Tableof Contents

 

 

 

**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 June 30, 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 mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.  YES x  NO o

 

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

 

| Large accelerated filer o |   | Accelerated filer o    |
|--------------------------------|--------|-----------------------------|
|                           |   |                        |
| Non-accelerated filer x   |   | Smaller reporting company o |

 

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

 

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

 

 

 

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* *
| **PART I - FINANCIAL INFORMATION** |                                                                                                       |
|-----------------------------------------|------------------------------------------------------------------------------------------------------------|
| ** **                              | ** **                                                                                                 |   |
| **Item 1.**                             | **Financial Statements.**                                                                                  | 3 |
|                                    |                                                                                                       |   |
|                                    | The consolidated financial statements of the  Registrant and its wholly owned subsidiary are as follows:   |   |
|                                    |                                                                                                       |   |
|                                    | Consolidated  Balance Sheets – June 30, 2008 (unaudited) and December 31, 2007.             | 3 |
|                                    |                                                                                                       |   |
|                                    | Consolidated  Statements of Income - For the six months ended June 30, 2008 and 2007  (unaudited).    | 4 |
|                                    |                                                                                                       |   |
|                                    | Consolidated Statements of Income - For the three  months ended June 30, 2008 and 2007 (unaudited).   | 5 |
|                                    |                                                                                                       |   |
|                                    | Consolidated Statements of Cash Flows - For the six  months ended June 30, 2008 and 2007 (unaudited). | 6 |
|                                    |                                                                                                       |   |
|                                    | Notes to Consolidated Financial Statements.                                                                | 8 |
|                                    |                                                                                                       |   |
| **Item 2.**                             | **Management’s  Discussion and Analysis or Plan of Operation.**                                       | 11 |
|                                    |                                                                                                       |   |
| **Item 3.**                             | **Quantitative  and Qualitative Disclosures about Market Risk.**                                           | 17 |
|                                    |                                                                                                       |   |
| **Item 4.**                             | **Controls and  Procedures.**                                                                              | 17 |
|                                    |                                                                                                       |   |
| **PART II  - OTHER INFORMATION**   |                                                                                                       |
|                                    |                                                                                                       |   |
| **Item 1.**                             | **Legal Proceedings.**                                                                                     | 19 |
|                                    |                                                                                                       |   |
| **Item 1A.**                            | **Risk Factors.**                                                                                          | 19 |
|                                    |                                                                                                       |   |
| **Item 2.**                             | **Unregistered  Sales of Equity Securities and Use of Proceeds.**                                          | 19 |
|                                    |                                                                                                       |   |
| **Item 3.**                             | **Defaults Upon  Senior Securities.**                                                                      | 20 |
|                                    |                                                                                                       |   |
| **Item 4.**                             | **Submission of  Matters to a Vote of Security Holders.**                                                  | 20 |
|                                    |                                                                                                       |   |
| **Item 5.**                             | **Other Information.**                                                                                     | 20 |
|                                    |                                                                                                       |   |
| **Item 6.**                             | **Exhibits.**                                                                                              | 21 |

 

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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**                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **June 30, 2008** | ** **  | **December 31, 2007** | ** ** |
| ** **                                                                                                                                                                  | ** ** | **(Unaudited)**             | ** **  | ** **                      | ** ** |
| **ASSETS**                                                                                                                                                                  |       |                        |        |                            |       |
|                                                                                                                                                                        |       |                        |        |                            |       |
| Cash and due  from banks                                                                                                                                                    |       | $                           | 2,771,050   |                            | $          | 4,462,015 |   |
| Federal funds  sold                                                                                                                                                         |       | 3,840,678                   |        | 10,607,427                      |       |
| Cash and cash  equivalents                                                                                                                                                  |       | 6,611,728                   |        | 15,069,442                      |       |
| Federal Home  Loan Bank stock, at cost                                                                                                                                      |       | 258,800                     |        | 258,800                         |       |
| Loans, net of  estimated allowance for loan losses of $982,010 in 2008 and $1,094,083 in  2007                                                                              |       | 99,237,890                  |        | 91,848,845                      |       |
| Premises and  equipment, net                                                                                                                                                |       | 5,469,979                   |        | 5,571,514                       |       |
| Accrued interest  receivable                                                                                                                                                |       | 465,467                     |        | 548,410                         |       |
| Deferred tax  assets, net                                                                                                                                                   |       | 292,791                     |        | 319,297                         |       |
| Foreclosed  assets                                                                                                                                                          |       | 395,871                     |        | 475,366                         |       |
| Cash surrender  value of bank owned life insurance                                                                                                                          |       | 2,299,822                   |        | 2,246,146                       |       |
| Other assets                                                                                                                                                                |       | 192,289                     |        | 196,503                         |       |
| Total Assets                                                                                                                                                                |       | $                           | 115,224,637 |                            | $          | 116,534,323 |   |
|                                                                                                                                                                        |       |                        |        |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                               |       |                        |        |                            |       |
|                                                                                                                                                                        |       |                        |        |                            |       |
| **LIABILITIES**                                                                                                                                                             |       |                        |        |                            |       |
| Deposits:                                                                                                                                                                   |       |                        |        |                            |       |
| Noninterest-bearing  demand                                                                                                                                                 |       | $                           | 8,861,253   |                            | $          | 12,352,954 |   |
| Interest-bearing                                                                                                                                                            |       |                        |        |                            |       |
| Money market,  interest checking and savings                                                                                                                                |       | 27,860,750                  |        | 31,787,128                      |       |
| Time deposits                                                                                                                                                               |       | 64,315,349                  |        | 60,889,257                      |       |
| Total Deposits                                                                                                                                                              |       | 101,037,352                 |        | 105,029,339                     |       |
| Accrued interest  payable                                                                                                                                                   |       | 536,049                     |        | 813,069                         |       |
| Other  liabilities                                                                                                                                                          |       | 308,004                     |        | 108,887                         |       |
| Federal Home  Loan Bank advances                                                                                                                                            |       | 4,220,188                   |        | 1,926,026                       |       |
| Total  Liabilities                                                                                                                                                          |       | 106,101,593                 |        | 107,877,321                     |       |
|                                                                                                                                                                        |       |                        |        |                            |       |
| **Commitments  and contingencies**                                                                                                                                          |       |                        |        |                            |       |
| ** **                                                                                                                                                                  |       |                        |        |                            |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                              |       |                        |        |                            |       |
| Stock:                                                                                                                                                                      |       |                        |        |                            |       |
| Preferred stock,  no par value; authorized 1,000,000 shares; none issued and outstanding                                                                                    |       | —                      |        | —                          |       |
| Common stock,  $0.333 par value; authorized 6,000,000 shares; issued and outstanding 2,389,391  shares at June 30, 2008 and 2,314,391 shares at December 31, 2007 |       | 796,337                     |        | 771,362                         |       |
| Additional  paid-in capital                                                                                                                                                 |       | 7,167,260                   |        | 6,942,260                       |       |
| Retained  earnings                                                                                                                                                          |       | 1,159,447                   |        | 943,380                         |       |
| Total  Stockholders’ Equity                                                                                                                                            |       | 9,123,044                   |        | 8,657,002                       |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                            |       | $                           | 115,224,637 |                            | $          | 116,534,323 |   |

 

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

 

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Six ****Months**** Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                            | ** ** | **June 30, 2008**            | ** ** | **June 30, 2007** | ** ** |
| ** **                                                            | ** ** | ** **                             | ** ** | ** ** | ** ** |
| **Interest  and dividend income:**                                    | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Loans, including  fees                                                |       | $                                      | 3,686,149  |   | $ | 3,584,623 |   |
| Dividends on  Federal Home Loan Bank stock                            |       | 117                                    |       | 8,262 |   |
| Federal funds  sold and other                                         |       | 60,487                                 |       | 280,310 |   |
| Total interest  and dividend income                                   |       | 3,746,753                              |       | 3,873,195 |   |
| ** **                                                            |       |                                   |       |   |   |
| ** **                                                            | ** ** | ** **                             | ** ** | ** ** | ** ** |
| **Interest  expense:**                                                | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Deposits                                                              |       | 1,757,212                              |       | 1,765,080 |   |
| Borrowed funds                                                        |       | 40,518                                 |       | 38,043 |   |
| Total interest  expense                                               |       | 1,797,730                              |       | 1,803,123 |   |
| Net interest  income before provision for  (benefit from) loan losses |       | 1,949,023                              |       | 2,070,072 |   |
| ** **                                                            | ** ** | ** **                             | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**                         |       | (137,599                               | )          | 40,963 |   |
| Net interest  income after provision for (benefit from) loan losses   | ** ** | 2,086,622                              | ** ** | 2,029,109 | ** ** |
|                                                                  |       |                                   |       |   |   |
| **Noninterest  income:**                                              |       |                                   |       |   |   |
| Service charges  on deposit accounts                                  |       | 266,845                                |       | 271,464 |   |
| Fees from  origination of mortgage loans sold                         |       | 6,872                                  |       | 48,105 |   |
| Investment sales  commissions                                         |       | 9,734                                  |       | 16,377 |   |
| Other                                                                 |       | 63,936                                 |       | 10,565 |   |
| Total  noninterest income                                             |       | 347,387                                |       | 346,511 |   |
|                                                                  |       |                                   |       |   |   |
| **Noninterest  expense:**                                             |       |                                   |       |   |   |
| Salaries and  employee benefits                                       |       | 1,040,682                              |       | 1,033,836 |   |
| Occupancy                                                             |       | 305,350                                |       | 262,848 |   |
| Advertising                                                           |       | 43,819                                 |       | 48,807 |   |
| Data processing                                                       |       | 164,342                                |       | 123,610 |   |
| Legal and  professional                                               |       | 237,643                                |       | 211,885 |   |
| Other operating                                                       |       | 324,336                                |       | 298,820 |   |
| Total  noninterest expense                                            |       | 2,116,172                              |       | 1,979,806 |   |
| **Income  before income taxes**                                       |       | 317,837                                |       | 395,814 |   |
|                                                                  |       |                                   |       |   |   |
| Income tax  expense                                                   |       | 101,770                                |       | 153,744 |   |
|                                                                  |       |                                   |       |   |   |
| **Net  income**                                                       |       | $                                      | 216,067    |   | $ | 242,070 |   |
|                                                                  |       |                                   |       |   |   |
| Basic earnings  per common share                                      |       | $                                      | .09        |   | $ | .10 |   |
| Diluted earnings  per common share                                    |       | $                                      | .09        |   | $ | .10 |   |

 

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

 

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                                           | ** ** | **Three****Months****Ended** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                           | ** ** | **June 30, 2008**       | ** ** | **June 30, 2007** | ** ** |
| ** **                                                           | ** ** | ** **                   | ** ** | ** ** | ** ** |
| **Interest and dividend income:**                                    | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Loans, including  fees                                               |       | $                            | 1,755,090  |   | $ | 1,865,500 |   |
| Dividends on  Federal Home Loan Bank stock                           |       | 39                           |       | 4,462 |   |
| Federal funds  sold and other                                        |       | 16,039                       |       | 167,677 |   |
| Total interest  and dividend income                                  |       | 1,771,168                    |       | 2,037,639 |   |
| ** **                                                           |       |                         |       |   |   |
| ** **                                                           | ** ** | ** **                   | ** ** | ** ** | ** ** |
| **Interest  expense:**                                               | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Deposits                                                             |       | 790,785                      |       | 939,492 |   |
| Borrowed funds                                                       |       | 23,173                       |       | 18,282 |   |
| Total interest  expense                                              |       | 813,958                      |       | 957,774 |   |
| Net interest  income before provision for (benefit from) loan losses |       | 957,210                      |       | 1,079,865 |   |
| ** **                                                           | ** ** | ** **                   | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**                        |       | (45,470                      | )          | (63,401 | ) |
| Net interest  income after provision for (benefit from) loan losses  | ** ** | 1,002,680                    | ** ** | 1,143,266 | ** ** |
|                                                                 |       |                         |       |   |   |
| **Noninterest  income:**                                             |       |                         |       |   |   |
| Service charges  on deposit accounts                                 |       | 136,444                      |       | 143,972 |   |
| Fees from  origination of mortgage loans sold                        |       | 550                          |       | 13,781 |   |
| Investment sales  commissions                                        |       | 4,256                        |       | 14,726 |   |
| Other                                                                |       | 28,767                       |       | 4,672 |   |
| Total noninterest  income                                            |       | 170,017                      |       | 177,151 |   |
|                                                                 |       |                         |       |   |   |
| **Noninterest  expense:**                                            |       |                         |       |   |   |
| Salaries and  employee benefits                                      |       | 487,720                      |       | 545,045 |   |
| Occupancy                                                            |       | 150,972                      |       | 135,351 |   |
| Advertising                                                          |       | 25,726                       |       | 29,812 |   |
| Data processing                                                      |       | 82,527                       |       | 67,905 |   |
| Legal and  professional                                              |       | 134,918                      |       | 130,360 |   |
| Other operating                                                      |       | 180,209                      |       | 178,168 |   |
| Total  noninterest expense                                           |       | 1,062,072                    |       | 1,086,641 |   |
| **Income  before income taxes**                                      |       | 110,625                      |       | 233,776 |   |
|                                                                 |       |                         |       |   |   |
| Income tax  expense                                                  |       | 28,123                       |       | 92,797 |   |
|                                                                 |       |                         |       |   |   |
| **Net  income**                                                      |       | $                            | 82,502     |   | $ | 140,979 |   |
|                                                                 |       |                         |       |   |   |
| Basic earnings  per common share                                     |       | $                            | .04        |   | $ | .06 |   |
| Diluted earnings  per common share                                   |       | $                            | .04        |   | $ | .06 |   |

 

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

 

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Six ****Months ****Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                   | ** ** | **June 30, 2008**            | ** ** | **June 30, 2007** | ** ** |
| ** **                                                                                   |       |                                   |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                   |       |                                   |       |   |   |
| Net income                                                                                   |       | $                                      | 216,067    |   | $ | 242,070 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                   |       |   |   |
| Provision for  (benefit from) loan losses                                                    |       | (137,599                               | )          | 40,963 |   |
| Depreciation                                                                                 |       | 159,825                                |       | 121,739 |   |
| Gain on sale of  premises and equipment                                                      |       | (12,300                                | )          | — |   |
| Write-down of  foreclosed assets                                                             |       | —                                 |       | 28,430 |   |
| Realized gain on  sales of foreclosed assets                                                 |       | (14,480                                | )          | (1,900 | ) |
| Deferred income  tax expense                                                                 |       | 26,506                                 |       | 12,239 |   |
| Increase in cash  surrender value of bank owned life insurance                               |       | (53,676                                | )          | — |   |
| Net change in:                                                                               |       |                                   |       |   |   |
| Accrued interest  receivable                                                                 |       | 82,943                                 |       | (264,899 | ) |
| Other assets                                                                                 |       | 4,214                                  |       | (25,342 | ) |
| Other  liabilities                                                                           |       | 199,117                                |       | 22,764 |   |
| Accrued interest  payable                                                                    |       | (277,020                               | )          | (204,751 | ) |
| Net cash  provided by (used in) operating activities                                         |       | 193,597                                |       | (28,687 | ) |
|                                                                                         |       |                                   |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                   |       |                                   |       |   |   |
| Purchase of bank  owned life insurance                                                       |       | —                                 |       | (1,600,000 | ) |
| Proceeds from  sale of foreclosed assets                                                     |       | 133,031                                |       | 34,900 |   |
| Loan  originations and principal collections, net                                            |       | (7,290,502                             | )          | (5,671,246 | ) |
| Additions to  premises and equipment                                                         |       | (58,290                                | )          | (1,822,811 | ) |
| Proceeds from  sale of premises and equipment                                                |       | 12,300                                 |       | — |   |
| Net cash used in  investing activities                                                       |       | (7,203,461                             | )          | (9,059,157 | ) |
|                                                                                         |       |                                   |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                   |       |                                   |       |   |   |
| Net change in  deposits (non-time deposits)                                                  |       | (7,418,079                             | )          | 2,777,372 |   |
| Net change in  time deposits                                                                 |       | 3,426,092                              |       | 6,926,417 |   |
| Issuance of  stock                                                                           |       | 249,975                                |       | — |   |
| Repayment of securitized  borrowings                                                         |       | —                                 |       | (3,099,091 | ) |
| Federal Home  Loan Bank advances                                                             |       | 3,000,000                              |       | — |   |
| Federal Home  Loan Bank repayments                                                           |       | (705,838                               | )          | (321,451 | ) |
| Net cash (used  in) provided by financing activities                                         |       | (1,447,850                             | )          | 6,283,247 |   |
|                                                                                         |       |                                   |       |   |   |
| Net change in  cash and cash equivalents                                                     |       | (8,457,714                             | )          | (2,804,597 | ) |
|                                                                                         |       |                                   |       |   |   |
| Cash and cash  equivalents at beginning of period                                            |       | 15,069,442                             |       | 15,488,412 |   |
|                                                                                         |       |                                   |       |   |   |
| Cash and cash  equivalents at end of period                                                  |       | $                                      | 6,611,728  |   | $ | 12,683,815 |   |

 

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

 

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| ** **                                                                       | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                       | ** ** | **June 30, 2008**    | ** ** | **June 30, 2007** | ** ** |
| ** **                                                                       |       |                           |       |   |   |
| **SUPPLEMENTARY  CASH FLOW INFORMATION:**                                        |       |                           |       |   |   |
| Interest paid on  deposits and borrowed funds                                    |       | $                              | 2,074,750  |   | $ | 2,007,873 |   |
| Income taxes  paid                                                               |       | $                              | —     |   | $ | 182,000 |   |
|                                                                             |       |                           |       |   |   |
| **SUPPLEMENTAL  SCHEDULE OF NON-CASH ACTIVITIES:**                               |       |                           |       |   |   |
| Foreclosed/repossessed  assets sold during the period and financed through loans |       | $                              | —     |   | $ | 20,000 |   |
| Loans moved to  foreclosed/repossessed assets                                    |       | $                              | 39,056     |   | $ | 61,429 |   |

 

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

 

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

**Greeneville, Tennessee**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

*Nature of Business*:

 

AmericanPatriot Financial Group, Inc. (the “Company”) is a bank holding companythat owns all of the outstanding common stock of American Patriot Bank (the “Bank”).  The Bank provides a variety of financial servicesthrough its locations in Greeneville and Maryville, Tennessee and surroundingareas.  The Bank’s primary depositproducts are demand deposits, savings accounts, and certificates ofdeposit.  Its primary lending productsare commercial loans, real estate loans, and installment loans.

 

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

 

*Basis of Presentation:*

 

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

 

TheaccompanyingunauditedconsolidatedfinancialstatementshavebeenpreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesforinterimfinancialinformationandinaccordancewiththeinstructionstoForm10-QandArticle10ofRegulation  S-XaspromulgatedbytheSecuritiesandExchangeCommission(“SEC”).  Accordingly,theydonotincludealltheinformationandfootnotesrequiredbyaccountingprinciplesgenerallyacceptedintheUnitedStatesforcompletefinancialstatements.  Intheopinionofmanagement,alladjustments(consistingofnormalrecurringaccruals)considerednecessaryforafairpresentationofthefinancialpositionandresultsofoperationsfortheperiodspresentedhavebeenincluded.  OperatingresultsforthethreeandsixmonthsendedJune30,2008arenotnecessarilyindicativeoftheresultsthatmaybeexpectedfortheyearendingDecember31,2008.  Forfurtherinformation,refertotheconsolidatedfinancialstatementsandnotestheretoincludedintheCompany’sAnnualReportonForm10-KfortheyearendedDecember31,2007.  Certainamountsfrompriorperiodfinancialstatementshavebeenreclassifiedtoconformtocurrentperiod’spresentation.

 

*Use of Estimates:*

 

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

 

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

 

No options were granted during the period ended June 30,2008; therefore, no compensation cost is recognized in the consolidatedstatement of income for the period ended June 30, 2008.  The aggregate intrinsic value of options was$124,760 at June 30, 2008.  Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying option and the market price of the Company’s commonstock, based on the most recent trade of the Company’s common stock of whichthe Company is aware at $6.25 per common share, for the 53,000 options thatwere in-the-money at June 30, 2008.

 

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

 

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

 

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

 
| ** **                                                        | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                                        | ** ** | **Income**                                          | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                                     | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                                |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                                                |       |   |   |   |   |   |   |
| Income available  to common stockholders                          |       | $                                                   | 82,502     |   | 2,340,353 |   | $ | 140,979 |   | 2,310,771 |   |
|                                                              |       |                                                |       |   |   |   |   |   |   |
| Effect of  dilutive securities                                    |       |                                                |       |   |   |   |   |   |   |
| Stock options  outstanding                                        |       | —                                              |       | 13,333 |   | — |   | 121,008 |   |
|                                                              |       |                                                |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                                |       |   |   |   |   |   |   |
| Income available  to common shareholders plus assumed conversions |       | $                                                   | 82,502     |   | 2,353,686 |   | $ | 140,979 |   | 2,431,779 |   |

 

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| ** **                                                        | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                                                        | ** ** | **Income**                                        | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                                   | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                              |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                                              |       |   |   |   |   |   |   |
| Income available  to common stockholders                          |       | $                                                 | 216,067    |   | 2,340,353 |   | $ | 242,070 |   | 2,310,771 |   |
|                                                              |       |                                              |       |   |   |   |   |   |   |
| Effect of  dilutive securities                                    |       |                                              |       |   |   |   |   |   |   |
| Stock options  outstanding                                        |       | —                                            |       | 15,418 |   | — |   | 120,319 |   |
|                                                              |       |                                              |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                              |       |   |   |   |   |   |   |
| Income available  to common shareholders plus assumed conversions |       | $                                                 | 216,067    |   | 2,355,771 |   | $ | 242,070 |   | 2,431,090 |   |

 

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

 

**Impactof Inflation**

 

The consolidatedfinancial statements and related financial data presented herein have beenprepared in accordance with accounting principles generally accepted in theUnited States and practices within the banking industry that require themeasurement of financial position and operating results in terms of historicaldollars without considering the changes in the relative purchasing power ofmoney over time due to inflation.  Unlikemost industrial companies, virtually all the assets and liabilities of afinancial institution are monetary in nature. As a result, interest rates have a more significant impact on a financialinstitution’s performance than the effects of general levels of inflation.

 

**CriticalAccounting Estimates**

 

The Company follows generally accepted accounting principles that arerecognized in the United States, along with general practices within thebanking industry.  In connection with theapplication of those principles and practices, we have made judgments andestimates which, in the case of our allowance for loan and lease losses (ALLL),are material to the determination of our financial position and results ofoperation.  Other estimates relate to thevaluation of assets acquired in connection with foreclosures or in satisfactionof loans, and realization of deferred tax assets.

 

**RecentAccounting Pronouncements**

 

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

 

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

 

In September 2006, the Financial Accounting Standards Boardratified a consensus opinion reached by the Emerging Issues Task Force on Issue06-04, *Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements*, (“EITF 06-4”) which requires employers that enter intoendorsement split-dollar life insurance arrangements that provide an employeewith a post-retirement benefit to recognize a liability for the future benefitspromised based on the substantive agreement made with the employer.  Whether the accrual is based on a deathbenefit or on the future cost of maintaining the insurance would depend on whatthe employer has effectively agreed to provide during the employee’sretirement.  The purchase of anendorsement-type life insurance policy does not qualify as a settlement of theliability.  The consensus in EITF 06-4 iseffective 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.  Thisstatement 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 adoptthis standard and implementation of SFAS 159 did not have a material impact onits financial position or results of operations.

 

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

 

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

 

**Forward-LookingStatements**

 

Management’sdiscussion of the Company and management’s analysis of the Company’s operationsand prospects, and other matters, may include forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995 and otherprovisions of federal and state securities laws.  Although the Company believes that theassumptions underlying such forward-looking statements contained in this Reportare reasonable, any of the assumptions could be inaccurate and, accordingly,there can be no assurance that the forward-looking statements included hereinwill prove to be accurate.  The use ofsuch words as “expect,” “anticipate,” “forecast,” and comparable terms shouldbe 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 todiffer from the results anticipated, but not guaranteed, in this Report,include (without limitation) economic and social conditions, competition forloans, mortgages, and other financial services and products, changes ininterest rates, unforeseen changes in liquidity, results of operations, andfinancial conditions affecting the Company’s customers, and other risks thatcannot be accurately quantified or completely identified.  Many factors affecting the Company’sfinancial condition and profitability, including changes in economicconditions, the volatility of interest rates, political events and competitionfrom other providers of financial services simply cannot be predicted. Becausethese factors are unpredictable and beyond the Company’s control, earnings mayfluctuate from period to period.  Thepurpose of this type of information is to provide readers with informationrelevant to understanding and assessing the financial condition and results ofoperations of the Company, and not to predict the future or to guaranteeresults.  The Company is unable topredict the types of circumstances, conditions and factors that can causeanticipated results to change.  TheCompany undertakes no obligation to publish revised forward-looking statementsto reflect the occurrence of changed or unanticipated events, circumstances orresults.

 

**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 shareexchange.  The Bank is aTennessee-chartered, FDIC-insured, non-Member commercial bank offering a widerange of banking services, including checking, savings, and money marketdeposit accounts, certificates of deposit and loans for consumers, commercialand real estate purposes, and is the principal business of the Company. Themain office of the Company is located at 3095 East Andrew Johnson Highway,Greeneville, Greene County, Tennessee, which is also the main office of theBank.  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 theBank are located at 506 Asheville Highway and 208 West Summer Street, Greeneville,Greene County, Tennessee.  During 2007the Bank purchased property in Maryville, Tennessee at 710 South FoothillsPlaza Drive.  This location is a 1.17acre lot, on which there is a 3,272 square foot fully operational brick bankbuilding with drive through facilities and was opened for business on July 9,2007.  These locations are centrallylocated and in high traffic/exposure areas. Automatic teller machines and overnight “deposit drops” are positionedto serve the Bank’s clients.  Additionalbranches may be established as market opportunities surface.

 

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**Liquidity**

 

AtJune 30, 2008, the Company had liquid assets of approximately $6.6 millionin the form of cash and federal funds sold compared to approximately $15.1million on December 31, 2007. Management believes that the liquid assets are adequate at June 30,2008. Additional liquidity should be provided by the growth in deposit accountsand loan repayments.  The Company alsohas the ability to purchase federal funds and is a member of the Federal HomeLoan Bank of Cincinnati that will provide a credit line if necessary.  Management is not aware of any trends, eventsor uncertainties that are reasonably likely to have a material impact on theCompany’s short term or long term liquidity.

 

**Results of Operations**

 

TheCompany had net income of $82,502 or $.04 per share for the quarter ended June 30,2008 compared to net income of $140,979 or $.06 per share for the quarter endedJune 30, 2007.  Net income for thesix months ended June 30, 2008 was $216,067 as compared to a net income of$242,070 for the same period in 2007. During the quarter ended June 30,2008, the Company recorded a benefit from loan losses of $(45,470), whilerecording a benefit from loan losses of $(63,401) for the same period in 2007.

 

*Net Interest Income/Margin*

 

Netinterest income represents the amount by which interest earned on variousassets exceeds interest paid on deposits and other interest-bearing liabilitiesand is the most significant component of the Company’s earnings.  Interest income for the quarter ended June 30,2008 was $1,771,168 compared to $2,037,639 for the same period in 2007, andtotal interest expense was $813,958 in 2008 compared to $957,774 in 2007 forthe same period.  Interest income for thesix months ended June 30, 2008 was $3,746,753, compared to $3,873,195 forthe same period in 2007, and total interest expense was $1,797,730 in 2008compared to $1,803,123 in 2007 for the same period.  The Company pursues local depositsaggressively with attractive interest rates, which has contributed tocompression of net interest margin. Also, the Federal Reserve Bank’s interest rate cuts over the pastseveral months have contributed to this compression as our loan yields haverepriced faster than our deposit yields. Based on the Company’s mix of interestearning assets and interest bearing liabilities, management believes that netinterest margin should begin to stabilize for the remainder of the year.  Many economists now believe we are at or nearthe end of interest rate cuts with likely increases later in 2008. If interestrates remain stable or begin to increase, net interest margin could increase.

 

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*Provision for / Benefit from Loan Losses*

 

The provision for (benefit from) loan losses represents a charge (orrecovery) to operations necessary to establish an allowance for possible loanlosses, which in management’s evaluation, is adequate to provide coverage forestimated losses on outstanding loans and to provide for uncertainties in theeconomy. The benefit from loan losses for the three month and six month periodended June 30, 2008 was $(45,470) and $(137,599), respectively, ascompared to a benefit of $(63,401) for the three month period and a provisionof $40,963 for the six month period ended June 30, 2007.  Forthe three and six months ended June 30, 2008, the Bank was able to recorda benefit from loan loss provision due to excellent collection efforts on bothconsumer and commercial loans. During the three and six months ended June 30,2008, loan charge-offs were $21,075 and $54,361 respectively.  The recoveries for the three and six monthperiods ended June 30, 2008 were $64,250 and $79,887, respectively.  The allowance for loan losses was $982,010 atJune 30, 2008 as compared to $1,094,083 at December 31, 2007, adecrease of 10.2%.  The allowance was..98% of loans at June 30, 2008. Management believes the allowance for loan losses at June 30, 2008to be adequate and will increase during the year to match normal loan growth.

 

*Provision (Benefit) for/from Income Taxes*

 

TheCompany’s provision for income tax expense for the three and six months ended June 30,2008 was $28,123 and $101,770, respectively when compared to $92,797 and$153,744 for the same periods in 2007. Management believes the provision for income taxes for the period ended June 30,2008 to be adequate.

 

*Noninterest Income*

 

The Company’s noninterest income consists of service charges on depositaccounts and other fees and commissions. Total noninterest income for three and six months ended June 30,2008 was $170,017 and $347,387, respectively when compared to $177,151 and$346,511 for the same periods in 2007. Service charges on deposit accounts decreased $7,528 and $4,619 for thethree and six months ended June 30, 2008 respectively, when compared tothe same periods in 2007. Fees from origination of mortgage loans solddecreased for the three and six months ended June 30, 2008 by $13,231 and$41,233 when compared to the same period in 2007. This decrease was primarily aresult of the general downturn with the housing industry and turnover of keypersonnel in our mortgage loan department. Investment sale commissions decreased $10,470 and $6,643 for the threeand six months ended June 30, 2008, as compared to the same periods in2007.  The reason for decreases in theinvestment sale commissions is the discontinuance of that service by the bankdue to the high overhead expense and lack of sufficient revenues.  The above decreases in noninterest incomewere offset by increased earnings on the cash surrender value of bank ownedlife insurance (BOLI) purchased in 2007. The cash surrender value increases for the three and six month periodsended June 30, 2008 were $26,838 and $53,676 respectively. Managementprojects that other fees and commissions and service charges will increase in2008.

 

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*Noninterest Expense*

 

Noninterestexpenses totaled $1,062,072 and $2,116,172 for the three and six months ended June 30,2008, as compared to $1,086,641 and $1,979,806 for the same periods in2007.   Salaries and benefits decreased $57,325 for the three monthsended June 30, 2008, while the six months ended June 30, 2008increased $6,846, as compared to the same periods in 2007.  The decreasein salaries and benefits for the three month period ended June 30, 2008 isdue to reductions in two senior level management positions. Legal and professionalfees increased $4,558 and $25,758 for the three and six months ended June 30,2008, as compared to the same periods in 2007.  Management continues toincur additional expenses to meet the demands of regulatory requirements,especially relating to compliance with Section 404 of the Sarbanes-OxleyAct of 2002, in addition to strategic plan development.  The Company hasalso incurred significant noninterest expense increases in the areas ofoccupancy, data processing and other operating expenses primarily as a resultof the addition of the Maryville, Tennessee branch which occurred in mid2007.  Combined, operating expenses relating to occupancy, advertising,data processing and all other expenses increased $28,198 and $103,762 for thethree and six months ended June 30, 2008, when compared to the sameperiods in 2007.  We expect future quarterly periods to be more comparablefor these categories of expenses.

 

**Financial Condition**

 

Total assets at June 30,2008, were $115,224,637, a decrease of $1,309,686 or 1.1% compared to 2007year-end assets of $116,534,323. Deposits decreased to $101,037,352 at June 30, 2008, a decrease of$3,991,987 or 3.8% from $105,029,339 at December 31, 2007.  The decrease in deposits was mainly due tofierce competition in our market and the overall economic downturn.

 

TheCompany places an emphasis on an integrated approach to its balance sheetmanagement. Significant balance sheet components of loans and sources of fundsare managed in an integrated manner with the management of interest rate risk,liquidity, and capital.  These componentsare discussed below.

 

*Loans*

 

Net loans outstandingtotaled $99,237,890 at June 30, 2008 compared to $91,848,845 at December 31,2007.  Commercial and real estate loangrowth accounted for almost all of the approximately $7.4 million increase forthe first two quarters of 2008. Management feels the overall quality of loansremains solid.  In the event that a loanis 90 days or more past due the accrual of income is generally discontinuedwhen the full collection of principal or interest is in doubt unless theobligations are both well secured and in the process of collection.  At June 30, 2008, total loans 90 days ormore past due and still accruing interest were $21,813, while total loans in non-accrualstatus were $499,387.  At December 31,2007, total loans 90 days or more past due and still accruing interest were $0,while total loans in non-accrual status were $149,244.

 

*Restricted Equity Investments*

 

Federal Home LoanBank (FHLB) stock at June 30, 2008 had an amortized cost and market valueof $258,800 as compared to an amortized cost and a market value of $258,800 at December 31,2007.   As a member of the FHLB, theCompany is required to maintain stock in an amount equal to .15% of total assets.  Federal Home Loan Bank stock is carried atcost.  Federal Home Loan Bank stock ismaintained by the Company at par value of one hundred dollars per share.

 

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*Deposits*

 

Totaldeposits, which are the principal source of funds for the Company, were$101,037,352 at June 30, 2008, compared to $105,029,339 at December 31,2007, representing a decrease of 3.8%. The Company has targeted local consumers, professional and commercialbusinesses as its central clientele, therefore, deposit instruments in the formof demand deposits, savings accounts, money market demand accounts, NOWaccounts, certificates of deposit and individual retirement accounts areoffered to customers.   The Companyestablished a line of credit with the Federal Home Loan Bank secured by ablanket-pledge of 1-4 family residential mortgage loans.   At June 30, 2008 the Company hadoutstanding advances of $4,220,187 at the Federal Home Loan Bank.   As mentioned previously, competition fordeposit accounts has been fierce in our local economy and the overall economicdownturn has also contributed to this overall decrease. These two factors havealso contributed to the shift from DDA, Money Market and Savings accounts intoCD’s and caused us to rely more heavily on FHLB advances.  We anticipate the trends seen over the firsttwo quarters of 2008 to continue through the remainder of the year.

 

*Capital*

 

Equitycapital at June 30, 2008 was $9,123,044, an increase of $466,042 from$8,657,002 at December 31, 2007, due to a net profit of $216,067 for thefirst six months of 2008 and the exercise of 75,000 shares of common stockoptions for $249,975 by former Chief Executor Officer, J. Robert Grubbs.

 

At June 30, 2008,both the Company’s and Bank’s capital ratios were in excess of the regulatoryminimums.  Those ratios are as follows:

 
| ** **                       | ** ** | **Required  Minimum  Ratio** | ** ** | **To be  Well  Capitalized** | ** ** | **Bank** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------------|------------|----------|------------|
| Tier 1 Leverage  ratio           |       | 4.00                         | %          | 5.00                              | %          | 7.96     | %          |
| Tier 1  risk-based capital ratio |       | 4.00                         | %          | 6.00                              | %          | 9.06     | %          |
| Total risk-based  capital ratio  |       | 8.00                         | %          | 10.00                             | %          | 10.04    | %          |

 

*Liabilityand Asset Management*

 

The Company’s Asset/Liability Committee (“ALCO”) actively measures andmanages interest rate risk using a process developed by the Company.  The ALCO is also responsible for implementingthe Company’s asset/liability management policies, overseeing the formulationand implementation of strategies to improve balance sheet positioning andearnings, and reviewing the Company’s interest rate sensitivity 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.

 

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Like any forecasting technique, interest rate simulation modeling isbased on a large number of assumptions. In this case, the assumptions relate primarily to loan and depositgrowth, asset and liability prepayments, interest rates and balance sheetmanagement strategies.  Managementbelieves that both individually and in the aggregate the assumptions arereasonable.  Nevertheless, the simulationmodeling process produces only a sophisticated estimate, not a precisecalculation of exposure.

 

At June 30, 2008, approximately 70% ofthe Company’s gross loans had adjustable rates. Based on the asset/liability modeling, management believes that theseloans reprice at a faster pace than liabilities held by the Company.  Because the majority of the Company’sliabilities are 12 months and under and the gap in repricing is asset sensitive,management believes that a rising rate environment would have a positive impacton the Company’s net interest margin. Floors in the majority of the Company’s adjustable rate assets alsomitigate interest rate sensitivity in a decreasing rate environment.  However, there is increasing pressure toadjust the floor rates downward in the adjustable rate portfolio as customersbecome more cost conscious and competition becomes more aggressive.

 

*Off-BalanceSheet Arrangements*

 

The Company, at June 30,2008, had outstanding unused lines of credit and standby letters of credit thattotaled approximately $12,952,239.  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 Home LoanBank.  At June 30, 2008, the Companyhad established with correspondent banks the ability to purchase Federal fundsif needed.

 

**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

 

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

 

**Item4.  Controls and Procedures**

 

a) Evaluation of Disclosure Controls and Procedures

 

TheCompany maintains disclosure controls and procedures, as defined in Rule 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “ExchangeAct”), that are designed to ensure that information required to be disclosed byit 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’srules and forms and that such information is accumulated and communicatedto the Company’s management, including its Chief Executive Officer and ChiefFinancial Officer.  The Company carriedout an evaluation, under the supervision and with the participation of itsmanagement, including its Chief Executive Officer and Chief Financial Officer,of the effectiveness 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.

 

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b) Changes in Internal Controls and Procedures

 

Therewere no changes in our internal controls over financial reporting during thequarter ended June 30, 2008, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.  LEGALPROCEEDINGS**

 

None.

 

**Item 1A.****    RISKFACTORS**

 

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

 

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

 

(a)   75,000 shares of the Company’s common stock wereissued during the quarter ended June 30, 2008 as a result of the exerciseof the following stock options:

 
| **Date Exercised** | ** ** | **Number of Shares** | ** ** | **Exercise Price** | ** ** |
|-------------------------|------------|--------------------------------|------------|-------------------------|------------|
|                    |       |                           |       |                    |       |
| April 29, 2008     |       | 75,000                         |       | $                       | 3.333      |   |
|                         |            |                                |            |                         |            |  |

 

The aggregate proceeds ofthe shares sold were $249,975.

 

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

 

The Company believes that an exemption from registration of theseshares was available to the Company in that the issuance thereof did not constitutea public offering of securities within the meaning of the Securities Act of1933, as amended, pursuant to Section 4(2) of the Securities Act.

 

The securities sold arenot convertible or exchangeable into any other equity security.

 

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

 

(b)         Not applicable.

 

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

 

The Company’s ability topay dividends is derived from the income of the Bank.  The Bank’s ability to declare and paydividends is limited by its obligations to maintain sufficient capital and byother general restrictions on its dividends that are applicable to banks thatare regulated by the FDIC and the Tennessee Department of FinancialInstitutions.  In addition, the FederalReserve Board may impose restrictions on the Company’s ability to pay dividendson its common stock.  As a result, theCompany cannot assure its shareholders that it will declare or pay dividends onshares of its common stock in the future and the Company has never paiddividends in the past.

 

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**Item 3.  DEFAULTS UPONSENIOR SECURITIES**

 

(a)             None.

 

(b)            None.

 

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

 

(a)             The annual meeting of the Company’s shareholders washeld June 24, 2008.

 

(b)            The following members of the Company’s board ofdirectors were each re-elected as Class I directors to serve for anadditional three-year term or until their respective successors are dulyelected and qualified:

 

Jerry A. Simmerly

Leonard B. Lawson

 

The term of officefor the following members of the board of directors continued after themeeting:  Wendy C. Warner (Class II);William J. Smead and Roger A. Woolsey (Class III).

 

(c)             (1) The following directors were elected by thefollowing tabulation:

 
| ** **         | ** ** | **Number of** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **    | ** ** |
|--------------------|------------|--------------------|------------|------------|------------|-------------|------------|-------------|------------|---------------|------------|
| ** **         | ** ** | **Shares**         | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Broker**    | ** ** |
| **Name**           | ** ** | **Voting**         | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
|               |       |               |       |       |       |        |       |        |       |          |       |
| Jerry A.  Simmerly |       | 1,279,075          |       | 1,270,734  |       | 500         |       | 7,841       |       | 0             |       |
| Leonard B.  Lawson |       | 1,279,075          |       | 1,232,284  |       | 38,950      |       | 7,841       |       | 0             |       |

 

(2)      The ratification of the appointment of Hazlett, Lewis &Bieter, PLLC as American Patriot Financial Group’s independent accountants andauditors for fiscal 2008.

 
| **Number of**     | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Broker**    | ** ** |
|------------------------|------------|------------|------------|-------------|------------|-------------|------------|---------------|------------|
| **Shares Voting** | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** | ** ** |
|                   |       |       |       |        |       |        |       |          |       |
| 1,279,075              |       | 1,255,808  |       | 2,301       |       | 20,966      |       | 0             |       |

 

(d)   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., as amended (restated for SEC electronic  filing purposes only).                                                              |
| 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                                                                                                              |
| 10.3***              |       | Employment Terms  Agreement between American Patriot Bank, American Patriot Financial  Group, Inc. and Jerry A. Simmerly dated June 1, 2007 and amended  July 2, 2007. |
| 10.4***              |       | Change of  Control Agreement between American Patriot Bank and Jerry A. Simmerly dated  June 1, 2007.                                                                            |
| 31.1                 |       | Certification  pursuant to Rule 13a-14a/15d-14(a)                                                                                                                                |
| 31.2                 |       | Certification  pursuant to Rule 13a-14a/15d-14(a)                                                                                                                                |
| 32.1                 |       | Certification  pursuant to Rule 18 USC Section 1350-Sarbanes-Oxley Act of 2002                                                                                              |
| 32.2                 |       | Certification  pursuant to Rule 18 USC Section 1350-Sarbanes-Oxley Act of 2002                                                                                              |

 

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

 

**Previously filedas an exhibit to American Patriot Bank’s (formerly known as Bank ofGreeneville) Registration Statement on Form 10-SB, as filed with theFederal Deposit Insurance Corporation on April 27, 2002, and incorporatedherein by reference.

 

***Previouslyfiled as an exhibit to a Form 10-Q filed by the Company with theSecurities and Exchange Commission on August 14, 2007, and incorporatedherein by reference.

 

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***SIGNATURES***

 

In accordance with the requirements of the ExchangeAct, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 

AMERICAN PATRIOTFINANCIAL GROUP, INC.(Registrant)

 

 
| DATE:  |   | August 14, 2008 |   | /s/ Jerry A. Simmerly   |
|--------|--------|----------------------|--------|-------------------------|
|   |   |                 |   | Jerry A. Simmerly       |
|   |   |                 |   | Chief Executive Officer |
|   |   |                 |   |                    |
|   |   |                 |   |                    |
| DATE:  |   | August 14, 2008 |   | /s/ T. Don Waddell      |
|   |   |                 |   | T. Don Waddell          |
|   |   |                 |   | Chief Financial Officer |

 

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