**UNITED STATESSECURITIES 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 March 31, 2008**                                                                                                                                                                                     |
|                                                                                                                                                                                                                                        |                                                                                                    |
| **OR**                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                        |                                                                                                    |
| **o**                                                                                                                                                                                                                                       | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                        |                                                                                                    |
| **For  the transition period from                    to                  ** |

 

**Commissionfile number   000-50771**

 

**AMERICAN PATRIOT FINANCIAL GROUP, INC.**

(Exactname of registrant as specified in its charter)

 

| **Tennessee**                    | ** ** | **20-0307691**                        |
|----------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |       |                                  |

 

| **3095  East Andrew Johnson Highway**

**Greeneville,  Tennessee** | ** ** | **37745**  |
|--------------------------------------------------------------------|------------|------------|
| (Address of principal  executive offices)                          |       | (Zip Code) |

 

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

 

**NotApplicable**

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

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES x  NO o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-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. (Check one):

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act.) YES o  NOx

 

As of May 1, 2008,there were 2,389,391 shares of common stock, $0.333 par value, issued andoutstanding.

 

 

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| ** **                            | **PART I - FINANCIAL INFORMATION**                                                                       |   |
|---------------------------------------|---------------------------------------------------------------------------------------------------------------|--------|
| ** **                            | ** **                                                                                                    |   |
| **Item 1.**                           | **Financial Statements.**                                                                                     |   |
|                                  |                                                                                                          |   |
|                                  | The consolidated financial statements of the  Registrant and its wholly owned subsidiary are as follows:      |
|                                  |                                                                                                          |   |
|                                  | Consolidated  Balance Sheets – March 31, 2008 (unaudited) and December 31, 2007.               |   |
|                                  |                                                                                                          |   |
|                                  | Consolidated Statements of Income - For the three  months ended March 31, 2008 and 2007 (unaudited).     |
|                                  |                                                                                                          |   |
|                                  | Consolidated Statements of Cash Flows - For the three  months ended March 31, 2008 and 2007 (unaudited). |
|                                  |                                                                                                          |   |
|                                  | Notes to Consolidated Financial Statements.                                                                   |   |
|                                  |                                                                                                          |   |
| **Item 2.**                           | **Management’s  Discussion and Analysis or Plan of Operation.**                                          |   |
|                                  |                                                                                                          |   |
| **Item 3.**                           | **Quantitative  and Qualitative Disclosures about Market Risk.**                                              |   |
|                                  |                                                                                                          |   |
| **Item 4T.**                          | **Controls and  Procedures.**                                                                                 |   |
|                                  |                                                                                                          |   |
| **PART II  - OTHER INFORMATION** |                                                                                                          |
|                                  |                                                                                                          |   |
| **Item 1.**                           | **Legal Proceedings.**                                                                                        |   |
|                                  |                                                                                                          |   |
| **Item 1A.**                          | **Risk Factors.**                                                                                             |   |
|                                  |                                                                                                          |   |
| **Item 2.**                           | **Unregistered  Sales of Equity Securities and Use of Proceeds.**                                             |   |
|                                  |                                                                                                          |   |
| **Item 3.**                           | **Defaults Upon  Senior Securities.**                                                                         |   |
|                                  |                                                                                                          |   |
| **Item 4.**                           | **Submission of  Matters to a Vote of Security Holders.**                                                     |   |
|                                  |                                                                                                          |   |
| **Item 5.**                           | **Other Information.**                                                                                        |   |
|                                  |                                                                                                          |   |
| **Item 6.**                           | **Exhibits.**                                                                                                 |   |

 

2

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

**Greeneville, Tennessee**

**CONSOLIDATED BALANCE SHEETS**

 

**Part I. FINANCIALINFORMATION**

 

**Item 1. Financial Statements**

 
| ** **                                                                                                                                               | ** ** | **As of**               | ** **  | **As of**                  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                                                               | ** ** | **March 31, 2008** | ** **  | **December 31, 2007** | ** ** |
| ** **                                                                                                                                               | ** ** | **(Unaudited)**              | ** **  | ** **                      | ** ** |
| **ASSETS**                                                                                                                                               |       |                         |        |                            |       |
|                                                                                                                                                     |       |                         |        |                            |       |
| Cash and due  from banks                                                                                                                                 |       | $                            | 3,056,649   |                            | $          | 4,462,015 |   |
| Federal funds  sold                                                                                                                                      |       | 2,196,553                    |        | 10,607,427                      |       |
| Cash and cash  equivalents                                                                                                                               |       | 5,253,202                    |        | 15,069,442                      |       |
| Federal Home  Loan Bank stock, at cost                                                                                                                   |       | 258,800                      |        | 258,800                         |       |
| Loans, net of  estimated allowance for loan losses of $1,045,129 in 2008 and $1,094,083 in  2007                                                         |       | 97,947,686                   |        | 91,848,845                      |       |
| Premises and  equipment, net                                                                                                                             |       | 5,500,067                    |        | 5,571,514                       |       |
| Accrued interest  receivable                                                                                                                             |       | 611,547                      |        | 548,410                         |       |
| Deferred tax  assets, net                                                                                                                                |       | 310,168                      |        | 319,297                         |       |
| Prepaid expenses                                                                                                                                         |       | 55,014                       |        | —                          |       |
| Foreclosed  assets                                                                                                                                       |       | 434,926                      |        | 475,366                         |       |
| Cash surrender  value of bank owned life insurance                                                                                                       |       | 2,272,984                    |        | 2,246,146                       |       |
| Other assets                                                                                                                                             |       | 143,753                      |        | 196,503                         |       |
| Total Assets                                                                                                                                             |       | $                            | 112,788,147 |                            | $          | 116,534,323 |   |
|                                                                                                                                                     |       |                         |        |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                            |       |                         |        |                            |       |
|                                                                                                                                                     |       |                         |        |                            |       |
| **LIABILITIES**                                                                                                                                          |       |                         |        |                            |       |
| Deposits:                                                                                                                                                |       |                         |        |                            |       |
| Noninterest-bearing  demand                                                                                                                              |       | $                            | 10,021,261  |                            | $          | 12,352,954 |   |
| Interest-bearing                                                                                                                                         |       |                         |        |                            |       |
| Money market,  interest checking and savings                                                                                                             |       | 29,553,528                   |        | 31,787,128                      |       |
| Time deposits                                                                                                                                            |       | 61,548,402                   |        | 60,889,257                      |       |
| Total Deposits                                                                                                                                           |       | 101,123,191                  |        | 105,029,339                     |       |
| Accrued interest  payable                                                                                                                                |       | 834,243                      |        | 813,069                         |       |
| Other  liabilities                                                                                                                                       |       | 167,734                      |        | 108,887                         |       |
| Federal Home  Loan Bank advances                                                                                                                         |       | 1,872,412                    |        | 1,926,026                       |       |
| Total  Liabilities                                                                                                                                       |       | 103,997,580                  |        | 107,877,321                     |       |
|                                                                                                                                                     |       |                         |        |                            |       |
| **Commitments  and contingencies**                                                                                                                       |       |                         |        |                            |       |
|                                                                                                                                                     |       |                         |        |                            |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                                           |       |                         |        |                            |       |
| Stock:                                                                                                                                                   |       |                         |        |                            |       |
| Preferred stock,  no par value; authorized 1,000,000 shares; none issued and outstanding                                                                 |       | —                       |        | —                          |       |
| Common stock,  $0.333 par value; authorized 6,000,000 shares; issued and outstanding  2,314,391 shares at March 31, 2008 and December 31, 2007 |       | 771,362                      |        | 771,362                         |       |
| Additional  paid-in capital                                                                                                                              |       | 6,942,260                    |        | 6,942,260                       |       |
| Retained  earnings                                                                                                                                       |       | 1,076,945                    |        | 943,380                         |       |
| Total  Stockholders’ Equity                                                                                                                         |       | 8,790,567                    |        | 8,657,002                       |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                         |       | $                            | 112,788,147 |                            | $          | 116,534,323 |   |

 

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

 

3

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                                           | ** ** | **Three ****Months**** Ended** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                           | ** ** | **March 31, 2008**             | ** ** | **March 31, 2007** | ** ** |
| ** **                                                           | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Interest  and dividend income:**                                   | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Loans, including  fees                                               |       | $                                        | 1,931,059  |   | $ | 1,719,123 |   |
| Dividends on Federal  Home Loan Bank stock                           |       | 78                                       |       | 3,800 |   |
| Federal funds  sold and other                                        |       | 44,448                                   |       | 112,633 |   |
| Total interest  and dividend income                                  |       | 1,975,585                                |       | 1,835,556 |   |
|                                                                 |       |                                     |       |   |   |
| **Interest  expense:**                                               | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Deposits                                                             |       | 966,427                                  |       | 825,588 |   |
| Borrowed funds                                                       |       | 17,345                                   |       | 19,761 |   |
| Total interest  expense                                              |       | 983,772                                  |       | 845,349 |   |
| Net interest  income before provision for (benefit from) loan losses | ** ** | 991,813                                  | ** ** | 990,207 | ** ** |
| ** **                                                           | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**                        |       | (92,129                                  | )          | 104,364 |   |
| Net interest  income after provision for (benefit from) loan losses  | ** ** | 1,083,942                                | ** ** | 885,843 | ** ** |
|                                                                 |       |                                     |       |   |   |
| **Noninterest  income:**                                             |       |                                     |       |   |   |
| Service charges  on deposit accounts                                 |       | 130,401                                  |       | 127,492 |   |
| Fees from  origination of mortgage loans sold                        |       | 6,322                                    |       | 34,324 |   |
| Investment sales  commissions                                        |       | 5,478                                    |       | 1,651 |   |
| Other                                                                |       | 35,169                                   |       | 5,893 |   |
| Total  noninterest income                                            |       | 177,370                                  |       | 169,360 |   |
|                                                                 |       |                                     |       |   |   |
| **Noninterest  expense:**                                            |       |                                     |       |   |   |
| Salaries and  employee benefits                                      |       | 552,962                                  |       | 488,791 |   |
| Occupancy                                                            |       | 154,378                                  |       | 127,497 |   |
| Advertising                                                          |       | 18,093                                   |       | 18,995 |   |
| Data processing                                                      |       | 81,815                                   |       | 55,705 |   |
| Legal and  professional                                              |       | 102,725                                  |       | 81,525 |   |
| Other operating                                                      |       | 144,127                                  |       | 120,652 |   |
| Total  noninterest expense                                           |       | 1,054,100                                |       | 893,165 |   |
| **Income  before income taxes**                                      |       | 207,212                                  |       | 162,038 |   |
|                                                                 |       |                                     |       |   |   |
| Income tax  expense                                                  |       | 73,647                                   |       | 60,947 |   |
|                                                                 |       |                                     |       |   |   |
| **Net  income**                                                      |       | $                                        | 133,565    |   | $ | 101,091 |   |
|                                                                 |       |                                     |       |   |   |
| Basic earnings  per common share                                     |       | $                                        | .06        |   | $ | .04 |   |
| Diluted earnings  per common share                                   |       | $                                        | .06        |   | $ | .04 |   |

 

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

 

4

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three ****Months ****Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                         | ** ** | **March 31, 2008**                  | ** ** | **March 31, 2007** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         |       |                                     |       |   |   |
| Net income                                                                         |       | $                                        | 133,565    |   | $ | 101,091 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                     |       |   |   |
| Provision for  (benefit from) loan losses                                          |       | (92,219                                  | )          | 104,364 |   |
| Depreciation                                                                       |       | 78,626                                   |       | 58,008 |   |
| Gain on sale of  premises and equipment                                            |       | (12,300                                  | )          | — |   |
| Write-down of  foreclosed assets                                                   |       | —                                   |       | 12,877 |   |
| Realized gain on  sales of foreclosed assets                                       |       | (7,221                                   | )          | (200 | ) |
| Deferred income  tax expense (benefit)                                             |       | 9,128                                    |       | (54,399 | ) |
| Federal Home  Loan Bank stock dividends                                            |       | —                                   |       | (3,800 | ) |
| Increase in cash  surrender value of bank owned life  insurance               |       | (26,838                                  | )          | — |   |
| Net change in:                                                                     |       |                                     |       |   |   |
| Accrued interest  receivable                                                       |       | (63,137                                  | )          | (44,671 | ) |
| Other assets                                                                       |       | (2,263                                   | )          | (5,135 | ) |
| Other  liabilities                                                                 |       | 58,847                                   |       | 64,137 |   |
| Accrued interest  payable                                                          |       | 21,174                                   |       | (59,012 | ) |
| Net cash  provided by operating activities                                         |       | 97,362                                   |       | 173,260 |   |
| ** **                                                                         |       |                                     |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         |       |                                     |       |   |   |
| Proceeds from  sale of foreclosed assets                                           |       | 86,716                                   |       | 1,200 |   |
| Loan  originations and principal collections, net                                  |       | (6,045,677                               | )          | (2,439,450 | ) |
| Additions to  premises and equipment                                               |       | (7,179                                   | )          | (1,576,124 | ) |
| Proceeds from  sale of premises and equipment                                      |       | 12,300                                   |       | — |   |
| Net cash used in  investing activities                                             |       | (5,953,840                               | )          | (4,014,374 | ) |
| ** **                                                                         |       |                                     |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         |       |                                     |       |   |   |
| Net change in  deposits (non-time deposits)                                        |       | (4,565,293                               | )          | 292,504 |   |
| Net change in  time deposits                                                       |       | 659,145                                  |       | 4,558,220 |   |
| Repayment of  securitized borrowings                                               |       | —                                   |       | (1,610,266 | ) |
| Federal Home  Loan Bank repayments                                                 |       | (53,614                                  | )          | (277,740 | ) |
| Net cash  provided by (used in) financing activities                               |       | (3,959,762                               | )          | 2,962,718 |   |
|                                                                               |       |                                     |       |   |   |
| Net change in  cash and cash equivalents                                           |       | (9,816,240                               | )          | (878,396 | ) |
|                                                                               |       |                                     |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 15,069,442                               |       | 15,488,412 |   |
|                                                                               |       |                                     |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                                        | 5,253,202  |   | $ | 14,610,016 |   |
|                                                                               |       |                                     |       |   |   |
| **SUPPLEMENTARY  CASH FLOW INFORMATION:**                                          |       |                                     |       |   |   |
| Interest paid on  deposits and borrowed funds                                      |       | $                                        | 962,598    |   | $ | 904,361 |   |
| Income taxes  paid                                                                 |       | $                                        | —     |   | $ | — |   |

 

The accompanying notes are an integral part of these consolidated financialstatements.

 

5

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| ** **                                         | ** ** | **Three ****Months ****Ended** | ** ** |
|----------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                         | ** ** | **March 31, 2008**             | ** ** | **March 31, 2007** | ** ** |
|                                               |       |                                     |       |   |   |
| **SUPPLEMENTAL  SCHEDULE OF NON-CASH ACTIVITIES:** |       |                                     |       |   |   |
| Loans moved to  foreclosed assets                  |       | $                                        | 32,430     |   | $ | 27,877 |   |
|                                                    |            |                                          |            |  |  |  |  |

 

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

 

6

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

**Greeneville,Tennessee**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note1.****   Summaryof Significant Accounting Policies**

 

*Natureof Business*:

 

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

 

The following is a description of thesignificant policies used in the preparation of the accompanying consolidatedfinancial statements.

 

*Basis of Presentation:*

 

These consolidated financial statementsinclude the accounts of the American Patriot Financial Group, Inc. and itswholly owned subsidiary, American Patriot Bank. Significant intercompany transactions and accounts are eliminated inconsolidation.

 

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and in accordance with the instructions to Form 10-Q and Article 10of Regulation  S-X as promulgated by theSecurities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation of the financialposition and results of operations for the periods presented have beenincluded.  Operating results for thethree months ended March 31, 2008 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2008.  For further information, refer to theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007.  Certain amounts from prior period financialstatements have been reclassified to conform to current period’s presentation.

 

*Use of Estimates:*

 

The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities as of the balance sheet date and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  The most significantmanagement accounting estimate is the allowance for loan losses.  The allowance for loan losses is evaluated ona regular basis by management and is based upon management’s periodic review ofthe collectibility of the loans in light of historical experience, the natureand volume of the loan portfolio, adverse situations that may affect theborrower’s ability to repay, estimated value of any underlying collateral andprevailing economic conditions.  Thisevaluation is inherently subjective as it requires estimates that aresusceptible to significant revision as more information becomes available.

 

7

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

 

No options were granted during the period ended March 31,2008; therefore, no compensation cost is recognized in the consolidatedstatement of income for the period ended March 31, 2008.  The aggregate intrinsic value of options was$468,499 at March 31, 2008.  Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying option and the quoted market price of the Company’scommon stock of $6.25 per common share for the 170,719 options that werein-the-money at March 31, 2008.

 

**Note3.****   EarningsPer Share of Common Stock**

 

Basic earnings per share(EPS) of common stock is computed by dividing net income by the weightedaverage number of common shares outstanding during the period.  Diluted earnings per share of common stock iscomputed by dividing net income by the weighted average number of common sharesand potential dilutive common shares outstanding during the period.  Stock options are regarded as potentialcommon shares.  Potential common sharesare computed using the treasury stock method. For the three months ended March 31, 2008, 34,900 options areexcluded from the effect of dilutive securities because they are anti-dilutive;19,000 options are similarly excluded from the effect of dilutive securitiesfor the three months ended March 31, 2007.

 

The following is areconciliation of the numerators and denominators used in the basic and dilutedearnings per share computations for the three months ended March 31, 2008and 2007:

 
| ** **                                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                                        | ** ** | **Income**                                           | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                                      | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                                 |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                                                 |       |   |   |   |   |   |   |
| Income available to common stockholders                           |       | $                                                    | 133,565    |   | 2,314,391 |   | $ | 101,091 |   | 2,310,771 |   |
|                                                              |       |                                                 |       |   |   |   |   |   |   |
| Effect of dilutive securities Stock options  outstanding          |       | —                                               |       | 68,810 |   | — |   | 119,621 |   |
|                                                              |       |                                                 |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                                 |       |   |   |   |   |   |   |
| Income  available to common shareholders plus assumed conversions |       | $                                                    | 133,565    |   | 2,383,201 |   | $ | 101,091 |   | 2,430,392 |   |

 

8

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Impact of Inflation**

 

The consolidated financial statements and related financial datapresented herein have been prepared in accordance with accounting principles generallyaccepted in the United States and practices within the banking industry thatrequire the measurement of financial position and operating results in terms ofhistorical dollars without considering the changes in the relative purchasingpower of money over time due to inflation. Unlike most industrial companies, virtually all the assets andliabilities of a financial institution are monetary in nature.  As a result, interest rates have a moresignificant impact on a financial institution’s performance than the effects ofgeneral levels of inflation.

 

**Critical Accounting Estimates**

 

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

 

**Recent Accounting Pronouncements**

 

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

 

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

 

In September 2006, the Financial Accounting Standards Boardratified a consensus opinion reached by the Emerging Issues Task Force on Issue06-04, *Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements*, (“EITF 06-04”) which requires employers that enterinto endorsement split-dollar life insurance arrangements that provide anemployee with a postretirement benefit to recognize a liability for the futurebenefits promised based on the substantive agreement made with theemployer.  Whether the accrual is basedon a death benefit or on the future cost of maintaining the insurance woulddepend on what the employer has effectively agreed to provide during theemployee’s retirement.  The purchase ofan endorsement-type life insurance policy does not qualify as a settlement ofthe liability.  The consensus in EITF 06-4is 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 permitsentities to choose to measure many financial instruments and certain otheritems at fair value.  The objective ofthis standard is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions.  This statementis 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 adoptthis standard and implementation of SFAS 159 did not have a material impact onits financial position or results of operations.

 

9

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

 

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

 

**Forward-LookingStatements**

 

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

 

10

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**General**

 

On January 23, 2004, American Patriot Financial Group, Inc.(formerly known as BG Financial Group, Inc.) (“Company”), a bank holdingcompany, acquired all of the outstanding shares of American Patriot Bank(formerly known as Bank of Greeneville) (“Bank”) in a one for one stock exchange.  The Bank is a Tennessee-chartered,FDIC-insured, non-Member commercial bank offering a wide range of bankingservices, including checking, savings, and money market deposit accounts,certificates of deposit and loans for consumers, commercial and real estatepurposes, and is the principal business of the Company. The main office of theCorporation is located at 3095 East Andrew Johnson Highway, Greeneville, GreeneCounty, Tennessee, which is also the main office of the Bank.  This location is a 2.66 acre lot, on whichthere is a fully operational modular bank unit. Other full service branch banking offices of the Bank are located at 506Asheville Highway and 208 West Summer Street, Greeneville, Greene County, Tennessee.  During 2007 the Bank purchased property inMaryville, Tennessee at 710 South Foothills Plaza Drive.  This location is a 1.17 acre lot, on whichthere is a 3,272 square foot fully operational brick bank building with drivethrough facilities and was opened for business on July 9, 2007.  These locations are centrally located and inhigh traffic/exposure areas.  Automaticteller machines and overnight “deposit drops” are positioned to serve the Bank’sclients.  Additional branches may beestablished as market opportunities surface.

 

**Liquidity**

 

At March 31, 2008, the Company had liquidassets of approximately $5.3 million in the form of cash and federal funds soldcompared to approximately $15.1 million on December 31, 2007.  Management believes that the liquid assetsare adequate at March 31, 2008. Additional liquidity should be provided bythe growth in deposit accounts and loan repayments.  The Company also has the ability to purchasefederal funds and is a member of the Federal Home Loan Bank of Cincinnati thatwill provide a credit line if necessary. Management is not aware of any trends, events or uncertainties that arereasonably likely to have a material impact on the Company’s short term or longterm liquidity.

 

**Resultsof Operations**

 

The Company had net income of $133,565 or $.06 pershare for the quarter ended March 31, 2008 compared to net income of$101,091 or $.04 per share for the quarter ended March 31, 2007.  During the quarter ended March 31, 2008,the Company recorded a benefit from loan losses of $(92,129), while recording aprovision for loan losses of $104,364 for the same period in 2007 (Seeadditional discussion at *Provision for / Benefitfrom Loan Losses*).

 

*Net Interest Income/Margin*

 

Net interest income represents the amount by whichinterest earned on various assets exceeds interest paid on deposits and otherinterest-bearing liabilities and is the most significant component of theCompany’s earnings.  Interest income forthe quarter ended March 31, 2008 was $1,975,585 compared to $1,835,556 forthe same period in 2007. Total interest expense was $983,772 for the quarterended March 31, 2008 compared to $845,349 in 2007 for the same period. TheCompany pursues local deposits aggressively with attractive interest rates,which has contributed to compression of net interest margin.  Also, the Federal Reserve Bank’s interestrate cuts over the past six months have contributed to this compression as ourloan yields have repriced faster than our deposit yields. Based on the Company’smix of interest earning assets and interest bearing liabilities, managementbelieves that net interest margin should begin to stabilize for the remainderof the year.  Many economists now believewe are at or near the end of interest rate cuts with likely increases later in2008. If interest rates remain stable or begin to increase, net interest margincould increase.

 

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*Provision for / Benefit from Loan Losses*

 

The provision for (benefit from) loan lossesrepresents a charge (or recovery) to operations necessary to establish anallowance for possible loan losses, which in management’s evaluation, isadequate to provide coverage for estimated losses on outstanding loans and toprovide for uncertainties in the economy. The provision for (benefit from) loanlosses during the three-month period ended March 31, 2008 was $(92,129) ascompared to $104,364 for the same three-month period ended March 31,2007.  During the three months ended March 31,2008, loan charge-offs were $21,075.  Therecoveries for the three-month period ended March 31, 2008 were$64,250.  The allowance for loan losseswas $1,045,129 at March 31, 2008 as compared to $1,094,083 at December 31,2007, a decrease of 4.5%.  The 4.5%decrease is due to more aggressive collection efforts on the part of managementas indicated by our net recoveries during the current 2008 quarter as well asan improvement in our specifically reserved loans through obtaining additionalloan collateral and payments. The allowance was approximately 1.06% of loans atMarch 31, 2008.  Management believesthe allowance for loan losses at March 31, 2008 to be adequate.

 

*Provision for Income Taxes*

 

The Company’s provision for income tax expense forthe three months ended March 31, 2008 was $73,647, compared to $60,947, forthe same period in 2007.  The provisionsrepresent 35.5% and 37.6% of the Company’s pretax income respectively.  Management believes the provision for incometaxes for the period ended March 31, 2008 to be adequate.

 

*Noninterest Income*

 

The Company’s noninterest income consists of servicecharges on deposit accounts and other fees and commissions.  Total noninterest income for the three monthsended March 31, 2008 was $177,370, compared to $169,360 for the sameperiod in 2007.  Earnings on the cashsurrender value of bank owned life insurance (BOLI) purchased in 2007 increased$26,838 during the three months ended March 31, 2008. Service charges ondeposit accounts increased $2,909 to $130,401 for the three months ended March 31,2008 from $127,492 for the same period in 2007. Investment sale commissions increased $3,827 to $5,478 for the threemonths ended March 31, 2008 when compared to the same period in 2007.  These increases were offset by a decrease of$28,002 in fees from origination of mortgage loans sold   from $34,324 during the three months ended March 31,2007 when compared to $6,322 for the same period in 2008.  This decrease was primarily a result of thewell known problems with the housing industry and turnover of key personnel inour mortgage loan department.  Managementprojects that noninterest income will improve during the remainder of 2008 dueto  more aggressive collection of feesand renewed marketing efforts.

 

*Noninterest Expense*

 

Noninterest expenses totaled $1,054,100 for thethree months ended March 31, 2008 as compared to $893,165 for the threemonths ended March 31, 2007 and consisted of employee costs, occupancyexpense and other operating expenses. Salaries and wages increased $64,171 from $488,791 for the three monthsended March 31, 2007 when compared to $552,962 for the three months ended March 31,2008. Occupancy expenses increased $26,881 from $127,497 for the three monthsended March 31, 2007 when compared to $154,378 for the three months ended March 31,2008.  Most of the increase in employeecosts and occupancy expenses can be accounted for by the addition of theMaryville Branch.  The Maryville branchcame on line during the second half of 2007. Data processing fees increased by $26,110 from $55,705 for the threemonths ended March 31, 2007 when compared to $81,815 for the three monthsended March 31, 2008.  The increasein data processing is due to the fact that we outsourced our item processingfunctionality to Jack Henry’s 4Sight division at the end of March 2007 andthe additional cost associated with the Maryville branch addition.  Legal and professional expenses increased$21,200 from $81,525 for the three months ended Marcy 31, 2007 when compared to$102,725 for the three months ended March 31, 2008. Management continuesto strengthen all departments of the Company to meet the new demands ofregulatory requirements and strategic plan development, which carries with itadditional legal and professional expenses. Other noninterest expense increased $23,475 from $120,652 for the threemonths ended March 31, 2007 to $144,127 when compared to the three monthsended March 31, 2008.  Most of theincrease in other noninterest expense can be attributed to the opening of thenew branch.

 

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**Financial Condition**

 

Total assets at March 31, 2008, were$112,788,147, a decrease of $3,746,176 or 3.2% compared to 2007 year-end assetsof $116,534,323.  Deposits decreased to$101,123,191 at March 31, 2008, a decrease of $3,906,148 or 3.7% from$105,029,339 at December 31, 2007. Most of the change in total assets andtotal deposits can be attributed to local competitive pricing of loans anddeposits as well as the overall economic downturn.  Premises and equipment decreased to $5,500,067at March 31, 2008 a decrease of $71,447 or 1.3% from $5,571,514 at December 31,2007, primarily as a result of minimal fixed asset purchases coupled withnormal depreciation charges.

 

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

 

*Loans*

 

Net loans outstanding totaled $97,947,686 at March 31,2008 compared to $91,848,845 at December 31, 2007.  Commercial and real estate loan growthaccounted for almost all of the approximately $6.1 million increase for thefirst quarter of 2008.

 

Management feels the overall quality of loans remains solid.  In the event that a loan is 90 days or morepast due the accrual of income is generally discontinued when the fullcollection of principal or interest is in doubt unless the obligations are bothwell secured and in the process of collection. At March 31, 2008, one loan for $125,667 was 90 days or more pastdue and still accruing interest, while total loans 90 days or more past due andin non-accrual status were $137,259.  At December 31,2007, 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$149,244.

 

*Restricted Equity Investments*

 

Federal Home LoanBank (FHLB) stock at March 31, 2008 had an amortized cost of $258,800 andrepresents no change when compared to an amortized cost of $258,800 at December 31,2007.   As a member of the FHLB, theCompany is required to maintain stock in an amount equal to at least .15% oftotal assets and 4% of outstanding FHLB advances.    Federal Home Loan Bank stock is carried atcost under the available-for-sale category. Federal Home Loan Bank stock is maintained by the Company at par valueof one hundred dollars per share.

 

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*Deposits*

 

Total deposits, which are the principal source offunds for the Company, were $101,123,191 at March 31, 2008, compared to$105,029,339 at December 31, 2007 representing a decrease of 3.7%.  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, moneymarket demand accounts, NOW accounts, certificates of deposit and individualretirement accounts are offered to customers.  The Company established a line of credit with the Federal Home Loan Banksecured by a blanket-pledge of 1-4 family residential mortgage loans. At March 31,2008 the Company had outstanding advances of $1,872,412 at the Federal HomeLoan Bank as compared to $1,926,026 at December 31, 2007.

 

*Capital*

 

Equity capital at March 31,2008 was $8,790,567, an increase of $133,565 from $8,657,002 at December 31,2007, due to a net profit of $133,565 for the first three months of 2008.

 

At March 31,2008, the Bank’s capital ratios were in excess of the regulatory minimums.  Those ratios are as follows:

 
| ** **                       | ** ** | **Required  Minimum  Ratio** | ** ** | **To be  Well  Capitalized** | ** ** | **Bank** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------------|------------|----------|------------|
| Tier  1 Leverage ratio           |       | 4.00                         | %          | 5.00                              | %          | 7.69     | %          |
| Tier  1 risk-based capital ratio |       | 4.00                         | %          | 6.00                              | %          | 8.81     | %          |
| Total  risk-based capital ratio  |       | 8.00                         | %          | 10.00                             | %          | 9.86     | %          |

 

*Liability and Asset Management*

 

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

 

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

 

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

 

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At March 31, 2008, approximately 72% ofthe institution’s gross loans had adjustable rates.  Based on the asset/liability modeling,management believes that these loans reprice at a faster pace than liabilitiesheld at the institution.  Because themajority of the institution’s liabilities are 12 months and under and the gapin repricing is asset sensitive, management believes that a rising rateenvironment would have a positive impact on the Company’s net interestmargin.  Floors in the majority of theinstitution’s adjustable rate assets also mitigate interest rate sensitivity ina decreasing rate environment.

 

*Off-Balance Sheet Arrangements*

 

The Company, at March 31,2008, had outstanding unused lines of credit and standby letters of credit thattotaled approximately $14,971,982.  Thesecommitments have fixed maturity dates and many will mature without being drawnupon, meaning that the total commitment does not necessarily represent thefuture cash requirements.  The Companyhas the ability to liquidate Federal funds sold or, on a short-term basis, topurchase Federal funds from other banks and to borrow from the Federal HomeLoan Bank.  At March 31, 2008, theCompany had established with correspondent banks the ability to purchaseFederal funds if needed.

 

**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

Theinformation set forth on pages 11 through 15 of Item 2, “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS isincorporated herein by reference.

 

**Item 4T.  Controls and Procedures**

 

a)                                      Evaluation of Disclosure Controls andProcedures

 

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

 

b)                                     Changes in Internal Controls andProcedures

 

There were no changes in our internal controls overfinancial reporting during the quarter ended March 31, 2008, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.  LEGALPROCEEDINGS**

 

None.

 

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

 

There have been nomaterial 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 31,2007, as filed with the Securities and Exchange Commission on March 31,2008.

 

**Item 2.  UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

(a)        None.

 

(b)       Not applicable.

 

(c)        No repurchases of Company securities weremade during the quarter ended March 31, 2008.

 

The Company’s ability topay dividends is derived from the income of the Bank.  The Bank’s ability to declare and paydividends is limited by its obligations to maintain sufficient capital and byother general restrictions on its dividends that are applicable to banks thatare regulated by the FDIC and the Department of Financial Institutions.  In addition, the Federal Reserve Board mayimpose restrictions on the Company’s ability to pay dividends on its commonstock.  As a result, the Company cannotassure its shareholders that it will declare or pay dividends on shares of itscommon stock in the future.

 

**Item 3.  DEFAULTS UPONSENIOR SECURITIES**

 

(a)        None.

 

(b)       None.

 

**Item 4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**Item 5.  OTHERINFORMATION**

 

(a)        None.

 

(b)       None.

 

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| **Item  6.** | **EXHIBITS.**      |
|--------------|--------------------|
|         |               |
|         | Index to Exhibits. |

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

 

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

 

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

 

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***SIGNATURES***

 

In accordance with the requirements of the Exchange Act, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 

AMERICAN PATRIOTFINANCIAL GROUP, INC.(Registrant)

 

 
| DATE:  |     May  15, 2008 |   | /s/ Jerry A. Simmerly            |
|--------|---------------------------------------|--------|----------------------------------|
|   |                                  |   | Jerry A. Simmerly                |
|   |                                  |   | Interim Chief Executive  Officer |
|   |                                  |   |                             |
|   |                                  |   |                             |
| DATE:  |     May  15, 2008 |   | /s/ T. Don Waddell               |
|   |                                  |   | T. Don Waddell                   |
|   |                                  |   | Interim Chief Financial  Officer |

 

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