other                                                  |       | 40,166                                   |       | 7,092 |   |
| Total  noninterest income                              |       | 181,482                                  |       | 199,680 |   |
|                                                   |       |                                     |       |   |   |
| **Noninterest  expense:**                              |       |                                     |       |   |   |
| Salaries and  employee benefits                        |       | 494,358                                  |       | 615,753 |   |
| Occupancy                                              |       | 147,519                                  |       | 176,615 |   |
| Advertising                                            |       | 52,090                                   |       | 38,358 |   |
| Data processing                                        |       | 80,741                                   |       | 77,239 |   |
| Legal and  professional                                |       | 61,579                                   |       | 106,866 |   |
| Other operating                                        |       | 193,020                                  |       | 186,668 |   |
| Total  noninterest expense                             |       | 1,029,307                                |       | 1,201,499 |   |
| **Income  (loss) before income taxes**                 |       | 146,717                                  |       | (24,194 | ) |
|                                                   |       |                                     |       |   |   |
| Income tax  expense (benefit)                          |       | 57,939                                   |       | (20,583 | ) |
|                                                   |       |                                     |       |   |   |
| **Net  income (loss)**                                 |       | $                                        | 88,778     |   | $ | (3,611 | ) |
|                                                   |       |                                     |       |   |   |
| Basic earnings  (loss) per common share                |       | $                                        | .04        |   | $ | (.00 | ) |
| Diluted earnings  (loss) per common share              |       | $                                        | .04        |   | $ | (.00 | ) |

 

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

 

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine ****Months ****Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                         | ** ** | **September 30, 2008**        | ** ** | **September 30, 2007** | ** ** |
| ** **                                                                         |       |                                    |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         |       |                                    |       |   |   |
| Net income                                                                         |       | $                                       | 304,844    |   | $ | 238,459 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                    |       |   |   |
| Provision for  (benefit from) loan losses                                          |       | (125,510                                | )          | 132,811 |   |
| Depreciation                                                                       |       | 238,462                                 |       | 194,886 |   |
| Gain on sale of  premises and equipment                                            |       | (12,300                                 | )          | — |   |
| Write-down of  foreclosed assets                                                   |       | 11,075                                  |       | 38,137 |   |
| Realized loss on  sales of foreclosed assets                                       |       | 4,207                                   |       | 12,500 |   |
| Deferred income  tax expense                                                       |       | 18,405                                  |       | 21,100 |   |
| Increase in cash  surrender value of bank owned life insurance                     |       | (80,514                                 | )          | — |   |
| Net change in:                                                                     |       |                                    |       |   |   |
| Accrued interest  receivable                                                       |       | 47,470                                  |       | (128,370 | ) |
| Other assets                                                                       |       | 31,022                                  |       | (56,297 | ) |
| Other  liabilities                                                                 |       | 363,237                                 |       | 82,210 |   |
| Accrued interest  payable                                                          |       | (395,355                                | )          | (135,245 | ) |
| Net cash  provided by operating activities                                         |       | 405,043                                 |       | 400,191 |   |
|                                                                               |       |                                    |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         |       |                                    |       |   |   |
| Purchase of bank  owned life insurance                                             |       | —                                  |       | (2,219,308 | ) |
| Proceeds from  sale of foreclosed assets                                           |       | 277,956                                 |       | 34,900 |   |
| Federal Home  Loan bank stock purchases                                            |       | (32,400                                 | )          | — |   |
| Loan  originations and principal collections, net                                  |       | (9,871,965                              | )          | (11,122,947 | ) |
| Additions to  premises and equipment                                               |       | (61,134                                 | )          | (2,005,443 | ) |
| Proceeds from  sale of premises and equipment                                      |       | 12,300                                  |       | — |   |
| Net cash used in  investing activities                                             |       | (9,675,243                              | )          | (15,312,798 | ) |
|                                                                               |       |                                    |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         |       |                                    |       |   |   |
| Net change in  deposits (non-time deposits)                                        |       | (8,984,374                              | )          | 6,103,393 |   |
| Net change in  time deposits                                                       |       | 5,162,589                               |       | 11,242,159 |   |
| Issuance of  stock                                                                 |       | 249,975                                 |       | 11,059 |   |
| Repayment of  securitized borrowings                                               |       | —                                  |       | (3,099,091 | ) |
| Federal Home  Loan Bank advances                                                   |       | 4,500,000                               |       | — |   |
| Federal Home  Loan Bank repayments                                                 |       | (810,308                                | )          | (365,501 | ) |
| Net cash  provided by financing activities                                         |       | 117,882                                 |       | 13,892,019 |   |
|                                                                               |       |                                    |       |   |   |
| Net change in  cash and cash equivalents                                           |       | (9,152,318                              | )          | (1,020,588 | ) |
|                                                                               |       |                                    |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 15,069,442                              |       | 15,488,412 |   |
|                                                                               |       |                                    |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                                       | 5,917,124  |   | $ | 14,467,824 |   |

 

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

 

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| ** **                                                                       | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                       | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** |
| ** **                                                                       |       |                             |       |   |   |
| **SUPPLEMENTARY  CASH FLOW INFORMATION:**                                        |       |                             |       |   |   |
| Interest paid on  deposits and borrowed funds                                    |       | $                                | 2,994,334  |   | $ | 2,961,257 |   |
| Income taxes  paid                                                               |       | $                                | —     |   | $ | 182,000 |   |
| ** **                                                                       |       |                             |       |   |   |
| **SUPPLEMENTAL  SCHEDULE OF NON-CASH ACTIVITIES:**                               |       |                             |       |   |   |
| Foreclosed/repossessed  assets sold during the period and financed through loans |       | $                                | —     |   | $ | 20,000 |   |
| Loans moved to  foreclosed/repossessed assets                                    |       | $                                | 211,889    |   | $ | 152,382 |   |

 

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

 

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

**Greeneville, Tennessee**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note1.****       ****Summary of SignificantAccounting Policies**

 

*Nature of Business*:

 

AmericanPatriot Financial Group, Inc. (the “Company”) is a bank holding companywhich owns all of the outstanding common stock of American Patriot Bank (the “Bank”).  The Bank provides a variety of financialservices through their locations in Greeneville and Maryville, Tennessee andsurrounding areas.  The Bank’s primarydeposit products are demand deposits, savings accounts, and certificates ofdeposit.  Its primary lending productsare commercial loans, real estate loans, and installment loans.

 

Thefollowing is a description of the significant policies used in the preparationof the accompanying consolidated financial statements.

 

*Basis of Presentation:*

 

Theseconsolidated financial statements include the accounts of American PatriotFinancial Group, Inc. and its wholly owned subsidiary, American PatriotBank.  Significant intercompanytransactions and accounts are eliminated in consolidation.

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and in accordance with the instructions to Form 10-Qand Article 10 of Regulation  S-X aspromulgated by the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation of the financial position and results of operations for theperiods presented have been included. Operating results for the three and nine months ended September 30,2008 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2008.  Forfurther information, refer to the consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2007.  Certainamounts from prior period financial statements have been reclassified toconform to the current period’s presentation.

 

*Use of Estimates:*

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities as of thebalance sheet date and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.  The mostsignificant management accounting estimate is the allowance for loanlosses.  The allowance for loan losses isevaluated on a regular basis by management and is based upon management’speriodic review of the collectibility of the loans in light of historicalexperience, the nature and volume of the loan portfolio, adverse situationsthat may affect the borrower’s ability to repay, estimated value of anyunderlying collateral and prevailing economic conditions.  This evaluation is inherently subjective asit requires estimates that are susceptible to significant revision as moreinformation becomes available.

 

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**Note 2.****       ****Stock Options and Awards**

 

No options were granted during the period ended September 30,2008; therefore, no compensation cost is recognized in the consolidatedstatement of income for the period ended September 30, 2008.  The aggregate intrinsic value of options was$124,760 at September 30, 2008.  Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying option and the quoted market price of the Company’scommon stock of $6.25 per common share for the 53,000 options that werein-the-money at September 30, 2008.

 

**Note3.****       ****Earnings Per Share ofCommon Stock**

 

Basic earnings per share(EPS) of common stock is computed by dividing net income by the weightedaverage number of common shares outstanding during the period.  Diluted earnings per share of common stock iscomputed by dividing net income by the weighted average number of common sharesand potential dilutive common shares outstanding during the period.  Stock options are regarded as potentialcommon shares.  Potential common sharesare computed using the treasury stock method. For the nine months ended September 30, 2008, 18,150 options areexcluded from the effect of dilutive securities because they are anti-dilutive;19,000 options are similarly excluded from the effect of dilutive securitiesfor the nine months ended September 30, 2007.

 

The following is areconciliation of the numerators and denominators used in the basic and dilutedearnings per share computations for the three and nine months ended September 30,2008 and 2007:

 
| ** **                                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| ** **                                                        | ** ** | **Income**                                               | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                                          | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                                     |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                                                     |       |   |   |   |   |   |   |
| Income available  to common stockholders                          |       | $                                                        | 88,778     |   | 2,356,818 |   | $ | (3,611 | ) | 2,311,474 |   |
|                                                              |       |                                                     |       |   |   |   |   |   |   |
| Effect of  dilutive securities                                    |       |                                                     |       |   |   |   |   |   |   |
| Stock options  outstanding                                        |       | —                                                   |       | 13,333 |   | — |   | 106,299 |   |
|                                                              |       |                                                     |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                                     |       |   |   |   |   |   |   |
| Income available  to common shareholders plus assumed conversions |       | $                                                        | 88,778     |   | 2,370,151 |   | $ | (3,611 | ) | 2,417,773 |   |

 

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| ** **                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **                                                        | ** ** | **Income**                                              | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                                         | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                                    |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                                                    |       |   |   |   |   |   |   |
| Income available  to common stockholders                          |       | $                                                       | 304,844    |   | 2,356,818 |   | $ | 238,459 |   | 2,311,474 |   |
|                                                              |       |                                                    |       |   |   |   |   |   |   |
| Effect of  dilutive securities                                    |       |                                                    |       |   |   |   |   |   |   |
| Stock options  outstanding                                        |       | —                                                  |       | 14,580 |   | — |   | 114,622 |   |
|                                                              |       |                                                    |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                                    |       |   |   |   |   |   |   |
| Income available  to common shareholders plus assumed conversions |       | $                                                       | 304,844    |   | 2,371,398 |   | $ | 238,459 |   | 2,426,096 |   |

 

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

 

**Impact of Inflation**

 

The consolidated financial statements and related financial datapresented herein have been prepared in accordance with accounting principlesgenerally accepted in the United States and practices within the bankingindustry that require the measurement of financial position and operatingresults in terms of historical dollars without considering the changes in therelative purchasing power of money over time due to inflation.  Unlike most industrial companies, virtuallyall the assets and liabilities of a financial institution are monetary innature.  As a result, interest rates havea more significant impact on a financial institution’s performance than theeffects of general levels of inflation.

 

**CriticalAccounting Estimates**

 

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

 

**RecentAccounting Pronouncements**

 

In July 2006, FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*, (“FIN 48”).  FIN 48 became effective for fiscal yearsbeginning 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 degreeof uncertainty.  FIN 48 did not have amaterial 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 aframework for measuring fair value and expands disclosures about fair valuemeasurements.  SFAS 157 will be appliedprospectively and is effective for fiscal years beginning after November 15,2007, and interim periods within those fiscal years.  SFAS 157 did not  have a material impact on the Company’sconsolidated financial statements.

 

In September 2006, the Financial Accounting Standards Boardratified a consensus opinion reached by the Emerging Issues Task Force on Issue06-04, *Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements*,(“EITF 06-4”) which requires employers that enter into endorsement split-dollarlife insurance arrangements that provide an employee with a postretirementbenefit to recognize a liability for the future benefits promised based on thesubstantive agreement made with the employer. Whether the accrual is based on a death benefit or on the future cost ofmaintaining the insurance would depend on what the employer has effectivelyagreed to provide during the employee’s retirement.  The purchase of an endorsement-type lifeinsurance policy does not qualify as a settlement of the liability.  The consensus in EITF 06-4 is effective forfiscal years beginning after December 15, 2007.  The Company adopted EITF 06-4 effective January 1,2008 and its adoption did not have a material impact on the Company.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*,(“SFAS 159”).  This statement permitsentities to choose to measure many financial instruments and certain otheritems at fair value. The objective of this standard is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilities differentlywithout having to apply complex hedge accounting provisions.  This statement is effective as of thebeginning of fiscal years beginning after November 15, 2007, with earlyadoption permitted under certain circumstances. The Company did not choose to early adopt this standard andimplementation of SFAS 159 did not have a material impact on its financialposition or results of operations.

 

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In March 2007, the EITF reached a final consensus on Issue No. 06-10,*Accounting for Deferred Compensation andPostretirement Benefit Aspects of Collateral Assignment Split-Dollar LifeInsurance Arrangements*, (“EITF 06-10”).  EITF 06-10 requires employers to recognize aliability for the post-retirement benefit related to collateral assignmentsplit-dollar life insurance arrangements in accordance with SFAS No. 106or APB Opinion No. 12.  EITF 06-10also requires employers to recognize and measure an asset based on the natureand substance of the collateral assignment split-dollar life insurancearrangement.  The provisions of EITF06-10 are effective for the Company on January 1, 2008, with earlierapplication permitted, and are to be applied as a change in accountingprinciple either through a cumulative-effect adjustment to retained earnings orother components of equity or net assets in the statement of financial positionas of the beginning of the year of adoption; or as a change in accountingprinciple through retrospective application to all prior periods.  Adoption of EITF 06-10 did not have asignificant impact on its consolidated financial statements, results ofoperations or liquidity.

 

The company has determined that all other recently issued accountingpronouncements will not have a material impact on its consolidated financialstatements or do not apply to its operations.

 

**Forward-LookingStatements**

 

Management’s discussion of the Company andmanagement’s analysis of the Company’s operations and prospects, and othermatters, may include forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 and other provisions offederal and state securities laws. Although the Company believes that the assumptions underlying suchforward-looking statements contained in this Report are reasonable, any of theassumptions could be inaccurate and, accordingly, there can be no assurancethat the forward-looking statements included herein will prove to beaccurate.  The use of such words as “expect,”“anticipate,” “forecast,” and comparable terms should be understood by thereader to indicate that the statement is “forward-looking” and thus subject tochange in a manner that can be unpredictable. Factors that could cause actual results to differ from the resultsanticipated, but not guaranteed, in this Report, include (without limitation)economic and social conditions, competition for loans, mortgages, and otherfinancial services and products, changes in interest rates, unforeseen changesin liquidity, results of operations, and financial conditions affecting theCompany’s customers, and other risks that cannot be accurately quantified orcompletely identified.  Many factorsaffecting the Company’s financial condition and profitability, includingchanges in economic conditions, the volatility of interest rates, politicalevents and competition from other providers of financial services simply cannotbe predicted. Because these factors are unpredictable and beyond the Company’scontrol, earnings may fluctuate from period to period.  The purpose of this type of information is toprovide readers with information relevant to understanding and assessing thefinancial condition and results of operations of the Company, and not topredict the future or to guarantee results. The Company is unable to predict the types of circumstances, conditionsand factors that can cause anticipated results to change.  The Company undertakes no obligation topublish revised forward-looking statements to reflect the occurrence of changedor unanticipated events, circumstances or results.

 

**General**

 

On January 23, 2004, American Patriot Financial Group, Inc.(formerly known as BG Financial Group, Inc.) (“Company”), a bank holdingcompany, acquired all of the outstanding shares of American Patriot Bank(formerly known as Bank of Greeneville) (“Bank”) in a one for one stockexchange.  The Bank is aTennessee-chartered, FDIC-insured, non-Member commercial bank offering a wide rangeof banking services, including checking, savings, and money market depositaccounts, certificates of deposit and loans for consumers, commercial and realestate purposes, and is the principal business of the Company. The main officeof 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 whichthere is a fully operational modular bank unit. Other full service branch banking offices of the Bank are located at 506Asheville Highway and 208 West Summer Street, Greeneville, Greene County,Tennessee.  During 2007 the Bankpurchased property in Maryville, Tennessee at 710 South Foothills PlazaDrive.  This location is a 1.17 acre lot,on which there is a 3,272 square foot fully operational brick bank buildingwith drive through facilities and was opened for business on July 9,2007.  These locations are centrallylocated and in high traffic/exposure areas. Automatic teller machines and overnight “deposit drops” are positionedto serve the Bank’s clients.  Additionalbranches may be established as market opportunities surface.

 

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**Liquidity**

 

At September 30, 2008, the Company had liquidassets of approximately $5.9 million in the form of cash and federal funds soldcompared to approximately $15.1 million on December 31, 2007.  Management believes that the liquid assetsare adequate at September 30, 2008. Additional liquidity should beprovided by growth in deposit accounts and loan repayments.  The Company also has the ability to purchasefederal funds and is a member of the Federal Home Loan Bank of Cincinnati thatwill provide a credit line if necessary. Management is aware of the trends, events and uncertainties that arereasonably likely to have a material impact on the Company’s short term or longterm liquidity and has taken a pro-active approach to develop a larger localdeposit base to help minimize any risk.

 

**Results of Operations**

 

The Company had net income of $88,778 or $.04 pershare for the quarter ended September 30, 2008 compared to a net loss of$(3,611) or $(.00) per share for the quarter ended September 30,2007.  Net income for the nine monthsended September 30, 2008 was $304,844 as compared to a net income of$238,459 for the same period in 2007. During the quarter ended September 30,2008, the Company recorded a provision for loan losses of $12,089, whilerecording a provision for loan losses of $91,848 for the same period in 2007.

 

*NetInterest Income/Margin*

 

Net interest income represents the amount by whichinterest earned on various assets exceeds interest paid on deposits and otherinterest-bearing liabilities and is the most significant component of theCompany’s earnings.  Interest income forthe quarter ended September 30, 2008 was $1,807,880 compared to $2,092,362for the same period in 2007, and total interest expense was $801,249 in 2008compared to $1,022,889 in 2007 for the same period.  Interest income for the nine months ended September 30,2008 was $5,554,633, compared to $5,965,557 for the same period in 2007, andtotal interest expense was $2,598,979 in 2008 compared to $2,826,012 in 2007for the same period.  The Company pursueslocal deposits aggressively with attractive interest rates, which hascontributed to compression of net interest margin.  Also, the Federal Reserve Bank’s interestrate cuts over the past several months have contributed to this compression asour loan yields have repriced faster than our deposit yields. Based on theCompany’s mix of interest earning assets and interest bearing liabilities,management believes that net interest margin could stay compressed for theremainder of the year.  If interest ratesremain stable or begin to increase, net interest margin could increase.

 

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*Provisionfor / Benefit from Loan Losses*

 

The provision for (benefit from) loan losses represents a charge (orrecovery) to operations necessary to establish an allowance for possible loanlosses, which in management’s evaluation, is adequate to provide coverage forestimated losses on outstanding loans and to provide for uncertainties in theeconomy. The provision for loan losses for the three month period ended September 30,2008 was $12,089, whereas, there was a benefit from loan losses of $(125,510)for the nine months ending that same period. This compares to a provision forloan losses of $91,848 and $132,811 for the three months and nine months ended September 30,2007.  For the nine months ended September 30, 2008, the Bank was able torecord a benefit from loan loss provision due to excellent collection effortson both consumer and commercial loans. During the three and nine monthsended September 30, 2008, loan charge-offs were $32,216 and $86,577respectively.  The recoveries for thethree and nine month periods ended September 30, 2008 were $38,154 and$102,404, respectively.  The allowancefor loan losses was $984,400 at September 30, 2008 as compared to $1,094,083at December 31, 2007, a decrease of 10.0%. The allowance was .96% of loans at September 30, 2008.  Management believes the allowance for loanlosses at September 30, 2008 to be adequate and will increase during theyear to match normal loan growth.

 

*Provision(Benefit) for/from Income Taxes*

 

The Company’s provision for income tax expense forthe three and nine months ended September 30, 2008 was $57,939 and$159,709, respectively when compared to a benefit from income taxes of$(20,583) and a provision for income taxes of $133,161 for the same periods in2007.  Management believes the provisionfor income taxes for the period ended September 30, 2008 to be adequate.

 

*NoninterestIncome*

 

The Company’s noninterestincome consists of service charges on deposit accounts and other fees andcommissions.  Total noninterest incomefor three and nine months ended September 30, 2008 was $181,482 and$528,869, respectively when compared to $199,680 and $546,191 for the sameperiods in 2007.  Service charges ondeposit accounts decreased $6,851 and $11,470 for the three and nine monthsended September 30, 2008 respectively, when compared to the same periodsin 2007. Fees from origination of mortgage loans sold decreased for the threeand nine months ended September 30, 2008 by $6,472 and $47,705 whencompared to the same period in 2007. This decrease was primarily a result ofthe well known problems with the housing industry and turnover of key personnelin our mortgage loan department. Investment sale commissions decreased $37,949 and $44,592 for the threeand nine months ended September 30, 2008, as compared to the same periodsin 2007.  The reason for decreases in theinvestment sale commissions is the discontinuance of that service by the bankdue to the high overhead expense and lack of sufficient revenues.  The above decreases in noninterest incomewere primarily offset by increased earnings on the cash surrender value of bankowned life insurance (BOLI) purchased in 2007. The cash surrender value increases for the three and nine month periodsended September 30, 2008 were $26,838 and $80,514 respectively. Managementprojects that other fees and commissions will increase and service charges willincrease during the remainder of 2008.

 

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*NoninterestExpense*

 

Noninterestexpenses totaled $1,029,307 and $3,145,480 for the three and nine months ended September 30,2008, as compared to $1,201,499 and $3,181,305 for the same periods in2007.   Salaries and benefits decreased $121,395 and $114,549 for thethree and nine months ended September 30, 2008, when compared to the sameperiods in 2007.  The decrease in salaries and benefits is due toreductions in two senior level management positions. Legal and professionalfees decreased $45,287 and $19,529 for the three and nine months ended September 30,2008, as compared to the same periods in 2007.  Management continues to incuradditional expenses to meet the demands of regulatory requirements, especiallyrelating to compliance with Section 404 of the Sarbanes-Oxley Act of 2002,in addition to strategic plan development.  However, these expenses havebegun to moderate in the Company’s second year of compliance under Section 404.The Company has incurred significant noninterest expense increases in the areasof occupancy, data processing and other operating expenses for the nine monthperiod ended September 30, 2008, primarily as a result of the addition ofthe Maryville, Tennessee branch which occurred in mid-2007.  Combined,operating expenses relating to occupancy, advertising, data processing and allother expenses decreased $5,510 for the three months ended September 30, 2008,while the nine months ended September 30, 2008 increased $98,253 ascompared to the same periods in 2007.

 

**FinancialCondition**

 

Totalassets at September 30, 2008, were $116,924,931, an increase of $390,608or 0.34% compared to 2007 year-end assets of $116,534,323.  Deposits decreased to $101,207,554 at September 30,2008, a decrease of $3,821,785 or 3.6% from $105,029,339 at December 31,2007.  The decrease in deposits wasmainly due to fierce competition in our market and the overall economic downturn.

 

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

 

*Loans*

 

Netloans outstanding totaled $101,637,551 at September 30, 2008 compared to$91,848,845 at December 31, 2007. Commercial and real estate loan growth accounted for almost all of theapproximately $9.8 million increase for the first three quarters of 2008.Management feels the overall quality of loans remains solid.  In the event that a loan is 90 days or morepast due the accrual of income is generally discontinued when the fullcollection of principal or interest is in doubt unless the obligations are bothwell secured and in the process of collection. At September 30, 2008, total loans 90 days or more past due andstill accruing interest were $0, while total loans in non-accrual status were$359,969.  At December 31, 2007,total loans 90 days or more past due and still accruing interest were $0, whiletotal loans in non-accrual status were $149,244.

 

The following is a summary of information pertainingto impaired loans:

 
| ** **                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2008**               | ** ** | **2007**              | ** ** |
|                                                    |       |                   |       |                  |       |
| Impaired loans  with a specific valuation allowance     |       | $                      | 3,525,647  |                  | $          | 4,035,939 |   |
| Total  specifically evaluated impaired loans            |       | $                      | 3,525,647  |                  | $          | 4,035,939 |   |
| Specific  valuation allowance related to impaired loans |       | $                      | 263,619    |                  | $          | 438,069 |   |

 

Inaddition to the specifically evaluated impaired loans above, the Bankcollectively evaluates large groups of smaller balance homogeneous loans forimpairment.  Loans collectively evaluatedfor impairment, risk rates special mention, substandard and doubtful, as of September 30,2008 and December 31, 2007 were $2,670,455 and $2,233,949,respectively.  The Bank has reserved$91,254 and $96,422 related to these loans as of September 30, 2008 and December 31,2007, respectively.

 

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Inconnection with impaired loans, additional funds are committed to one borrowerin an amount not to exceed $392,575 subject to compliance with provisions ofthe applicable loan agreement which includes a lending base formula.

 

As of September 30,2008, the Company has identified loans aggregating $3,525,647 as beingimpaired, of which all but $250,988 are performing as it relates to the paymentof interest.  The forementioned total isapproximately $510,000 less than reported at December 31, 2007.  The reduction is due to principal reductionsaggregating $743,000 applicable to four loans, the transfer of a $126,000balance to Other Real Estate Owned upon completion of foreclosure and therecognition of $359,000 in new impaired credits.

 

*RestrictedEquity Investments*

 

Federal Home LoanBank (FHLB) stock at September 30, 2008 had an amortized cost and marketvalue of $291,200 as compared to an amortized cost and a market value of$258,800 at December 31, 2007.   Asa member of the FHLB, the Company is required to maintain stock in an amountequal to a minimum of .15% of total assets. Federal Home Loan Bank stock is carried at cost.  Federal Home Loan Bank stock is maintained bythe Company at par value of one hundred dollars per share.

 

*Deposits*

 

Total deposits, which are the principal source offunds for the Company, were $101,207,554 at September 30, 2008, comparedto $105,029,339 at December 31, 2007, representing a decrease of3.6%.  The Company has targeted localconsumers, professional and commercial businesses as its central clientele;therefore, deposit instruments in the form of demand deposits, savingsaccounts, money market demand accounts, NOW accounts, certificates of depositand individual retirement accounts are offered to customers.   The Company established a line of creditwith the Federal Home Loan Bank secured by a blanket-pledge of 1-4 familyresidential mortgage loans.   At September 30,2008 the Company had outstanding advances of $5,615,718 at the Federal HomeLoan Bank.  As mentioned previously,competition for deposit accounts has been fierce in our local economy and theoverall economic downturn has also contributed to this overall decrease. Thesetwo factors have also contributed to the shift from DDA, Money Market andSavings accounts into CD’s and caused us to rely more heavily on FHLBadvances.  We anticipate the trends seenover the first three quarters of 2008 to continue through the remainder of theyear.

 

*Capital*

 

Equity capital at September 30,2008 was $9,211,821, an increase of $554,819 from $8,657,002 at December 31,2007, due to a net profit of $304,844 for the first nine months of 2008 and theexercise of 75,000 shares of common stock options for $249,975 by former ChiefExecutive Officer, J. Robert Grubbs at $3.333 per common share.

 

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At September 30,2008, both the Company’s and Bank’s capital ratios were in excess of theregulatory minimums.  Those ratios are asfollows:

 
| ** **                       | ** ** | **Required  Minimum  Ratio** | ** ** | **To be  Well  Capitalized** | ** ** | **Bank** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------------|------------|----------|------------|
| Tier 1 Leverage  ratio           |       | 4.00                         | %     | 5.00                              | %          | 7.91     | %          |
| Tier 1  risk-based capital ratio |       | 4.00                         | %     | 6.00                              | %          | 9.28     | %          |
| Total risk-based  capital ratio  |       | 8.00                         | %          | 10.00                             | %          | 10.28    | %          |

 

*Liabilityand Asset Management*

 

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

 

The primary tool that management uses tomeasure short-term interest rate risk is a net interest income simulation modelprepared by an independent correspondent institution.  These simulations estimate the impact thatvarious changes in the overall level of interest rates over one- and two-yeartime horizons would have on net interest income.  The results help the Company developstrategies for managing exposures to interest rate risk.

 

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

 

At September 30, 2008, approximately 68%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 liabilitiesheld by the Company.  Because themajority of the Company’s liabilities are 12 months and under and the gap inrepricing is asset sensitive, management believes that a rising rateenvironment would have a positive impact on the Company’s net interestmargin.  Floors in the majority of theCompany’s adjustable rate assets also mitigate interest rate sensitivity in adecreasing rate environment.  However,there is increasing pressure to adjust the floor rates downward in theadjustable rate portfolio as customers become more cost conscious andcompetition becomes more aggressive.

 

*Off-BalanceSheet Arrangements*

 

The Company, at September 30,2008, had outstanding unused lines of credit and standby letters of credit thattotaled approximately $12,569,000.  Thesecommitments have fixed maturity dates and many will mature without being drawnupon, meaning that the total commitment does not necessarily represent thefuture cash requirements.  The Companyhas the ability to liquidate Federal funds sold or, on a short-term basis, topurchase Federal funds from other banks and to borrow from the Federal HomeLoan Bank.  At September 30, 2008,the Company had established with correspondent banks the ability to purchaseFederal funds if needed.

 

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

 

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

 

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

 

a)                                      Evaluation of Disclosure Controls andProcedures

 

The Company maintains disclosure controls andprocedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgatedunder the Securities Exchange Act of 1934 (the “Exchange Act”), that aredesigned to ensure that information required to be disclosed by it in thereports 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 andforms and that such information is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief FinancialOfficer.  The Company carried out anevaluation, under the supervision and with the participation of its management,including its Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of its disclosure controls andprocedures as of the end of the period covered by this report.  Based on the evaluation of these disclosurecontrols and procedures, the Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure control and procedures wereeffective.

 

b)                                     Changes in Internal Controls and Procedures

 

There were no changes in our internal controls overfinancial reporting during the quarter ended September 30, 2008, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item1.****          ****LEGAL PROCEEDINGS**

 

 None.

 

**Item 1A.****               ****RISK FACTORS**

 

There have been no material changes to our riskfactors as previously disclosed in Part I, Item 1A of our Annual Report onForm 10-K for the fiscal year ended December 31, 2007, as filed withthe Securities and Exchange Commission on March 31, 2008.

 

**Item2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

(a)        None.

 

(b)       Not applicable.

 

(c)        No repurchases of Company securities were made duringthe quarter ended September 30, 2008.

 

The Company’s ability topay dividends is derived from the income of the Bank.  The Bank’s ability to declare and paydividends is limited by its obligations to maintain sufficient capital and byother general restrictions on its dividends that are applicable to banks thatare regulated by the FDIC and the Department of Financial Institutions.  In addition, the Federal Reserve Board mayimpose restrictions on the Company’s ability to pay dividends on its commonstock.  As a result, the Company cannotassure its shareholders that it will declare or pay dividends on shares of itscommon stock in the future and the Company has never paid dividends in thepast.

 

**Item3.****          ****DEFAULTS UPON SENIORSECURITIES**

 

(a)             None.

 

(b)            None.

 

**Item4.****          ****SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

None.

 

**Item5.****          ****OTHER INFORMATION**

 

(a)             None.

 

(b)            None.

 

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**Item6.****          ****EXHIBITS.**

 

Index to Exhibits.

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                       |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1*                 |       | Articles of  Share Exchange of American Patriot Bank and American Patriot Financial  Group, Inc.                                                                                 |
| 2.2*                 |       | Plan of Share  Exchange of American Patriot Bank and American Patriot Financial  Group, Inc.                                                                                     |
|                 |       |                                                                                                                                                                                  |
| 3.1***               |       | Charter of  American Patriot Financial Group, Inc.                                                                                                                               |
| 3.2*                 |       | Bylaws of  American Patriot Financial Group, Inc.                                                                                                                                |
|                 |       |                                                                                                                                                                                  |
| 10.1**               |       | Stock Option  Agreement between American Patriot Bank and T. Don Waddell                                                                                                              |
| 10.2***              |       | Employment Terms  Agreement between American Patriot Bank, American Patriot Financial  Group, Inc. and Jerry A. Simmerly dated June 1, 2007 and amended  July 2, 2007. |
| 10.3***              |       | Change of  Control Agreement between American Patriot Bank and Jerry A. Simmerly dated  June 1, 2007.                                                                            |
|                 |       |                                                                                                                                                                                  |
| 31.1                 |       | Certification  pursuant to Rule 13a-14a/15d-14(a)                                                                                                                                |
| 31.2                 |       | Certification  pursuant to Rule 13a-14a/15d-14(a)                                                                                                                                |
| 32.1                 |       | Certification pursuant  to Rule 18 USC Section 1350-Sarbanes-Oxley Act of 2002                                                                                              |
| 32.2                 |       | Certification  pursuant to Rule 18 USC Section 1350-Sarbanes-Oxley Act of 2002                                                                                              |

 

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

 

**Previously filed as an exhibit to American PatriotBank’s Registration Statement on Form 10-SB, as filed with the FederalDeposit Insurance Corporation on April 27, 2002, and incorporated hereinby reference.

 

***Previously filed as an exhibit to a Form 10-Qfiled by the Company with the Securities and Exchange Commission on August 14,2007, and incorporated herein by reference.

 

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Table of Contents

 

***SIGNATURES***

 

In accordance with the requirements of the Exchange Act, the registranthas 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,  2008 |   | /s/ Jerry A. Simmerly |
|                                    |   | Jerry A. Simmerly |
|                                    |   | Chief Executive Officer |
|                                    |   |   |
|                                    |   |   |
| DATE:                                   | November 14,  2008 |   | /s/ T. Don Waddell |
|                                    |   | T. Don Waddell |
|                                    |   | Chief Financial Officer |

 

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