UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON,
D.C. 20549




FORM 10-Q




(Mark
One)




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




For
the quarterly period ended June 30, 2009




OR




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




For
the transition period from _____________________ to
________________




Commission
file number   000-50771




AMERICAN PATRIOT FINANCIAL
GROUP, INC.


(Exact
name of registrant as specified in its charter)




Tennessee
                      
                      20-0307691(State
      or other jurisdiction of
                      
                      (I.R.S.
      Employer Identification No.)incorporation
      or organization)3095
      East Andrew Johnson Highway
                        Greeneville,
      Tennessee
                      
                      37745(Address
      of principal executive offices)
                      
                      (Zip
      Code)Registrant’s
      telephone number, including area code:  (423)
      636-1555Not 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 o  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 definitions of “large accelerated filer,"
"accelerated filer” and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
      (Do not check if a smaller 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 oNOx




As of
August 1, 2009, there were 2,389,391 shares of common stock, $0.333 par value,
issued and outstanding.







PART
      I - FINANCIAL INFORMATIONItem
      1.
                Financial
      Statements.
                3The
      consolidated financial statements of the Registrant and its wholly owned
      subsidiary are as follows:
                3Consolidated
      Balance Sheets - June 30, 2009 (unaudited) and December 31,
      2008.
                3Consolidated
      Statements of Income - For the six months ended June 30, 2009 and 2008
      (unaudited).
                4Consolidated
      Statements of Income - For the three months ended June 30, 2009 and 2008
      (unaudited).
                5Consolidated
      Statements of Cash Flows - For the six months ended June 30, 2009 and 2008
      (unaudited).
                6Notes
      to Consolidated Financial Statements.
                8Item
      2.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                14Item
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk.
                22Item
      4.
                Controls
      and Procedures.
                22PART
      II - OTHER INFORMATIONItem
      1.
                Legal
      Proceedings.
                23Item
      1A.
                Risk
      Factors.
                23Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds.
                23Item
      3.
                Defaults
      Upon Senior Securities.
                23Item
      4.
                Submission
      of Matters to a Vote of Security Holders.
                23Item
      5.
                Other
      Information.
                24Item
      6.
                Exhibits.
                25




2


AMERICAN
PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY


Greeneville,
Tennessee


CONSOLIDATED
BALANCE SHEETS





Part
I. FINANCIAL INFORMATION


Item
1.  Financial Statements


As of
                                  
                                  
                                  As ofJune 30, 2009
                                  
                                  
                                  December 31, 2008(Unaudited)ASSETSCash
      and due from banks
                                  
                                  $
                                  4,596,504
                                  
                                  
                                  $
                                  2,690,246Federal
      funds sold
                                  
                                  
                                  13,736,719
                                  
                                  
                                  
                                  3,706,160Cash
      and cash equivalents
                                  
                                  
                                  18,333,223
                                  
                                  
                                  
                                  6,396,406Federal
      Home Loan Bank stock, at cost
                                  
                                  
                                  296,500
                                  
                                  
                                  
                                  291,200Loans,
      net of estimated allowance for loan losses of$3,026,728
      in 2009 and $2,373,648 in 2008
                                  
                                  
                                  100,628,824
                                  
                                  
                                  
                                  103,327,562Premises
      and equipment, net
                                  
                                  
                                  5,163,917
                                  
                                  
                                  
                                  5,317,685Accrued
      interest receivable
                                  
                                  
                                  416,657
                                  
                                  
                                  
                                  505,460Deferred
      tax assets, net
                                  
                                  
                                  1,718,665
                                  
                                  
                                  
                                  788,325Foreclosed
      assets
                                  
                                  
                                  2,832,177
                                  
                                  
                                  
                                  394,579Cash
      surrender value of bank owned life insurance
                                  
                                  
                                  2,411,306
                                  
                                  
                                  
                                  2,353,498Other
      assets
                                  
                                  
                                  183,611
                                  
                                  
                                  
                                  218,111Total
      Assets
                                  
                                  $
                                  131,984,880
                                  
                                  
                                  $
                                  119,592,826LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESDeposits:Noninterest-bearingdemand
                                  
                                  $
                                  7,883,434
                                  
                                  
                                  $
                                  7,937,765Interest-bearingMoney
      market, interest checking and savings
                                  
                                  
                                  31,713,391
                                  
                                  
                                  
                                  25,490,810Time
      deposits
                                  
                                  
                                  77,991,742
                                  
                                  
                                  
                                  70,310,602Total
      Deposits
                                  
                                  
                                  117,588,567
                                  
                                  
                                  
                                  103,739,177Accrued
      interest payable
                                  
                                  
                                  684,796
                                  
                                  
                                  
                                  522,592Other
      liabilities
                                  
                                  
                                  473,037
                                  
                                  
                                  
                                  476,003Federal
      Home Loan Bank and other borrowings
                                  
                                  
                                  6,389,423
                                  
                                  
                                  
                                  6,506,805Total
      Liabilities
                                  
                                  
                                  125,135,823
                                  
                                  
                                  
                                  111,244,577Commitments
      and contingenciesSTOCKHOLDERS’
      EQUITYStock:Preferred
      stock, no par value; authorized 1,000,000shares;
      none issued and outstanding
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Common
      stock, $0.333 par value; authorized6,000,000
      shares; issued and outstanding2,389,391
      shares at June 30, 2009 andDecember
      31, 2008
                                  
                                  
                                  796,337
                                  
                                  
                                  
                                  796,337Additional
      paid-in capital
                                  
                                  
                                  7,167,260
                                  
                                  
                                  
                                  7,167,260Retained
      earnings (deficit)
                                  
                                  
                                  (1,114,540
                                  )
                                  
                                  
                                  384,652Total
      Stockholders’ Equity
                                  
                                  
                                  6,849,057
                                  
                                  
                                  
                                  8,348,249Total
      Liabilities and Stockholders’ Equity
                                  
                                  $
                                  131,984,880
                                  
                                  
                                  $
                                  119,592,826





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


3


AMERICAN
PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY


Greeneville,
Tennessee


CONSOLIDATED
STATEMENTS OF INCOME


(Unaudited)





Six Months EndedJune 30, 2009
                                      
                                      
                                      June 30, 2008Interest
      and dividend income:Loans,
      including fees
                                      
                                      $
                                      3,159,269
                                      
                                      
                                      $
                                      3,686,149Dividends
      on Federal Home Loan Bank stock
                                      
                                      
                                      6,528
                                      
                                      
                                      
                                      117Federal
      funds sold and other
                                      
                                      
                                      11,505
                                      
                                      
                                      
                                      60,487Total
      interest and dividend income
                                      
                                      
                                      3,177,302
                                      
                                      
                                      
                                      3,746,753Interest
      expense:Deposits
                                      
                                      
                                      1,493,467
                                      
                                      
                                      
                                      1,757,212Borrowed
      funds
                                      
                                      
                                      130,417
                                      
                                      
                                      
                                      40,518Total
      interest expense
                                      
                                      
                                      1,623,884
                                      
                                      
                                      
                                      1,797,730Net
      interest income before provisionfor
      (benefit from) loan losses
                                      
                                      
                                      1,553,418
                                      
                                      
                                      
                                      1,949,023Provision
      for (benefit from) loan losses
                                      
                                      
                                      2,024,995
                                      
                                      
                                      
                                      (137,599
                                      )Net
      interest income (loss) after provisionfor
      (benefit from) loan losses
                                      
                                      
                                      (471,577
                                      )
                                      
                                      
                                      2,086,622Noninterest
      income:Service
      charges on deposit accounts
                                      
                                      
                                      210,158
                                      
                                      
                                      
                                      266,845Fees
      from origination of mortgage loans sold
                                      
                                      
                                      15,875
                                      
                                      
                                      
                                      6,872Investment
      sales commissions
                                      
                                      
                                      -
                                      
                                      
                                      
                                      9,734Other
                                      
                                      
                                      70,763
                                      
                                      
                                      
                                      63,936Total
      noninterest income
                                      
                                      
                                      296,796
                                      
                                      
                                      
                                      347,387Noninterest
      expense:Salaries
      and employee benefits
                                      
                                      
                                      889,132
                                      
                                      
                                      
                                      1,040,682Occupancy
                                      
                                      
                                      303,910
                                      
                                      
                                      
                                      305,350Advertising
                                      
                                      
                                      25,995
                                      
                                      
                                      
                                      43,819Data
      processing
                                      
                                      
                                      165,289
                                      
                                      
                                      
                                      164,342Legal
      and professional
                                      
                                      
                                      388,069
                                      
                                      
                                      
                                      237,643Other
      operating
                                      
                                      
                                      482,356
                                      
                                      
                                      
                                      324,336Total
      noninterest expense
                                      
                                      
                                      2,254,751
                                      
                                      
                                      
                                      2,116,172Income
      (loss) before income tax (benefit)expense
                                      
                                      
                                      (2,429,532
                                      )
                                      
                                      
                                      317,837Income
      tax (benefit) expense
                                      
                                      
                                      (930,340
                                      )
                                      
                                      
                                      101,770Net
      (loss) income
                                      
                                      $
                                      (1,499,192
                                      )
                                      
                                      $
                                      216,067Basic
      net (loss) income per common share
                                      
                                      $
                                      (.63
                                      )
                                      
                                      $
                                      .09Diluted
      net (loss) income per common share
                                      
                                      $
                                      (.63
                                      )
                                      
                                      $
                                      .09




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


4


AMERICAN
PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY


Greeneville,
Tennessee


CONSOLIDATED
STATEMENTS OF INCOME


(Unaudited)





Three Months EndedJune 30, 2009
                                      
                                      
                                      June 30, 2008Interest
      and dividend income:Loans,
      including fees
                                      
                                      $
                                      1,492,679
                                      
                                      
                                      $
                                      1,755,090Dividends
      on Federal Home Loan Bank stock
                                      
                                      
                                      3,234
                                      
                                      
                                      
                                      39Federal
      funds sold and other
                                      
                                      
                                      8,191
                                      
                                      
                                      
                                      16,039Total
      interest and dividend income
                                      
                                      
                                      1,504,104
                                      
                                      
                                      
                                      1,771,168Interest
      expense:Deposits
                                      
                                      
                                      747,850
                                      
                                      
                                      
                                      790,785Borrowed
      funds
                                      
                                      
                                      64,911
                                      
                                      
                                      
                                      23,173Total
      interest expense
                                      
                                      
                                      812,761
                                      
                                      
                                      
                                      813,958Net
      interest income before provisionfor
      (benefit from) loan losses
                                      
                                      
                                      691,343
                                      
                                      
                                      
                                      957,210Provision
      for (benefit from) loan losses
                                      
                                      
                                      1,168,339
                                      
                                      
                                      
                                      (45,470
                                      )Net
      interest income (loss) after provisionfor
      (benefit from) loan losses
                                      
                                      
                                      (476,996
                                      )
                                      
                                      
                                      1,002,680Noninterest
      income:Service
      charges on deposit accounts
                                      
                                      
                                      107,077
                                      
                                      
                                      
                                      136,444Fees
      from origination of mortgage loans sold
                                      
                                      
                                      5,376
                                      
                                      
                                      
                                      550Investment
      sales commissions
                                      
                                      
                                      -
                                      
                                      
                                      
                                      4,256Other
                                      
                                      
                                      35,270
                                      
                                      
                                      
                                      28,767Total
      noninterest income
                                      
                                      
                                      147,723
                                      
                                      
                                      
                                      170,017Noninterest
      expense:Salaries
      and employee benefits
                                      
                                      
                                      403,665
                                      
                                      
                                      
                                      487,720Occupancy
                                      
                                      
                                      156,938
                                      
                                      
                                      
                                      150,972Advertising
                                      
                                      
                                      3,581
                                      
                                      
                                      
                                      25,726Data
      processing
                                      
                                      
                                      81,739
                                      
                                      
                                      
                                      82,527Legal
      and professional
                                      
                                      
                                      255,695
                                      
                                      
                                      
                                      134,918Other
      operating
                                      
                                      
                                      271,199
                                      
                                      
                                      
                                      180,209Total
      noninterest expense
                                      
                                      
                                      1,172,817
                                      
                                      
                                      
                                      1,062,072Income
      (loss) before income tax(benefit)
      expense
                                      
                                      
                                      (1,502,090
                                      )
                                      
                                      
                                      110,625Income
      tax (benefit) expense
                                      
                                      
                                      (576,933
                                      )
                                      
                                      
                                      28,123Net
      (loss) income
                                      
                                      $
                                      (925,157
                                      )
                                      
                                      $
                                      82,502Basic
      net (loss) income per common share
                                      
                                      $
                                      (.39
                                      )
                                      
                                      $
                                      .04Diluted
      net (loss) incomes per common share
                                      
                                      $
                                      (.39
                                      )
                                      
                                      $
                                      .04




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




5




AMERICAN
PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY


Greeneville,
Tennessee


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months EndedJune 30, 2009
                                        
                                        
                                        June 30, 2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                                        
                                        $
                                        (1,499,192
                                        )
                                        
                                        $
                                        216,067Adjustments
      to reconcile net (loss) income to net cashprovided
      by operating activities:Provision
      for (benefit from) loan losses
                                        
                                        
                                        2,024,995
                                        
                                        
                                        
                                        (137,599
                                        )Depreciation
                                        
                                        
                                        158,486
                                        
                                        
                                        
                                        159,825Gain
      on sale of premises and equipment
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (12,300
                                        )Realized
      loss (gain) on sales of foreclosed assets
                                        
                                        
                                        2,415
                                        
                                        
                                        
                                        (14,480
                                        )Deferred
      income tax (benefit) expense
                                        
                                        
                                        (930,340
                                        )
                                        
                                        
                                        26,506Increase
      in cash surrender value of bank owned lifeinsurance
                                        
                                        
                                        (57,808
                                        )
                                        
                                        
                                        (53,676
                                        )Net
      change in:Accrued
      interest receivable
                                        
                                        
                                        88,803
                                        
                                        
                                        
                                        82,943Other
      assets
                                        
                                        
                                        34,500
                                        
                                        
                                        
                                        4,214Other
      liabilities
                                        
                                        
                                        (2,966
                                        )
                                        
                                        
                                        199,117Accrued
      interest payable
                                        
                                        
                                        162,204
                                        
                                        
                                        
                                        (277,020
                                        )Net
      cash (used in) provided byoperating
      activities
                                        
                                        
                                        (18,903
                                        )
                                        
                                        
                                        193,597CASH
      FLOWS FROM INVESTING ACTIVITIES:Federal
      Home Loan Bank stock purchase
                                        
                                        
                                        (5,300
                                        )
                                        
                                        
                                        -Proceeds
      from sale of foreclosed assets
                                        
                                        
                                        14,952
                                        
                                        
                                        
                                        133,031Loan
      originations and principal collections, net
                                        
                                        
                                        (1,781,222
                                        )
                                        
                                        
                                        (7,290,502
                                        )Additions
      to premises and equipment
                                        
                                        
                                        (4,718
                                        )
                                        
                                        
                                        (58,290
                                        )Proceeds
      from sale of premises and equipment
                                        
                                        
                                        -
                                        
                                        
                                        
                                        12,300Net
      cash used in investing activities
                                        
                                        
                                        (1,776,288
                                        )
                                        
                                        
                                        (7,203,461
                                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      change in deposits (non-time deposits)
                                        
                                        
                                        6,168,250
                                        
                                        
                                        
                                        (7,418,079
                                        )Net
      change in time deposits
                                        
                                        
                                        7,681,140
                                        
                                        
                                        
                                        3,426,092Issuance
      of stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        249,975Federal
      Home Loan Bank advances
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,000,000Federal
      Home Loan Bank repayments
                                        
                                        
                                        (117,382
                                        )
                                        
                                        
                                        (705,838
                                        )Net
      cash provided by (used in)financing
      activities
                                        
                                        
                                        13,732,008
                                        
                                        
                                        
                                        (1,447,850
                                        )Net
      change in cash and cash equivalents
                                        
                                        
                                        11,936,817
                                        
                                        
                                        
                                        (8,457,714
                                        )Cash
      and cash equivalents at beginning of period
                                        
                                        
                                        6,396,406
                                        
                                        
                                        
                                        15,069,442Cash
      and cash equivalents at end of period
                                        
                                        $
                                        18,333,223
                                        
                                        
                                        $
                                        6,611,728





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




6




AMERICAN
PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY


Greeneville,
Tennessee


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)


(Unaudited)





Six Months EndedJune 30, 2009
                        
                        
                        June 30, 2008SUPPLEMENTARY
      CASH FLOW INFORMATION:Interest
      paid on deposits and borrowed funds
                        
                        $
                        1,461,680
                        
                        
                        $
                        2,074,750Income
      taxes paid
                        
                        $
                        152,004
                        
                        
                        $
                        -SUPPLEMENTAL
      SCHEDULE OF NON-CASHACTIVITIES:Loans
      moved to foreclosed/repossessed assets
                        
                        $
                        2,454,965
                        
                        
                        $
                        39,056




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




7


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
for interim financial information and in accordance with the instructions to
Form 10-Q and Article 10 of Regulation  S-X as promulgated by the
Securities and Exchange Commission (“SEC”).  Accordingly, they do not
include all the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements.  In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the financial position and results of operations for the periods presented have
been included.  Operating results for the three and six months ended
June 30, 2009, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009.  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, 2008.  Certain amounts from prior period financial statements have
been reclassified to conform to current period’s presentation.





Use
of Estimates:





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States (“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.


8





Note
      2.
            Stock
      Options and Awards





No
      options were granted during the quarter or six months ended June 30, 2009;
      therefore, no compensation cost related to options is recognized in the
      consolidated statement of income for the period ended June 30,
      2009.  The aggregate intrinsic value of options was $6,460 at
      June 30, 2009.  The aggregate intrinsic value is calculated as
      the difference between the exercise price of the underlying option and the
      quoted market price of the Company’s common stock of $3.50 per common
      share for the 38,000 options that were in-the-money at June 30,
      2009.





Note
      3.
            Earnings
      Per Share of Common Stock





Basic
      earnings per share (“EPS”) of common stock is computed by dividing net
      income by the weighted average number of common shares outstanding during
      the period.  Diluted earnings per share of common stock is
      computed by dividing net income by the weighted average number of common
      shares and potential dilutive common shares outstanding during the
      period.  Stock options are regarded as potential common
      shares.  Potential common shares are computed using the treasury
      stock method.  For the six months ended June 30, 2009, 71,150
      options are excluded from the effect of dilutive securities because they
      are anti-dilutive; 18,150 options are similarly excluded from the effect
      of dilutive securities for the six months ended June 30,
    2008.





The
      following is a reconciliation of the numerators and denominators used in
      the basic and diluted earnings per share computations for the three and
      six months ended June 30, 2009 and
2008.





Three Months Ended June 30,2009
                                    
                                    
                                    2008Income(Loss)
                                    
                                    
                                    Shares
                                    
                                    
                                    Income
                                    
                                    
                                    Shares(Numerator)
                                    
                                    
                                    (Denominator)
                                    
                                    
                                    (Numerator)
                                    
                                    
                                    (Denominator)Basic
      EPSIncome
      (loss) available tocommon
      stockholders
                                    
                                    $
                                    (925,157
                                    )
                                    
                                    
                                    2,389,391
                                    
                                    
                                    $
                                    82,502
                                    
                                    
                                    
                                    2,340,353Effect
      of dilutive securitiesStock
      options outstanding
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    13,333Diluted
      EPSIncome
      (loss) available tocommon
      shareholders plusassumed
      conversions
                                    
                                    $
                                    (925,157
                                    )
                                    
                                    
                                    2,389,391
                                    
                                    
                                    $
                                    82,502
                                    
                                    
                                    
                                    2,353,686




9





Six Months Ended June 30,2009
                                      
                                      
                                      2008Income
                                      
                                      
                                      Shares
                                      
                                      
                                      Income
                                      
                                      
                                      Shares(Numerator)
                                      
                                      
                                      (Denominator)
                                      
                                      
                                      (Numerator)
                                      
                                      
                                      (Denominator)Basic
      EPSIncome
      (loss) available tocommon
      stockholders
                                      
                                      $
                                      (1,499,192
                                      )
                                      
                                      
                                      2,389,391
                                      
                                      
                                      $
                                      216,067
                                      
                                      
                                      
                                      2,340,353Effect
      of dilutive securitiesStock
      options outstanding
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      15,418Diluted
      EPSIncome
      (loss) available tocommon
      shareholders plusassumed
      conversions
                                      
                                      $
                                      (1,499,192
                                      )
                                      
                                      
                                      2,389,391
                                      
                                      
                                      $
                                      216,067
                                      
                                      
                                      
                                      2,355,771





Note
      4.
            Fair
      Value Disclosures





Fair
      Value Measurements:





Statement
of Financial Accounting Standards No. 157, Fair Value Measurements
(“SFAS 157”), defines fair value, establishes a framework for measuring fair
value in GAAP and expands disclosures about fair value
measurements.  SFAS 157 applies only to fair-value measurements that
are already required or permitted by other accounting standards and is expected
to increase the consistency of those measurements.  The definition of
fair value focuses on the exit price, i.e., 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, not the entry price, i.e., the
price that would be paid to acquire the asset or received to assume the
liability at the measurement date.  The statement emphasizes that fair
value is a market-based measurement, not an entity-specific
measurement.  Therefore, the fair value measurement should be
determined based on the assumptions that market participants would use in
pricing the asset or liability.





The
      Company has an established process for determining fair
      values.  Fair value is based upon quoted market prices, where
      available.  If listed prices or quotes are not available, fair
      value is based upon internally developed models or processes that use
      primarily market-based or independently-sourced market data, including
      interest rate yield curves, option volatilities and third party
      information.  Valuation adjustments may be made to ensure that
      financial instruments are recorded at fair value.  Furthermore,
      while the Company believes its valuation methods are appropriate and
      consistent with other market participants, the use of different
      methodologies, or assumptions, to determine the fair value of certain
      financial instruments could result in a different estimate of fair value
      at the reporting date.





SFAS
      157 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:


10




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.  Following is a description of the valuation
      methodologies used for instruments measured at fair value, as well as the
      general classification of such instruments pursuant to the valuation
      hierarchy.





Impaired Loans – The
      Company does not record loans at fair value on a recurring
      basis.  However, from time to time, a loan is considered
      impaired and an allowance for loan losses is established.  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 SFAS 114,
      Accounting by Creditors
      for Impairment of a Loan, (“SFAS 114”).  The fair value
      of impaired loans is estimated using several methods including collateral
      value, liquidation value and discounted cash flows.  Those
      impaired loans not requiring an allowance represent loans for which the
      fair value of the expected repayments or collateral exceed the recorded
      investments in such loans.  At June 30, 2009, substantially all
      of the total impaired loans were evaluated (or impaired loans were
      primarily evaluated) based on the fair value of collateral.  In
      accordance with SFAS 157, 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 the 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.





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 adjustments
      to the fair value are recorded as a component of foreclosed real estate
      expense.  Other real estate is included in Level 3 of the
      valuation hierarchy.





The
      Company has no assets or liabilities measured at fair value on a recurring
      basis; however, 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).


11




Assets
measured at fair value on a nonrecurring basis as of June 30,
2009:





QuotedPrices inActive
                  
                  
                  Significant
                  
                  
                  SignificantBalance as
                  
                  
                  Markets for
                  
                  
                  Other
                  
                  
                  Otherof
                  
                  
                  Identical
                  
                  
                  Observable
                  
                  
                  UnobservableJune 30,
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  Inputs2009
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)Foreclosed
      Assets
                  
                  $
                  2,832,177
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,832,177Impaired
      Loans
                  
                  
                  7,885,786
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,885,786




Losses
      derived from Level 3 inputs were calculated primarily by models utilizing
      estimated collateral value or the discounted present value of expected
      cash flows.





Fair
      Value of Financial Instruments:





The fair
value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation.  Fair
value is best determined based upon quoted market prices.  However, in
many instances, there are no quoted market prices for the Company’s various
financial instruments.  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.  SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, excludes certain financial instruments and all
non-financial instruments from its disclosure
requirements.  Accordingly, the aggregate fair value amounts presented
may not necessarily represent the underlying fair value of the
Company.





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





Cash
      and Cash Equivalents


The
      carrying amounts of cash and federal funds sold approximate fair
      values.





Federal
      Home Bank Loan Stock


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





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 (including non-performing loans) are estimated using
      discounted cash flow analyses, using interest rates currently being
      offered for loans with similar terms to borrowers of similar credit
      quality.





Accrued
      Interest Receivable


The
      carrying amounts of accrued interest receivable approximate fair
      value.


12





Cash
      Surrender Value of Bank-Owned Life
Insurance


The
      carrying value of bank-owned life insurance approximates fair value
      because this investment is carried at cash surrender value, as determined
      by the insurer.





Deposits


The
      fair values disclosed for demand deposits (e.g., interest and non-interest
      checking, passbook savings, and certain types of money market accounts)
      are, by definition, equal to the amount payable on demand at the reporting
      date (i.e., their carrying amounts).  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 interest
      rates currently being offered on certificates to a schedule of aggregated
      expected monthly maturities on time
deposits.





Federal
      Home Loan Bank Advances


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





Accrued
      Interest Payable


The
      carrying amounts of accrued interest payable approximate fair
      value.





Other Borrowings


The
      carrying amounts of federal funds purchased and other short-term
      borrowings maturing within ninety days approximate their fair
      values.  Fair values of other borrowings are estimated using
      discounted cash flow analyses based on the Company’s current incremental
      borrowing rates for similar types of borrowing
    arrangements.





Off-Balance
      Sheet Credit-Related Instruments


Commitments
      to extend credit and standby letters of credit do not represent a
      significant value to the Company until such commitments are
      funded.





The
      estimated fair values of the Company’s financial instruments are as
      follows at June 30, 2009 and December 31,
2008:





June 30, 2009
                  
                  
                  December 31, 2008Carrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairAmount
                  
                  
                  Value
                  
                  
                  Amount
                  
                  
                  ValueFinancial
      Assets:Cash
      and cash equivalents
                  
                  $
                  18,333,223
                  
                  
                  $
                  18,333,223
                  
                  
                  $
                  6,396,406
                  
                  
                  $
                  6,396,406Federal
      Home Loan Bank stock
                  
                  
                  296,500
                  
                  
                  
                  296,500
                  
                  
                  
                  291,200
                  
                  
                  
                  291,200Loans,
      net
                  
                  
                  100,628,824
                  
                  
                  
                  100,806,682
                  
                  
                  
                  103,327,562
                  
                  
                  
                  103,366,947Accrued
      interest receivable
                  
                  
                  416,657
                  
                  
                  
                  416,657
                  
                  
                  
                  505,460
                  
                  
                  
                  505,460Cash
      surrender value of BOLI
                  
                  
                  2,411,306
                  
                  
                  
                  2,411,306
                  
                  
                  
                  2,353,498
                  
                  
                  
                  2,353,498Financial
      Liabilities:Deposits
                  
                  
                  117,588,567
                  
                  
                  
                  117,855,181
                  
                  
                  
                  103,739,177
                  
                  
                  
                  104,400,737Accrued
      interest payable
                  
                  
                  684,796
                  
                  
                  
                  684,796
                  
                  
                  
                  522,592
                  
                  
                  
                  522,592Federal
      Home Loan Bank andother
      borrowings
                  
                  
                  6,389,423
                  
                  
                  
                  6,580,552
                  
                  
                  
                  6,506,805
                  
                  
                  
                  6,656,364




13




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




In
September 2006, the Financial Accounting Standards Board ratified a
consensus opinion reached by the Emerging Issues Task Force on Issue 06-04,Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements , (“EITF 06-04”) which requires employers that
enter into endorsement split-dollar life insurance arrangements that provide an
employee with a postretirement benefit to recognize a liability for the future
benefits promised based on the substantive agreement made with the
employer.  Whether the accrual is based on a death benefit or on the future
cost of maintaining the insurance would depend on what the employer has
effectively agreed to provide during the employee’s retirement.  The
purchase of an endorsement-type life insurance policy does not qualify as a
settlement of the liability.  The consensus in EITF 06-4 is effective for
fiscal 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
permits entities to choose to measure many financial instruments and certain
other items at fair value.  The objective of this standard is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions.  This statement is effective as of the beginning of fiscal
years beginning after November 15, 2007, with early adoption permitted
under certain circumstances.  The Company did not choose to early adopt
this standard and implementation of SFAS 159 did not have a material impact on
its financial position or results of operations.


14





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





In
October 2008, the FASB issued FSP No. FAS 157-3 Determining the Fair Value of a
Financial Asset When The Market for That Asset Is Not
Active.This FSP clarifies the application of SFAS No. 157 in
a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active.  This FSP was effective
for the Company upon issuance, including prior periods for which financial
statements have not been issued; and, therefore was effective for the Company's
financial statements as of and for the year ended December 31,
2008.  Adoption of FSP No. 157-3 had no impact on the Company's
consolidated financial statements.





In
December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN
46(R)-8, Disclosures about
Transfers of Financial Assets and Interests in Variable Interest Entities
(“FSP 140-4 and 46(R)-8”).  This FSP requires additional disclosures
by public entities with continuing involvement in transfers of financial assets
to special purpose entities and with variable interests in VIEs, including
sponsors that have a variable interest in a VIE.  Additionally, this
FSP requires certain disclosures to be provided by a public entity that is (1) a
sponsor of a qualifying special-purpose entity (SPE) that holds a variable
interest in the qualifying SPE but was not the transferor (nontransferor) of
financial assets to the qualifying SPE, and (2) a servicer of a qualifying SPE
that holds a significant variable interest in the qualifying SPE but was not the
transferor (nontransferor) of financial assets to the qualifying
SPE.  This FSP is effective for the first reporting period (interim or
annual) that ends after December 15, 2008.  The Company adopted FSP
140-4 and 46(R)-8 as of December 31, 2008, and its adoption did not have a
significant impact on the Company's consolidated financial
statements.





Financial
Accounting Standards Board (“FASB”) Staff Position (“FSP”), Statement of
Financial Accounting Standards (“SFAS”) No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly was issued
April 9, 2009.  FSP SFAS 157-4 affirms that the objective of fair
value when the market for an asset is not active is the price that would be
received to sell the asset in an orderly transaction, and clarifies and includes
additional factors for determining whether there has been a significant decrease
in market activity for an asset when the market for that asset is not
active.  FSP SFAS 157-4 requires an entity to base its conclusion
about whether a transaction was not orderly on the weight of the
evidence.  FSP SFAS 157-4 also amended SFAS 157, “Fair Value
Measurements,” to expand certain disclosure requirements.  FSP SFAS
157-4 is effective for interim and annual periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15,
2009.  FSP SFAS 157-4 became effective for the Company on June 15,
2009 and did not have a significant impact on the Company’s financial
statements.


15


FSP SFAS
107-1 and Accounting Principles Board (“APB”) 28-1, Interim Disclosures about Fair Value
of Financial Instruments were issued April 9, 2009.  FSP SFAS
107-1 and APB 28-1 amends SFAS 107, Disclosures about Fair Value of
Financial Instruments, to require an entity to provide disclosures about
fair value of financial instruments in interim financial information and amends
APB Opinion No. 28, Interim
Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods.  Under FSP SFAS 107-1 and
APB 28-1, a publicly traded company shall include disclosures about the fair
value of its financial instruments whenever it issues summarized financial
information for interim reporting periods.  In addition, entities must
disclose, in the body or in the accompanying notes of its summarized financial
information for interim reporting periods and in its financial statements for
annual reporting periods, the fair value of all financial instruments for which
it is practicable to estimate that value, whether recognized or not recognized
in the statement of financial position, as required by SFAS 107.  The
new interim disclosures required by FSP SFAS 107-1 and APB 28-1 are included in
the Company’s interim financial statements for the second quarter, June 30,
2009.





On May
28, 2009, the FASB issued SFAS No. 165, Subsequent
Events.  Under SFAS 165, companies are required to evaluate
events and transactions that occur after the balance sheet date but before the
date the financial statements are issued, or available to be issued in the case
of non-public entities.  SFAS 165 requires entities to recognize in
the financial statements the effect of all events or transactions that provide
additional evidence of conditions that existed at the balance sheet date,
including the estimates inherent in the financial preparation
process.  Entities shall not recognize the impact of events or
transactions that provide evidence about conditions that did not exist at the
balance sheet date but arose after that date.  SFAS 165 also requires
entities to disclose the date through which subsequent events have been
evaluated.  SFAS 165 was effective for interim and annual reporting
periods ending after June 15, 2009.  The Company adopted the
provisions of SFAS 165 for the quarter ended June 30, 2009, as required, and
adoption did not have a material impact on the financial statements taken as a
whole.




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 “expect,” “anticipate,” “forecast,” and comparable terms should be
understood by the reader to indicate that the statement is “forward-looking” and
thus subject to change in a manner that can be unpredictable.  Factors
that could cause actual results to differ from the results anticipated, but not
guaranteed, in this Report, include (without limitation) economic and social
conditions, competition for loans, mortgages, and other financial services and
products, changes in interest rates, unforeseen changes in liquidity, results of
operations, and financial conditions affecting the Company’s customers, and
other risks that cannot be accurately quantified or completely
identified.  Many factors affecting the Company’s financial condition
and profitability, including changes in economic conditions, the volatility of
interest rates, political events and competition from other providers of
financial services simply cannot be predicted. Because these factors are
unpredictable and beyond the Company’s control, earnings may fluctuate from
period to period.  The purpose of this type of information is to
provide readers with information relevant to understanding and assessing the
financial condition and results of operations of the Company, and not to predict
the future or to guarantee results.  The Company is unable to predict
the types of circumstances, conditions and factors that can cause anticipated
results to change.  The Company undertakes no obligation to publish
revised forward-looking statements to reflect the occurrence of changed or
unanticipated events, circumstances or results.


16





General





On
January 23, 2004, American Patriot Financial Group, Inc. (formerly known as BG
Financial Group, Inc.) (“Company”), a bank holding company, acquired all of the
outstanding shares of American Patriot Bank (formerly known as Bank of
Greeneville) (“Bank”) in a one for one stock exchange.  The Bank is a
Tennessee-chartered, FDIC-insured, non-Member commercial bank offering a wide
range of banking services, including checking, savings, and money market deposit
accounts, certificates of deposit and loans for consumers, commercial and real
estate purposes, and is the principal business of the Company. The main office
of the Corporation is located at 3095 East Andrew Johnson Highway, Greeneville,
Greene County, Tennessee, which is also the main office of the
Bank.  This location is a 2.66 acre lot, on which there is a fully
operational modular bank unit.  Other full service branch banking
offices of the Bank are located at 506 Asheville Highway and 208 West Summer
Street, Greeneville, Greene County, Tennessee.  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 June 30, 2009, the Company had
liquid assets of approximately $18.3 million in the form of cash and federal
funds sold compared to approximately $6.4 million on December 31,
2008.  Management believes that the liquid assets are adequate at June
30, 2009. Additional liquidity should be provided by the growth in deposit
accounts and loan repayments.  The Company also has the ability to
purchase federal funds and is a member of the Federal Home Loan Bank of
Cincinnati that will provide a credit line if necessary. Management is not aware
of any trends, events or uncertainties that are reasonably likely to have a
material impact on the Company’s short term or long term liquidity and has taken
a pro-active approach to develop a larger local deposit base to help minimize
any risk.





Results
of Operations





The Company had a net loss of
$(925,157) or $(.39) per share for the quarter ended June 30, 2009 compared to
net income of $82,502 or $.04 per share for the quarter ended June 30,
2008.  The Company had a net loss for the six months ended June 30,
2009 of $(1,499,192) as compared to net income of $216,067 for the same period
in 2008.  A significant increase to the provision for loan losses was
the primary cause of the net loss in 2009.  During the quarter ended
June 30, 2009, the Company recorded a provision for loan losses of $1,168,339,
while recording a benefit from loan losses of $(45,470) for the same period in
2008. For the six months ended June 30, 2009, the provision for loan losses was
$2,024,995 compared to a benefit of ($137,599) for the comparable period in
2008.


17


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 June 30, 2009 was $1,504,104 compared to $1,771,168 for the same period in
2008, and total interest expense was $812,761 in 2009 compared to $813,958 in
2008 for the same period.  Interest income for the six months ended
June 30, 2009 was $3,177,302, compared to $3,746,753 for the same period in
2008, and total interest expense was $1,623,884 in 2009 compared to $1,797,730
in 2008 for the same period.  The Company pursues local deposits
aggressively with attractive interest rates, which has contributed to
compression of net interest margin.  Also, the Federal Reserve Bank’s
interest rate cuts beginning in latter 2007 and continuing through out all of
2008 have contributed to this compression as our loan yields have repriced
faster than our deposit yields. Based on the Company’s mix of interest earning
assets and interest bearing liabilities, management believes that net interest
margin should begin to stabilize for the remainder of the year.  Many
economists now believe we are at or near the end of interest rate cuts with
likely increases later in 2009. If interest rates remain stable or begin to
increase, net interest margin could increase.





Provision
for / Benefit from Loan Losses





The
provision for (benefit from) loan losses represents a charge (or recovery) to
operations necessary to establish an allowance for possible loan losses, which
in management's evaluation, is adequate to provide coverage for estimated losses
on outstanding loans and to provide for uncertainties in the economy. The
provision for loan losses for the three month and six month period ended June
30, 2009 was $1,168,339 and $2,024,995, respectively, as compared to a benefit
of $(45,470) and $(137,599) for the same three month and six month period ended
June 30, 2008.  During the three and six months ended June 30, 2009,
loan charge-offs were $713,997 and $1,444,654 respectively.  The
recoveries for the three and six month periods ended June 30, 2009 were $16,125
and $72,739, respectively.  The allowance for loan losses was
$3,026,728 at June 30, 2009 as compared to $2,373,648 at December 31, 2008, an
increase of 27.5%.  The allowance was 2.9% of loans at June 30,
2009.  Identification of additional impaired loans in conjunction with
other economic declines (primarily increased unemployment rates in our primary
lending areas) resulted in significant provision for loan losses during the
three and six month periods ended June 30, 2009.


Management believes that the
allowance for loan losses is adequate at June 30, 2009. 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 pursue more
aggressive strategies for problem loan resolution, and is committed to bolster
loan loss reserves to levels sufficient to absorb losses recognized in the
pursuit of this strategy.




Provision
(Benefit) for/from Income Taxes





The Company's benefit from income tax
expense for the three and six months ended June 30, 2009 was $(576,933) and
$(930,340), respectively when compared to a provision of $28,123 and $101,770
for the same periods in 2008.  Management believes the provision
(benefit) for income taxes for the period ended June 30, 2009 to be
adequate.


18


Noninterest
Income





The Company's noninterest income
consists of service charges on deposit accounts and other fees and
commissions.  Total noninterest income for three and six months ended
June 30, 2009 was $147,723 and $296,796, respectively when compared to $170,017
and $347,387 for the same periods in 2008.  Service charges on deposit
accounts decreased $29,367 and $56,687 for the three and six months ended June
30, 2009 respectively, when compared to the same periods in 2008.The primary cause of the
decline in service charges was related to declines in NSF and overdraft
fees.  These fees are primarily activity driven and relate to transaction
based checking accounts.  The bank noted a significant decline in checking
account balances when comparing the first six months of 2009 to the first six
months of 2008, and a corresponding decrease in NSF and overdraft transactions
during the first six months of 2009, as compared to the first six months of
2008. Fees from origination of mortgage loans sold increased for the three and
six months ended June 30, 2009 by $4,826 and $9,003 when compared to the same
period in 2008. Favorable interest rates spurred an increase in mortgage loan
originations during the first half of 2009. Investment sale commissions
decreased $4,256 and $9,734 for the three and six months ended June 30, 2009, as
compared to the same periods in 2008.  The reason for decreases in the
investment sale commissions is the discontinuance of that service by the bank
due to the high overhead expense and lack of sufficient revenues. Management
projects that other fees and commissions and service charges will improve during
the remainder of 2009.





Noninterest
Expense





Noninterest expenses totaled $1,172,817 and $2,254,751 for the three and six
months ended June 30, 2009, as compared to $1,062,072 and $2,116,172 for the
same periods in 2008.   Salaries and benefits decreased $84,055 and
$151,550 for the three and six months ended June 30, 2009, as compared to the
same periods in 2008.  The decrease in salaries and benefits for the three
and six months ended June 30, 2009 is due to reductions in senior level
management positions. Legal and professional fees increased $120,777 and
$150,426 for the three and six months ended June 30, 2009, as compared to the
same periods in 2008.  Management continues to incur additional expenses to
meet the demands of regulatory requirements, especially relating to SOX 404
compliance, in addition to strategic plan development.  The Company has
also incurred significant noninterest expense increases in other operating
expenses primarily as a result of increased collection expenses, ATM expenses
FDIC insurance and state banking assessments.   Combined, operating
expenses relating to all other expenses increased $90,990 and $158,020 for the
three and six months ended June 30, 2009, when compared to the same periods in
2008.





Financial
Condition





Total assets at June 30, 2009, were
$131,984,880, an increase of $12,392,054 or 10.4% compared to 2008 year-end
assets of $119,592,826.  Deposits increased to $117,588,567 at
June 30, 2009, an increase of $13,849,390 or 13.4% from $103,739,177 at
December 31, 2008. Most of the change in total assets and total deposits
can be attributed to the Company taking measures to increase liquidity by
offering attractive rates to customers.  The majority of our increased
liquidity at June 30, 2009 has been placed in Federal funds sold. Premises and
equipment decreased to $5,163,917 at June 30, 2009 a decrease of $153,768
or 2.9% from $5,317,685 at December 31, 2008, primarily as a result of
minimal fixed asset purchases coupled with normal depreciation
charges.  Other significant additions noted as of June 30, 2009 when
compared to December 31, 2008 relate to foreclosed assets.  During the
first two quarters of 2009, management foreclosed on one significant loan
relationship totaling approximately $1,012,000 in addition to several other
smaller loan foreclosures.





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


19


Loans





Net loans
outstanding totaled $100,628,824 at June 30, 2009 compared to $103,327,562 at
December 31, 2008.  $2.3 million of the $2.7 million shrinkage relates
to real estate loans and reflects management's strategy of reducing the
concentration in these loan types based on the current economic climate's impact
on the real estate industry. Management is monitoring this portfolio
closely.  In the event that a loan is 90 days or more past due the
accrual of income is generally discontinued when the full collection of
principal or interest is in doubt unless the obligations are both well secured
and in the process of collection.  At June 30, 2009, there were no loans 90
days or more past due and still accruing interest, while total loans 90 days or
more past due and in non-accrual status were $6,197,002.  At
December 31, 2008, there we no loans 90 days or more past due and still
accruing interest, while total loans 90 days or more past due and in non-accrual
status were $599,667.





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





June 30,
                            
                            
                            December 31,2009
                            
                            
                            2008Impaired
      loans with a specificvaluation
      allowance
                            
                            $
                            11,098,399
                            
                            
                            $
                            6,414,683Total
      specifically evaluatedimpaired
      loans
                            
                            $
                            11,098,399
                            
                            
                            $
                            6,414,683Specific
      valuation allowancerelated
      to impaired loans
                            
                            $
                            2,051,930
                            
                            
                            $
                            1,512,511


In
addition to the specifically evaluated impaired loans above, the Bank
collectively evaluates large groups of smaller balance homogeneous loans for
impairment.  Loans collectively evaluated for impairment, risk rates
special mention, substandard and doubtful, as of June 30, 2009 and December 31,
2008 were $2,904,962 and $739,517, respectively.  The Bank has
reserved $86,926 and $29,149 related to these loans as of June 30, 2009 and
December 31, 2008, respectively.





In
connection with impaired loans, additional funds are committed to one borrower
in an amount not to exceed $78,825 subject to compliance with provisions of the
applicable loan agreement which includes a lending base formula.





As of
June 30, 2009, the Company has identified loans aggregating $11,098,399 as being
impaired, of which $6,197,002 are non-performing as it relates to payment of
interest.  The aforementioned total is approximately $5,598,000 more
than reported at December 31, 2008.  The increase is primarily related
to identified problem assets centered in the Blount County Market.





Restricted
Equity Investments




Federal
Home Loan Bank (FHLB) stock at June 30, 2009 had an amortized cost and market
value of $296,500 as compared to an amortized cost and a market value of
$291,200 at December 31, 2008.   As a member of the FHLB, the
Company is required to maintain stock in an amount equal to .15% of total
assets.  Federal Home Loan Bank stock is carried at
cost.  Federal Home Loan Bank stock is maintained by the Company at
par value of one hundred dollars per share.




Deposits





Total deposits, which are the principal
source of funds for the Company, were $117,588,567 at June 30, 2009, compared to
$103,739,177 at December 31, 2008, representing an increase of
13.4%.  The Company has targeted local consumers, professional and
commercial businesses as its central clientele; therefore, deposit instruments
in the form of demand deposits, savings accounts, money market demand accounts,
NOW accounts, certificates of deposit and individual retirement accounts are
offered to customers.   The Company established a line of credit
with the Federal Home Loan Bank secured by a blanket-pledge of 1-4 family
residential mortgage loans. At June 30, 2009 the Company had outstanding
advances of $5,389,423 at the Federal Home Loan Bank compared with $5,506,805 at
December 31, 2008. At June 30, 2009 and December 31, 2008, the Company also had
$1,000,000 in short-term borrowings from Jefferson Federal Bank which is due on
demand.


20





Capital





Equity capital at June 30, 2009 was
$6,849,057, a decrease of $1,499,192 from $8,348,249 at December 31, 2008, due
to a net loss of $1,499,192 for the first six months of 2009.





At June 30, 2009, both the Company’s
and Bank’s capital ratios were in excess of the regulatory
minimums.  Those ratios are as follows:





Required
                    Minimum
                    Ratio
                  
                  
                  To be
                    Well
                    Capitalized
                  
                  
                  Requirements
                    Under the
                    Order
                  
                  
                  BankTier
      1 Leverage ratio
                  
                  
                  4.00
                  %
                  
                  
                  5.00
                  %
                  
                  
                  8.00
                  %
                  
                  
                  6.89
                  %Tier
      1 risk-based capital ratio
                  
                  
                  4.00
                  %
                  
                  
                  6.00
                  %
                  
                  
                  10.00
                  %
                  
                  
                  7.56
                  %Total
      risk-based capital ratio
                  
                  
                  8.00
                  %
                  
                  
                  10.00
                  %
                  
                  
                  11.00
                  %
                  
                  
                  8.81
                  %


In June 2009, the Bank’s Board of
Directors consented to the issuance of an Order to Cease and Desist (Order) by
the FDIC.  The Order requires the Bank to cease and desist from the
unsafe and unsound banking practices and violations of law and or regulations as
discussed in the Order.  The Order also includes minimum capital
ratios to maintain and prohibits payment of dividends without approval by the
FDIC, among other issues.





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 June
30, 2009, approximately 69% of the Company’s gross loans had adjustable
rates.  Based on the asset/liability modeling, management believes
that these loans reprice at a faster pace than liabilities held by the
Company.  Because the majority of the Company’s liabilities are 12
months and under and the gap in repricing is asset sensitive, management
believes that a rising rate environment would have a positive impact on the
Company’s net interest margin.  Floors in the majority of the
Company’s adjustable rate assets also mitigate interest rate sensitivity in a
decreasing rate environment.  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.


21


Off-Balance
Sheet Arrangements
 
 The Company, at June 30, 2009, had
outstanding unused lines of credit and standby letters of credit that totaled
approximately $11,451,000.  These commitments have fixed maturity
dates and many will mature without being drawn upon, meaning that the total
commitment does not necessarily represent the future cash
requirements.  The Company has the ability to liquidate Federal funds
sold or, on a short-term basis, to purchase Federal funds from another bank and
to borrow from the Federal Home Loan Bank.  At June 30, 2009, 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 14 through 22 of Item 2, “MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, is
incorporated herein by reference.
  Item
4.  Controls and Procedures
  a)Evaluation of
      Disclosure Controls and
Procedures
  The
Company maintains disclosure controls and procedures, as defined in
Rule 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that
information required to be disclosed by it in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time period specified in the SEC’s rules and forms and that such
information is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer.  The
Company carried out an evaluation, under the supervision and with the
participation of its management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures as of the end of the period covered by this
report.  Based on the evaluation of these disclosure controls and
procedures, the Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure control and procedures were
effective.
 
 b)Changes in Internal
      Controls and Procedures
  There
were no changes in the Company’s internal controls over financial reporting
during the quarter ended June 30, 2009, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  22
  PART
II - OTHER INFORMATION
 
 Item
1.  LEGAL PROCEEDINGS
 
 None.
  Item
1A.  RISK FACTORS
 
 There
have been no material changes to our risk factors as previously disclosed in
Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, as filed with the Securities and Exchange Commission on April
15, 2009.
 
 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 June
      30, 2009.
  The
Company's ability to pay dividends is derived from the income of the
Bank.  The Bank's ability to declare and pay dividends is limited by
its obligations to maintain sufficient capital and by other general restrictions
on its dividends that are applicable to banks that are regulated by the FDIC and
the Tennessee Department of Financial Institutions (“TDFI”).  Pursuant
to the terms of the Order, the Bank is prohibited from paying dividends to the
Company without the prior written consent of 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. The Company has never paid dividends in the
past.
 
 Item
3.  DEFAULTS UPON SENIOR SECURITIES
 
 (a)
              None.
  (b)
              None.
  Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 (a)
              The
      annual meeting of the Company’s shareholders was held June 26,
      2009.
 
 (b)
              The
      following members of the board of directors were each re-elected as Class
      II directors to serve for an additional three-year term or until their
      respective successors are duly elected and
  qualified:
 
 Wendy C.
Warner
 Michael
G. Burns
 
 The term
of office for the following members of the board of directors continued after
the meeting:  William J. Smead and Roger A. Woolsey (Class
III).  The Bank does not currently have a Class I
director.
  23
  (c)  
(1)   The following directors were elected by the following
tabulation:
 
 Name
                  
                  Number of
                    Shares
                    Voting
                  
                  
                  For
                  
                  
                  Withheld
                  
                  
                  Broker Non-
                    VoteWendy
      C. Warner
                  
                  
                  1,346,093
                  
                  
                  
                  1,296,522
                  
                  
                  
                  49,571
                  
                  
                  
                  0Michael
      G. Burns
                  
                  
                  1,346,093
                  
                  
                  
                  1,330,582
                  
                  
                  
                  15,511
                  
                  
                  
                  0
 
 (2)
              The
      ratification of the appointment of Hazlett, Lewis & Bieter, PLLC as
      independent auditors for the Company for the fiscal year 2009 was as
      follows:
 
 Number of
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    BrokerShares Voting
                    
                    For
                    
                    
                    Against
                    
                    
                    Abstain
                    
                    
                    Non-Votes1,346,093
                    
                    
                    1,332,252
                    
                    
                    
                    2,375
                    
                    
                    
                    11,466
                    
                    
                    
                    0
 
 (d) 
 None.
 
 Item
5.  OTHER INFORMATION
 
 (a)  
None.
  (b)   None.
  24
  Item
6.   EXHIBITS.
 
 Index to Exhibits.
 
 Exhibit No.
                
                Description3.1*
                
                Charter
      of American Patriot Financial Group, Inc.3.2*
                
                Bylaws
      of American Patriot Financial Group, Inc.10.1**
                
                Stipulation
      and Consent to the Issuance of an Order to Cease and Desist dated May 29,
      200910.2**
                
                Order
      to Cease and Desist between American Patriot Bank and the Federal Deposit
      Insurance Corporation dated June 3, 200931.1
                
                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 200232.2
                
                Certification
      pursuant to Rule 18 U.S.C. Section 1350, as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002
 
 *
      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.
 
 **
      Previously filed as an exhibit to a Current Report on Form 8-K filed by
      American Patriot Financial Group, Inc. with the Commission on June 9,
      2009.
  25
  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: August 14,
      2009
                                  
                                  /s/
      William J. SmeadWilliam
      J. SmeadInterim
      Chief Executive OfficerDATE: August 14,
      2009
                                  
                                  /s/
      T. Don WaddellT.
      Don WaddellChief
      Financial
Officer
  26