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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

(Mark One)ý

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2008ORo

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the transition period
from                                to        
                        .

Commission File Number 000-50771

American Patriot Financial Group, Inc.(Exact name of registrant as specified in Charter)

Tennessee

62-1852691(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer
Identification No.)3095 East Andrew Johnson Highway,
Greeneville, Tennessee(Address of principal executive office)

37745(Zip Code)


Registrant's
telephone number, including area code(423) 636-1555

Securities
registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.333 par value per share

Indicate by check mark if the registrant is a well-known, seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o    No ý

Indicate by check mark whether registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days: Yes ý    No o.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company ý


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No ý.

The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of the last business day of the registrant's
most recently completed second fiscal quarter ended June 30, 2008, was $13,738,998, based upon the average sale price on that date.

As
of April 10, 2009, there were 2,389,391shares of the registrant's common stock outstanding.

DOCUMENTS
INCORPORATED BY REFERENCE

Portions
of the registrant's Definitive Proxy Statement involving the election of directors at the annual meeting of shareholders to be held June 26, 2009 are incorporated by
reference into Part III of this Annual Report on Form 10-K.



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TABLE OF CONTENTS



PART IITEM 1.

BUSINESS


1ITEM 1A.

RISK FACTORS


14ITEM 1B.

UNRESOLVED STAFF COMMENTS


14ITEM 2.

PROPERTIES


14ITEM 3.

LEGAL PROCEEDINGS


14ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


14PART IIITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES


15ITEM 6.

SELECTED FINANCIAL DATA


17ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION


17ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


33ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


34ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


34ITEM 9A(T).

CONTROLS AND PROCEDURES


34ITEM 9B.

OTHER INFORMATION


34PART IIIITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE


35ITEM 11.

EXECUTIVE COMPENSATION


35ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS


35ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE


35ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES


35PART IVITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES


36


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PART I

ITEM 1.    BUSINESS

General

American
Patriot Financial Group, Inc. (the "Corporation," "we" or "us") is a one-bank holding company formed as a Tennessee corporation to own the shares of American
Patriot Bank (the "Bank"). The Corporation was incorporated on October 10, 2003, for the purpose of acquiring 100% of the shares of the Bank by means of a share exchange (the "Share Exchange"),
and becoming a registered bank holding company under the Federal Reserve Act. The Share Exchange was completed on January 23, 2004. The activities of the Corporation are subject to the
supervision of the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). The offices of the Corporation are the same as the principal office of the Bank. The Bank is the only
subsidiary of the Corporation.

American
Patriot Bank commenced operations as a state chartered bank on July 9, 2001. The Bank has total assets of approximately $120 million at December 31, 2008.
The Bank's deposit accounts are insured by the Federal Deposit Insurance Corporation ("FDIC"), up to the maximum applicable limits thereof. The Bank is not a member of the Federal Reserve System.

The
Bank's customer base consists primarily of small to medium-sized business retailers, manufacturers, distributors, contractors, professionals, service businesses and local residents.
The Bank offers a full range of competitive retail and commercial banking services. The deposit services offered include various types of checking accounts, savings accounts, money market investment
accounts, certificates of deposits, and retirement accounts. Lending services include consumer installment loans, various types of mortgage loans, personal lines of credit, home equity loans, credit
cards, real estate construction loans, commercial loans to small and medium size businesses and professionals, and letters of credit. The Bank also offers safe deposit boxes of various sizes. The Bank
issues VISA and MasterCard credit cards and is a merchant depository for cardholder drafts under both types of credit cards. The Bank offers its customers drive-through banking services at its offices
and automated teller machines ("ATMs"). The Bank has trust powers but does not have a trust department.

The
Bank is subject to the regulatory authority of the Department of Financial Institutions of the State of Tennessee ("TDFI") and the FDIC.

The
Corporation's and the Bank's principal executive offices are both located at 3095 East Andrew Johnson Highway, Greeneville, Tennessee 37745, and its telephone number is
(423) 636-1555.

Market
Area and Competition

All
phases of the Bank's business are highly competitive. The Bank is subject to intense competition from various financial institutions and other companies or firms that offer financial
services. The Bank competes for deposits with other commercial banks, savings and loan associations, credit unions and issuers of commercial paper and other securities, such as money-market and mutual
funds. In making loans, the Bank is expected to compete with other commercial banks, savings and loan associations, consumer finance companies, credit unions, leasing companies, and other lenders.

The
Bank's primary market area is Greene County and Blount County, Tennessee. In Greene County as of June 30, 2008, there were 7 banks and 1 savings and loan institution, with at
least 26 offices actively engaged in banking activities, including 3 major state-wide financial institutions, with a total of $1.3 billion in deposits. In Blount County as of
June 30, 2008, there were 13 banks and 1 savings and loan institution with at least 45 offices actively engaged in banking activities, including 4 major state-wide financial
institutions, with a total of $1.6 billion in deposits. In addition, there are numerous credit unions, finance companies, and other financial services providers.

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Employees

At
December 31, 2008, the Bank employed 41 persons on a full-time basis, and 7 persons on a part-time basis. The Bank's employees are not represented by
any union or other collective bargaining agreement, and the Bank believes its employee relations are satisfactory.

Supervision
and Regulation



The Corporation is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"), and is registered
with the Federal Reserve Board. Its banking subsidiaries are subject to restrictions under federal law which limit the transfer of funds by the subsidiary banks to their respective holding companies
and nonbanking subsidiaries, whether in the form of loans, extensions of credit, investments, or asset purchases. Such transfers by any subsidiary bank to its holding company or any
non-banking subsidiary are limited in amount to 10% of the subsidiary bank's capital and surplus and, with respect to the Corporation and all such nonbanking subsidiaries, to an aggregate
of 20% of such bank's capital and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts. The Holding Company Act also prohibits, subject to certain
exceptions, a bank holding company from engaging in or acquiring direct or indirect control of more than 5% of the voting stock of any company engaged in non banking activities. An exception to this
prohibition is for activities expressly found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto or financial in
nature.

As
a bank holding company, the Corporation is required to file with the Federal Reserve Board semi-annual reports and such additional information as the Federal Reserve Board
may require. The Federal Reserve Board also makes examinations of the Corporation.

According
to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each
such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Furthermore, in the event of a loss suffered or anticipated by the
FDICeither as a result of default of a banking or thrift subsidiary of the Corporation or related to FDIC assistance provided to a subsidiary in danger of defaultthe other
banking subsidiaries of the Corporation may be assessed for the FDIC's loss, subject to certain exceptions.

Various
federal and state statutory provisions limit the amount of dividends the subsidiary banks can pay to their holding companies without regulatory approval. The payment of dividends
by any bank also may be affected by other factors, such as the maintenance of adequate capital for such subsidiary bank. In addition to the foregoing restrictions, the Federal Reserve Board has the
power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends
by bank holding companies, which expresses the Federal Reserve Board's view that a bank holding company experiencing earnings weaknesses should not pay cash dividends that exceed its net income or
that could only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. Furthermore, the TDFI also has authority to prohibit the payment of dividends by a
Tennessee bank when it determines such payment to be an unsafe and unsound banking practice.

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A
bank holding company and its subsidiaries are also prohibited from acquiring any voting shares of, or interest in, any banks located outside of the state in which the operations of the
bank holding company's subsidiaries are located, unless the acquisition is specifically authorized by the statutes of the state in which the target is located. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or provision of any property or service. Thus, an affiliate of a bank
holding company may not extend credit, lease or sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer must obtain or provide
some additional credit, property or services from or to its bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a
competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended.

In
approving acquisitions by bank holding companies of banks and companies engaged in the banking-related activities described above, the Federal Reserve Board considers a number of
factors, including the expected benefits to the public such as greater convenience, increased competition, or gains in efficiency, as weighed against the risks of possible adverse effects such as
undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between new
activities and activities commenced through the acquisition of a going concern.

The
Attorney General of the United States may, within 30 days after approval by the Federal Reserve Board of an acquisition, bring an action challenging such acquisition under the
federal antitrust laws, in which case the effectiveness of such approval is stayed pending a final ruling by the courts. Failure of the Attorney General to challenge an acquisition does not, however,
exempt the holding company from complying with both state and federal antitrust laws after the acquisition is consummated or immunize the acquisition from future challenge under the
anti-monopolization provisions of the Sherman Act.

Capital
Guidelines

The
Federal Reserve Board has risk based capital guidelines for bank holding companies and member banks. Under the guidelines, the minimum ratio of capital to risk weighted assets
(including certain off balance sheet items, such as standby letters of credit) is 8%. To be considered a "well capitalized" bank or bank holding company under the guidelines, a bank or bank holding
company must have a total risk based capital ratio in excess of 10%.

At
least half of the total capital is to be comprised of common equity, retained earnings, and a limited amount of perpetual preferred stock, after subtracting goodwill and certain other
adjustments ("Tier I capital"). The remainder may consist of perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock not qualifying
for Tier I capital, and a limited amount of loan loss reserves ("Tier II capital"). The Bank is subject to similar capital requirements adopted by the FDIC. In addition, the Federal
Reserve Board, and the FDIC have adopted a minimum leverage ratio (Tier I capital to total assets) of 3% (or 4% if the bank's CAMEL rating is below "1"). Generally, banking organizations are
expected to operate well above the minimum required capital level of 3% unless they meet certain specified criteria, including that they have the highest regulatory ratings. Most banking organizations
are required to maintain a leverage ratio of 3%, plus an additional cushion of at least 1% to 2%. Most community banks are encouraged to maintain a minimum leverage ratio of 6.5% to 7.0%; the Bank's
leverage ratio at December 31, 2008, was 7.85%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without significant reliance upon intangible assets.

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Under
the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), failure to meet the capital guidelines could subject a banking institution to a variety of
enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC.

Sarbanes-Oxley
Act of 2002

On
July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. This legislation represents a comprehensive revision of laws affecting corporate governance,
accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered, or that file reports under, the Securities Exchange Act of
1934. In particular, the act establishes (i) new requirements for audit committees, including independence, expertise and responsibilities; (ii) additional responsibilities regarding
financial statements for the chief executive officer and chief financial officer of the reporting company and new requirements for them to certify the accuracy of periodic reports; (iii) new
standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers, including an accelerated
time frame for reporting of insider transactions; and (v) new and increased civil and criminal penalties for violations of the federal securities laws. The legislation also established a new
accounting oversight board to enforce auditing standards and restrict the scope of services that accounting firms may provide to their public company audit clients.

Because
the Corporation's common stock is registered with the SEC, it is subject to the requirements of this legislation. At the present time, and subject to the final rules and
regulations to be adopted and issued by the SEC, management anticipates that the Corporation will incur additional expense as a result of the act but does not expect that the Corporation's compliance
will have a material impact on its business. To the extent that the Corporation has already implemented the requirements of this legislation and the related regulations, compliance has been
accomplished with existing Corporation personnel and the hiring of additional outside consultants.

The
Corporation files periodic reports with the SEC. The public may read and copy any materials the Corporation files with the SEC at the SEC's Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. Information regarding the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains
an Internet site that contains reports, proxy and information statements, and other information regarding the Corporation that the Corporation files electronically with the SEC. This information may
be found at www.sec.gov.

Bank
Regulation

The
Bank is a Tennessee state-chartered bank and is subject to the regulations of and supervision by the FDIC as well as the TDFI, Tennessee's state banking authority. The Bank is also
subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be
granted and the interest that may be charged thereon and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations
also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the
money supply and credit availability in order to influence the economy.

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From
time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance
between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are
frequently made in Congress, in the Tennessee legislature and before various bank regulatory and other professional agencies. The likelihood of any major legislative changes and the impact such
changes might have on the Bank are impossible to predict.

General.The Bank, as a Tennessee state chartered bank, is subject to primary supervision, periodic examination and
regulation by the Commissioner of the TDFI ("Commissioner") and the FDIC. If, as a result of an examination of a bank, the FDIC should determine that the financial condition, capital resources, asset
quality, earnings prospects, management, liquidity or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation,
various remedies are available to the FDIC. Such remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any
violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to
remove officers and directors and ultimately to terminate a Bank's deposit insurance. The Commissioner has many of the same remedial powers, including the power to take possession of a bank whose
capital becomes impaired.

The
deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank pays a semiannual statutory assessment. Although the Bank
is not a member of the Federal Reserve System, it is nevertheless subject to certain regulations of the Federal Reserve Board.

Various
requirements and restrictions under the laws of the State of Tennessee and the United States affect the operations of the Bank. State and federal statutes and regulations relate
to many aspects of the Bank's operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices and capital requirements. Further, the Bank is required to maintain certain levels of capital and meet additional specific requirements established by banking regulators.

Tennessee
law contains limitations on the interest rates that may be charged on various types of loans and restrictions on the nature and amount of loans that may be granted and on the
types of investments which may be made. The operations of banks are also affected by various consumer laws and regulations, including those relating to equal credit opportunity and regulation of
consumer lending practices. All Tennessee banks must become and remain insured banks under the FDIA ("Federal Deposit Insurance Act"). (See 12 U.S.C. §1811, et seq.).

Payment of Dividends.The Bank is subject to the Tennessee Banking Act, which limits a bank's ability to pay dividends. The
payment of dividends by any bank is dependent upon its earnings and financial condition and subject to the statutory power of certain federal and state regulatory agencies to act to prevent what they
deem unsafe or unsound banking practices. The payment of dividends could, depending upon the financial condition of the Bank, be deemed to constitute such an unsafe or unsound banking practice. Under
Tennessee law, the board of directors of a state bank may not declare dividends in any calendar year that exceeds the total of its retained net income of the preceding two (2) years without the
prior approval of the TDFI. The FDIA prohibits a state bank, the deposits of which are insured by the FDIC, from paying dividends if it is in default in the payment of any assessments due the FDIC.
The Bank is also subject to the minimum capital requirements of the FDIC which impact the Bank's ability to pay dividends. If the Bank fails to meet these standards, it may not be able to pay
dividends or to accept additional deposits because of regulatory requirements.

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If,
in the opinion of the applicable federal bank regulatory authority, a depository institution is engaged in or is about to engage in an unsafe or unsound practice (which, depending on
the financial condition of the depository institution, could include the payment of dividends), such authority may require that such institution cease and desist from such practice. The federal
banking agencies have indicated that paying dividends that deplete a depository institution's capital base to an inadequate level would be such an unsafe and unsound banking practice. Moreover, the
Federal Reserve Board, the Comptroller of the Currency and the FDIC have issued policy statements which provide that bank holding companies and insured depository institutions generally should only
pay dividends out of current operating earnings.

The
payment of dividends by the Bank is limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines and other regulatory requirements. As
indicated in Part II, Item 5 of this Report, we do not foresee paying dividends in the near future.

FIRREA.Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") on
August 9, 1989. FIRREA provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after
August 9, 1989 in connection with (i) the default of a commonly controlled FDIC insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC insured depository institution in danger of default. FIRREA provides that certain types of persons affiliated with financial institutions can be fined by the federal regulatory agency having
jurisdiction over a depository institution with federal deposit insurance (such as the Bank) up to $1 million per day for each violation of certain regulations related (primarily) to lending to
and transactions with executive officers, directors, principal shareholders and the interests of these individuals. Other violations may result in civil money penalties of $5,000 to $30,000 per day or
in criminal fines and penalties. In addition, the FDIC has been granted enhanced authority to withdraw or to suspend deposit insurance in certain cases.

FDICIA.The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") which was enacted on December 19,
1991, substantially revised the depository institution regulatory and funding provisions of the FDIA and made revisions to several other federal banking statutes. Among other things, FDICIA requires
the federal banking regulators to take "prompt corrective action" in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. FDICIA establishes five
capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under applicable regulations, a
FDIC-insured depository institution is defined to be well capitalized if it maintains a Leverage Ratio of at least 5%, a risk adjusted Tier 1 Capital Ratio of at least 6% and a
Total Risk-Based Capital Ratio of at least 10% and is not subject to a directive, order or written agreement to meet and maintain specific capital levels. An insured depository institution
is defined to be adequately capitalized if it meets all of its minimum capital requirements as described above. In addition, an insured depository institution will be considered undercapitalized if it
fails to meet any minimum required measure, significantly undercapitalized if it is significantly below such measure and critically undercapitalized if it fails to maintain a level of tangible equity
equal to not less than 2% of total assets. An insured depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.

The
capital-based prompt corrective action provision of FDICIA and their implementing regulations apply to FDIC-insured depository institutions and are not directly
applicable to holding companies which control such institutions. However, the Federal Reserve Board has indicated that, in regulating bank holding companies, it will take appropriate action at the
holding company level based on an assessment of the effectiveness of supervisory actions imposed upon subsidiary depository institutions pursuant to such provisions and regulations.

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FDICIA
generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its
holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System.
In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee
the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to
succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.

Significantly
undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a
receiver or conservator generally within 90 days of the date on which they became critically undercapitalized.

FDICIA
contains numerous other provisions, including accounting, audit and reporting requirements, termination of the "too big to fail" doctrine except in special cases, limitations on
the FDIC's payment of deposits at foreign branches, new regulatory standards in such areas as asset quality, earnings and compensation and revised regulatory standards for, among other things, powers
of state banks, real estate lending and capital adequacy. FDICIA also requires that a depository institution provide 90 days prior notice of the closing of any branches.

Various
other legislation, including proposals to revise the bank regulatory system and to limit the investments that a depository institution may make with insured funds, is from time
to time introduced in Congress. The TDFI and FDIC will examine the Bank periodically for compliance with various regulatory requirements. Such examinations, however, are for the protection of the
Deposit Insurance Fund ("DIF") and for depositors, and not for the protection of investors and shareholders.

Interstate Act.The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act"), which
was enacted on September 29, 1994, among other things and subject to certain conditions and exceptions, permits on an interstate basis (i) bank holding company acquisitions commencing
one year after enactment of banks of a minimum age of up to five years as established by state law in any state, (ii) mergers of national and state banks after May 31, 1997 unless the
home state of either bank has opted out of the interstate bank merger provision, (iii) branching de novo by national and state banks if the host state has opted-in to this provision
of the Interstate Act, and (iv) certain bank agency activities after one year after enactment. The Interstate Act contains a 30% intrastate deposit cap, except for the initial acquisition in
the state, restriction that applies to certain interstate acquisitions unless a different intrastate cap has been adopted by the applicable state pursuant to the provisions of the Interstate Act and a
10% national deposit cap restriction. Tennessee has opted-in to the Interstate Act. Management cannot predict the extent to which the business of the Bank may be affected. Tennessee has
also adopted legislation allowing banks to acquire branches across state lines subject to certain conditions, including the availability of similar legislation in the other state.

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Brokered Deposits and Pass-Through Insurance.The FDIC has adopted regulations under FDICIA governing the receipt
of brokered deposits and pass-through insurance. Under the regulations, a bank cannot accept or rollover or renew brokered deposits unless (i) it is well capitalized or
(ii) it is adequately capitalized and receives a waiver from the FDIC. In addition, bank regulators can limit a bank's ability to accept brokered deposits or other volatile funding. The Bank is
currently limited in its ability to increase brokered deposits. A bank that cannot receive brokered deposits also cannot offer "pass-through" insurance on certain employee benefit
accounts. Whether or not it has obtained such a waiver, an adequately capitalized bank may not pay an interest rate on any deposits in excess of 75 basis points over certain index prevailing market
rates specified by regulation. There are no such restrictions on a bank that is well capitalized.

FDIC Insurance Premiums.The Bank is required to pay semiannual FDIC deposit insurance assessments to the Deposit Insurance
Fund ("DIF"). The FDIC merged the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") to form the DIF on March 31, 2006 in accordance with the Federal Deposit
Insurance Reform Act of 2005. The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based upon statutory factors that include
the balance of insured deposits as well as the degree of risk the institution poses to the insurance fund. The FDIC uses a risk-based premium system that assesses higher rates on those
institutions that pose greater risks to the DIF. Under the rule adopted by the FDIC in November 2006, beginning in 2007, the FDIC placed each institution in one of four risk categories using a
two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory group assignment). Currently, rates range between $.07
and $.78 per $100 in assessable deposits. The rate ranges are based on the four risk categories that in turn are based on asset size as well as capital, supervisory, credit, and other risk factors.
Within the range for a given risk category, the rate applicable to any particular institution is determined by the FDIC according to formal guidelines. Any change in these rates and the category of
risk into which the Bank will fall could have an adverse effect on the Bank's earnings.

Under
the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a federal bank regulatory agency.

Gramm-Leach-Bliley Act.The Gramm-Leach-Bliley Act adopted in November 1999 has been referred to as the most
important banking bill in over 60 years. The most significant provisions ratify new powers for banks and bank holding companies, especially in the areas of securities and insurance. The Act
also includes requirements regarding the privacy and protection of customer information held by financial institutions, as well as many other providers of financial services. There are provisions
providing for functional regulation of the various services provided by institutions among different regulators. There are other provisions which limit the future expansion of unitary thrift holding
companies which now prevent companies like Wal-Mart from owning a thrift institution. Finally, among many other sections of the Act, there is some relief for small banks from the
regulatory burden of the Community Reinvestment Act. The regulatory agencies have been adopting many new regulations to implement the Act.

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USA Patriot Act.On October 26, 2001, President Bush signed the USA PATRIOT Act of 2001 into law. This act contains
the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the "IMLAFA"). The IMLAFA substantially broadens existing anti-money laundering
legislation and the extraterritorial jurisdiction of the United States, imposes new compliance and due diligence obligations, creates new crimes and penalties, compels the production of documents
located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarifies the safe harbor from civil
liability to customers. The U.S. Treasury Department has issued a number of regulations implementing the USA PATRIOT Act that apply certain of its requirements to financial institutions such as our
banking and broker-dealer subsidiaries. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money
laundering and terrorist financing. The Treasury Department is expected to issue a number of additional regulations which will further clarify the USA PATRIOT Act's requirements.

The
IMLAFA requires all "financial institutions," as defined, to establish anti-money laundering compliance and due diligence programs. Such programs are required to include,
among other things, adequate policies, the designation of a compliance officer, employee training programs, and an independent audit function to review and test the program. The Bank has established
anti-money laundering compliance and due diligence programs to comply with IMLAFA.

Capital Requirements.The federal regulatory agencies use capital adequacy guidelines in their examination and regulation of
banks. If the capital falls below the minimum levels established by these guidelines, the Bank may (1) be denied approval to acquire or establish additional banks or non-bank
businesses or to open facilities, or (2) be subject to other regulatory restrictions or actions.

Banking
organizations historically were required to maintain a minimum ratio of primary capital to total assets of 5.5%, and a minimum ratio of total capital to total assets of 6.0%. The
primary and total capital ratio requirements have been replaced by the adoption of risk-based and leverage capital requirements.

Risk-Based
Capital Requirements

The
FDIC adopted risk-based capital guidelines for banks effective after December 31, 1990. The risk-based capital guidelines are designed to make
regulatory capital requirements more sensitive to differences in risk profile among banks to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets.
Assets and off-balance sheet items are assigned to broad risk categories each with appropriate weights. The resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items. The ratios are minimums. The guidelines require all federally regulated banks to maintain a minimum risk-based
total capital ratio of 8%, of which at least 4% must be Tier I capital (see the description of Tier I capital and Tier II capital below).

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A
banking organization's qualifying total capital consists of two components: Tier I capital (core capital) and Tier II capital (supplementary capital). Tier I
capital is an amount equal to the sum of: (i) common shareholders' equity (including adjustments for any surplus or deficit); (ii) non-cumulative perpetual preferred stock;
and (iii) the company's minority interests in the equity accounts of consolidated subsidiaries. Intangible assets generally must be deducted from Tier I capital, subject to limited
exceptions for goodwill arising from certain supervisory acquisitions. Other intangible assets may be included in an amount up to 25% of Tier I capital, provided that the asset meets each of
the following criteria: (i) the asset must be able to be separated and sold apart from the banking organization or the bulk of its assets; (ii) the market value of the asset must be
established on an annual basis through an identifiable stream of cash flows and there must be a high degree of certainty that the asset will hold this market value notwithstanding the future prospects
of the banking organization; and (iii) the banking organization must demonstrate that a liquid market exists for the asset. Intangible assets in excess of 25% of Tier I capital generally
are deducted from a banking organization's regulatory capital. At least 50% of the banking organization's total regulatory capital must consist of Tier I capital.

Tier II
capital is an amount equal to the sum of (i) the allowance for possible credit losses in an amount up to 1.25% of risk-weighted assets;
(ii) cumulative perpetual preferred stock with an original maturity of 20 years or more and related surplus; (iii) hybrid capital instruments (instruments with characteristics of
both debt and equity), perpetual debt and mandatory convertible debt securities; and (iv) in an amount up to 50% of Tier I capital, eligible term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or more, including related surplus. The inclusion of the foregoing elements of Tier II capital are subject
to certain requirements and limitations of the FDIC.

Investments
in unconsolidated banking and finance subsidiaries, investments in securities subsidiaries and reciprocal holdings of capital instruments must be deducted from capital. The
federal banking regulators may require other deductions on a case-by-case basis.

Under
the risk-weighted capital guidelines, balance sheet assets and certain off-balance sheet items, such as standby letters of credit, are assigned to one of
four risk weight categories (0%, 20%, 50%, or 100%) according to the nature of the asset and its collateral or the identity of any obligor or guarantor. For example, cash is assigned to the 0% risk
category, while loans secured by one-to-four family residences are assigned to the 50% risk category. The aggregate amount of such asset and off-balance sheet items
in each risk category is adjusted by the risk weight assigned to that category to determine weighted values, which are added together to determine the total risk-weighted assets for the
banking organization. Accordingly, an asset, such as a commercial loan, which is assigned to a 100% risk category is included in risk-weighted assets at its nominal face value, whereas a
loan secured by a single-family home mortgage is included at only 50% of its nominal face value. The application ratios are equal to capital, as determined, divided by risk-weighted
assets, as determined.

Leverage
Capital Requirements

The
FDIC has a regulation requiring certain banking organizations to maintain additional capital of 1% to 2% above a 3% minimum Tier I Leverage Capital Ratio (Tier I
capital, less intangible assets, to total assets). In order for an institution to operate at or near the minimum Tier I leverage capital requirement of 3%, the FDIC expects that such
institution would have well-diversified risk, no undue rate risk exposure, excellent asset quality, high liquidity and good earnings. In general, the bank would have to be considered a
strong banking organization, rated in the highest category under the bank rating system and have no significant plans for expansion. Higher Tier I leverage capital ratios of up to 5% will
generally be required if all of the above characteristics are not exhibited, or if the institution is undertaking expansion, seeking to engage in new activities, or otherwise faces unusual or abnormal
risks.

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The
FDIC rule provides that institutions not in compliance with the regulation are expected to be operating in compliance with a capital plan or agreement with the regulator. If they do
not do so, they are deemed to be engaging in an unsafe and unsound practice and may be subject to enforcement action. In addition, failure by an institution to maintain capital of at least 2% of
assets constitutes an unsafe and unsound practice and may subject the institution to enforcement action. An institution's failure to maintain capital of at least 2% of assets constitutes an unsafe and
unsound condition justifying termination of FDIC insurance.

Depositor Preference.The Omnibus Budget Reconciliation Act of 1993 provides that deposits and certain claims for
administrative expenses and employee compensation against an insured depositary institution would be afforded a priority over other general unsecured claims against such an institution, including
federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver.

Effect of Governmental Policies.The Bank is affected by the policies of regulatory authorities, including the Federal
Reserve System. An important function of the Federal Reserve System is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve are: purchases and
sales of U.S. Government securities in the marketplace; changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal Reserve; and changes in the
reserve requirements of depository institutions. These instruments are effective in influencing economic and monetary growth, interest rate levels and inflation.

The
monetary policies of the Federal Reserve System and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are
expected to continue to do so in the future. Because of changing conditions in the national economy and in the money market, as well as the result of actions by monetary and fiscal authorities, it is
not possible to predict with certainty future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank or whether the changing economic conditions will have a
positive or negative effect on operations and earnings.

Bills
are pending before the United States Congress and the Tennessee General Assembly which could affect the business of the Bank, and there are indications that other similar bills may
be introduced in the future. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of the Bank may be affected thereby.

Investment
Policy

The
objective of the Bank's investment policy is to invest funds not otherwise needed to meet the loan demand of its market area to earn the maximum return for the Bank, yet still
maintain sufficient liquidity to meet fluctuations in the Bank's loan demand and deposit structure. In doing so, the Bank balances the market and credit risks against the potential investment return,
makes investments compatible with the pledge requirements of the Bank's deposits of public funds, maintains compliance with regulatory investment requirements, and assists the various public entities
with their financing needs. The asset liability and investment committee has full authority over the investment portfolio and makes decisions on purchases and sales of securities. The entire
portfolio, along with all investment transactions occurring since the previous Board of Director's meeting, is reviewed by the Board at its next monthly meeting. The investment policy allows portfolio
holdings to include short-term securities purchased to provide the Bank's needed liquidity and longer term securities purchased to generate level income for the Bank over periods of
interest rate fluctuations. At this time the Bank does not have a security portfolio.

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Loan Policy

All
lending activities of the Bank are under the direct supervision and control of the full Board of Directors and Douglas P. Archbold, Chief Credit Officer. The Board of Directors
enforces loan authorizations, decides on loans exceeding such limits, services all requests for officer credits to the extent allowable under current laws and regulations, administers all problem
credits, and determines the allocation of funds for each lending division. The Bank's established maximum loan volume to deposits is 100%. The loan portfolio consists primarily of real estate,
commercial, farming and installment loans. Commercial loans consist of either real estate loans or term loans. Maturity of term loans is normally limited to five to seven years. Conventional real
estate loans may be made up to 85% of the appraised value or purchase cost of the real estate for no more than a thirty year term. Installment loans are based on the earning capacity and vocational
stability of the borrower.

The
full Board makes a monthly review of loans which are 30 days or more past due and the full Board of Directors makes a monthly review of loans which are 45 days or more
past due.

Management
of the Bank periodically reviews the loan portfolio, particularly nonaccrual and renegotiated loans. The review may result in a determination that a loan should be placed on a
nonaccrual status for income recognition. In addition, to the extent that management identifies potential losses in the loan portfolio, it reduces the book value of such loans, through
charge-offs, to their estimated collectible value. In the event that a loan is 90 days or more past due the accrual of income is generally discontinued when the full collection of
principal or interest is in doubt unless the obligations are both well secured and in the process of collection. The Bank maintains a specific reserve for impaired loans.

When
a loan is classified as nonaccrual, any unpaid interest is reversed against current income. Interest is included in income thereafter only to the extent received in cash. The loan
remains in a nonaccrual classification until such time as the loan is brought current, when it may be returned to accrual classification. When principal or interest on a nonaccrual loan is brought
current, if in management's opinion future payments are questionable, the loan would remain classified as nonaccrual. After a nonaccrual or renegotiated loan is charged off, any subsequent payments of
either interest or principal are applied first to any remaining balance outstanding, then to recoveries and lastly to income.

The
Bank had no tax-exempt loans during the year ended December 31, 2008. The Bank had no loans outstanding to foreign borrowers at December 31, 2008. The
Bank's underwriting guidelines are applied to four major categories of loans, commercial and industrial, consumer, agricultural and real estate which includes residential, construction and development
and certain other real estate loans. The Bank requires its loan officers and Board to consider the borrower's character, the borrower's financial condition as reflected in current financial
statements, the borrower's management capability, the borrower's industry and the economic environment in which the loan will be repaid. Before approving a loan, the loan officer or Board must
determine that the borrower is basically honest and creditworthy, determine that the borrower is a capable manager, understand the specific purpose of the loan, understand the source and plan of
repayment, determine that the purpose, plan and source of repayment as well as collateral are acceptable, reasonable and practical given the normal framework within which the borrower operates.

Credit
Risk Management and Reserve for Loan Losses

Credit
risk and exposure to loss are inherent parts of the banking business. Management seeks to manage and minimize these risks through its loan and investment policies and loan review
procedures. Management establishes and continually reviews lending and investment criteria and approval procedures that it believes reflect the risk sensitive nature of the Bank. The loan review
procedures are set to monitor adherence to the established criteria and to ensure that such standards are enforced and maintained on a continuing basis. Management's objective in establishing lending
and investment standards is to manage the risk of loss and provide for income generation through pricing policies.

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The
loan portfolio is regularly reviewed, and management determines the amount of loans to be charged-off. In addition, such factors as the Bank's previous loan loss
experience, prevailing and anticipated economic conditions, any industry concentrations and the overall quality of the loan portfolio are considered. While management uses available information to
recognize losses on loans and real estate owned, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the allowances for losses on loans and real estate owned. Such agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available at the time of their examinations. In addition, any loan or portion thereof which is classified as a "loss" by regulatory examiners is
charged-off.

Capital
Resources/Liquidity

Liquidity.Of primary importance to depositors, creditors and regulators is the ability to have readily available funds
sufficient to repay fully maturing liabilities. The Bank's liquidity, represented by cash and cash due from banks, is a result of its operating, investing and financing activities. In order to insure
funds are available at all times, the Bank devotes resources to projecting on a monthly basis the amount of funds which will be required and maintains relationships with a diversified customer base so
funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets which are generally matched to correspond to
the maturity of liabilities.

The
Bank has a formal liquidity policy whereby management considers several liquidity ratios on a monthly basis to determine the adequacy of liquidity. In the opinion of management, its
liquidity levels are considered adequate. The Bank is subject to general FDIC guidelines which do not require a minimum level of liquidity. Management believes its liquidity ratios meet or exceed
these guidelines. Management does not know of any trends or demands which are reasonably likely to result in liquidity increasing or decreasing in any material manner.

Impact of Inflation and Changing Prices.The financial statements and related financial data presented herein have been
prepared in accordance with U.S. generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering
the changes in the relative purchasing power of money over time and due to inflation. The impact of inflation on operations of the Bank is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Bank's performance than the
effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.

Capital
Adequacy

Capital
adequacy refers to the level of capital required to sustain asset growth over time and to absorb losses. The objective of the Bank's management is to maintain a level of
capitalization that is sufficient to take advantage of profitable growth opportunities while meeting regulatory requirements. This is achieved by improving profitability through effectively allocating
resources to more profitable businesses, improving asset quality, strengthening service quality, and streamlining costs. The primary measures used by management to monitor the results of these efforts
are the ratios of average equity to average assets, average tangible equity to average tangible assets, and average equity to net loans.

The
Federal Reserve Board has adopted capital guidelines governing the activities of bank holding companies. These guidelines require the maintenance of an amount of capital based on
risk-adjusted assets so that categories of assets with potentially higher credit risk will require more capital backing than assets with lower risk. In addition, banks and bank holding
companies are required to maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as loan commitments.

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The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital categories for banks and bank holding companies. The bank regulators adopted
regulations defining these five capital categories in September 1992. Under these regulations, each bank is classified into one of the five categories based on its level of risk-based
capital as measured by Tier I capital, total risk-based capital, and Tier I leverage ratios and its supervisory ratings.

The
following table lists the five categories of capital and each of the minimum requirements for the three risk-based capital ratios.

Total Risk-Based Capital Ratio

Tier I Risk-Based Capital Ratio

Leverage RatioWell-capitalized


10% or above


6% or above


5% or aboveAdequately capitalized


8% or above


4% or above


4% or aboveUndercapitalized


Less than 8%


Less than 4%


Less than 4%Significantly undercapitalized


Less than 6%


Less than 3%


Less than 3%Critically undercapitalized








2% or less


ITEM 1A.    RISK FACTORS

As a smaller reporting company, the Corporation is not required to include this information in our Annual Report on Form 10-K (the "Report").

ITEM 1B.    UNRESOLVED STAFF COMMENTS

As a smaller reporting company, the Corporation is not required to include this information in this Report.

ITEM 2.    PROPERTIES

The main office of the Corporation is located at 3095 East Andrew Johnson Highway, Greeneville, Greene County, Tennessee, which is also the main office of the
Bank. This location is a 2.66 acre lot, on which there is a fully operational modular bank unit. A full service branch banking office of the Bank is located at 506 Asheville Highway, Greeneville,
Greene County, Tennessee. The Bank also operates a full service branch banking office in Maryville, Blount County, Tennessee at 710 South Foothills Plaza Drive. This location is a 1.17 acre lot, on
which there is a 3,272 square foot fully operational brick bank building with drive through facilities. The Bank also leases property for its branch office located at 210 West Summer Street,
Greeneville, Greene County, Tennessee. These locations are centrally located and in high traffic/exposure areas. Automatic teller machines and overnight "deposit drops" are positioned to serve the
Bank's clients. Additional branches may be established as market opportunities surface.

ITEM 3.    LEGAL PROCEEDINGS

To the best of the Corporation's knowledge, there are no pending legal proceedings, other than routine litigation incidental to the business, to which the
Corporation or the Bank is a party or of which any of the Corporation's or the Bank's property is the subject.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth quarter of 2008 through the solicitation of proxies or otherwise.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of the Corporation is not traded through an organized exchange nor is there a known active trading market. The number of shareholders of record
at December 31, 2008 was 1,837. The following table shows the quarterly range of high and low sale prices for the Corporation's stock during the fiscal years 2008 and 2007. These sale prices
represent known transactions and do not necessarily represent all trading transactions for the periods.

Year



High

Low2007:

First Quarter

$
9.75

$
8.00Second Quarter

$
9.00

$
9.00Third Quarter

$
9.00

$
7.00Fourth Quarter

$
8.50

$
7.002008:

First Quarter

$
7.00

$
6.00Second Quarter

$
6.25

$
4.00Third Quarter

$
6.25

$
4.00Fourth Quarter

$
6.00

$
4.90


Dividends

The payment of cash dividends is subject to the discretion of the Corporation's Board of Directors and the Bank's ability to pay dividends. The Bank's ability to
pay dividends is restricted by applicable regulatory requirements. The Corporation cannot assure its shareholders that it will declare or pay dividends on shares of its common stock in the future, the
Corporation has never paid dividends in the past and the Corporation does not foresee paying dividends in the future.

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Securities Authorized for Issuance Under Equity Compensation Plans

The Bank issued stock option agreements to certain officers and employees ("Options"), at various times beginning on July 16, 2001. These Options were not
approved by the shareholders, as such approval is not necessary for these non-qualified option agreements. Upon consummation of the Share Exchange, the Corporation became party to these
options issued by the Bank.

The
following table reflects the number of shares to be issued upon the exercise of options granted under the Option agreements, the weighted-average exercise price of all such options,
and the total number of shares of common stock reserved for issuance upon the exercise of authorized, not-yet-granted options as of December 31, 2008:

Plan Category

# of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)

Weighted-average
Exercise Price of
Outstanding Options,
Warrants, and Rights
(b)

# of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (excluding
securities reflected in
column (a))
(c)Equity Compensation Plans Approved by Security Holders








Equity Compensation Plans Not Approved by Security Holders


71,150

$
6.92


166,859Total


71,150

$
6.92


166,859


The
maximum number of shares of the Corporation's common stock available for issuance pursuant to stock options is 375,000 shares. As of December 31, 2008 the maximum number of
shares available for future stock option grants is 166,859 shares. The option exercise price is equal to the fair market value of the Corporation's common stock at the date of the grant. The options
expire on the tenth anniversary of the date of the option. Prior to adopting Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),Share-Based
Payment, the Corporation elected to vest immediately all remaining stock options as of May 17, 2005. Proceeds received by the Corporation from exercises of the stock
options are credited to common stock and additional paid-in capital.

Recent Sales of Unregistered Securities

In July 2001, the Bank issued 750,000 shares of its common stock in an initial offering. This sale was exempt from registration under the Securities Act of 1933,
as amended, pursuant to Section 3. In the past three years, neither the Bank nor the Corporation has sold any additional shares of its common stock, except as follows:



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Purchases of Equity Securities by the Registrant and Affiliated Purchasers

The Corporation made no repurchases of its equity securities, and no Affiliated Purchasers (as defined in Rule 10b - 18(a)(3) under the Securities Exchange
Act of 1934) purchased any shares of the Corporation's equity securities during the fourth quarter of the fiscal year ended December 31, 2008.

ITEM 6.    SELECTED FINANCIAL DATA

As a smaller reporting company, the Corporation is not required to include this information in this Report.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following is a discussion of our financial condition and results of operations for the years ended December 31, 2008 and 2007. The discussion and
analysis should be read in conjunction with our consolidated financial statements and related notes in order to obtain a better understanding of the information contained in the financial statements.
The discussions contained herein are for the consolidated entity American Patriot Financial Group, Inc. (the "Corporation") and its wholly-owned subsidiary American Patriot Bank (the "Bank")
collectively referred to herein as the "Company".

Overview

During 2008, the entire financial industry experienced significant instability and anxiety as economic conditions deteriorated. Dramatic declines in the housing
market during the past year as well as increasing foreclosures and unemployment have been widespread. The Company did not participate in the subprime residential mortgage loans to retail customers,
and did not invest in mortgaged backed securities of the preferred stock of Freddie Mac and Fannie Mae. Nonetheless, the effects of a slowing economy, steep declines in housing starts and real estate
development and related sale activities adversely affected by the Company's portfolio of loans to builders and developers of residential real estate. The Company's loans to commercial customers in the
related building trades and allied industries have also been adversely impacted. As a result, the Company's net loss has increased in 2008, primarily due to the increased provisions for loan losses.

Impact of Inflation

The consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted
in the United States and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation.

Critical Accounting Estimates

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

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Recent Accounting Pronouncements

In March 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 156,Accounting for Servicing of Financial
Assets, ("SFAS 156") an Amendment of FASB Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, ("SFAS 140"), which requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if
practicable, and requires entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement 140 for
subsequent measurement. SFAS 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company adopted SFAS 156 on
January 1, 2007. The adoption of SFAS 156 did not have any material impact on the Company's consolidated financial condition or results of operation.

In
July 2006, FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, ("FIN 48"). FIN 48
became effective for fiscal years beginning 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 degree of uncertainty.
FIN 48 did not have a material 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 a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies only to fair-value measurements that are already required or
permitted by other accounting standards and is expected to increase the consistency of those measurements. The statement emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The effective
date for SFAS 157 was for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS 157 effective January 1,
2008.

In
September 2006, the Financial Accounting Standards Board ratified a consensus opinion reached by the Emerging Issues Task Force on Issue 06-04, Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements,("EITF 06-04") which requires employers that enter into endorsement split-dollar life insurance arrangements that provide an employee with a postretirement benefit to recognize a
liability for the future benefits promised based on the substantive agreement made with the employer. Whether the accrual is based on a death benefit or on the future cost of maintaining the insurance
would depend on what the employer has effectively agreed to provide during the employee's retirement. The purchase of an endorsement-type life insurance policy does not qualify as a
settlement of the liability. The consensus in EITF 06-04 is effective for fiscal years beginning after December 15, 2007. The Company adopted EITF 06-04
effective January 1, 2008, and its adoption had no impact on the Company's consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities,("SFAS 159"). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this standard is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. This statement was effective as of January 1, 2008; however, it had no impact on the Company's consolidated financial statements because it did not elect the fair value
option for any financial instrument not presently being accounted for at fair value.

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In
March 2007, the EITF reached a final consensus on Issue No. 06-10,Accounting for Deferred Compensation and Postretirement Benefit Aspects
of Collateral Assignment Split-Dollar Life Insurance Arrangements, ("EITF 06-10"). EITF 06-10 requires employers to recognize a liability
for the post-retirement benefit related to collateral assignment split-dollar life insurance arrangements in accordance with SFAS No. 106 or APB Opinion No. 12.
EITF 06-10 also requires employers to recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. The
provisions of EITF 06-10 were effective for the Company on January 1, 2008. EITF 06-10 had no impact on the Company's consolidated financial statements.

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

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

The
Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial statements or do not apply to its
operations.

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Forward-Looking Statements

Management's discussion of the Company and management's analysis of the Company's operations and prospects, and other matters, may include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of federal and state securities laws. Although the Company believes that the assumptions
underlying such forward-looking statements contained in this Report are reasonable, any of the assumptions could be inaccurate and, accordingly, there can be no assurance that the forward-looking
statements included herein will prove to be accurate. The use of such words as "expect," "anticipate," "forecast," and comparable terms should be understood by the reader to indicate that the
statement is "forward-looking" and thus subject to change in a manner that can be unpredictable. Factors that could cause actual results to differ from the results anticipated, but not guaranteed, in
this Report, include (without limitation) economic and social conditions, competition for loans, mortgages, and other financial services and products, changes in interest rates, unforeseen changes in
liquidity, results of operations, and financial conditions affecting the Company's customers, and other risks that cannot be accurately quantified or completely identified. Many factors affecting the
Company's financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services
simply cannot be predicted. Because these factors are unpredictable and beyond the Company's control, earnings may fluctuate from period to period. The purpose of this type of information is to
provide readers with information relevant to understanding and assessing the financial condition and results of operations of the Company, and not to predict the future or to guarantee results. The
Company is unable to predict the types of circumstances, conditions and factors that can cause anticipated results to change. The Company undertakes no obligation to publish revised forward-looking
statements to reflect the occurrence of changes or unanticipated events, circumstances, or results.

Results of Operations

The Company had a net loss of $558,728 for the year ended December 31, 2008 (or a negative $.24 per share) compared to a net loss of $190,585 (or a
negative $.08 per share) for the year ended December 31, 2007.



Net interest income represents the amount by which interest earned on various assets exceeds interest paid on deposits and other interest-bearing liabilities and
is the most significant component of the Company's earnings. Interest income for 2008 was $7,324,977 compared to $8,024,221 in 2007. Total interest expense was $3,434,935 in 2008 compared to
$3,880,004 in 2007. Average earning assets increased approximately $10 million (10.73%) to approximately $104 million for the year 2008 as compared to $94 million for the year
2007. Average interest-bearing liabilities increased approximately $11 million (13.51%) in 2008 to $96 million as compared to $85 million in 2007. Net interest margin was 3.72% in
2008 compared to 4.39% in 2007, or 67 basis points decrease. The net change in the net interest margin was significant because the net decreases in the yield on interest-earning assets was
approximately 150 basis points compared to the decrease in the rate paid on interest-bearing liabilities of 101 basis points, which is attributable to the Bank being asset sensitive with assets
repricing faster than liabilities.



The provision for loan losses represents a charge to operations necessary to establish an estimated allowance for loan losses, which in management's evaluation,
is adequate to provide coverage for estimated losses on outstanding loans. The estimated allowance for loan losses is evaluated on a regular basis by management and is based upon the Bank's historical
loss experience adjusted for certain other factors based on management's judgment.

20

---



Table of Contents

The
year 2008 represents the Bank's seventh full year of operations. During 2008, the Bank recognized a provision for loan losses of $1,297,538. The Bank incurred a decrease in net
charge-offs during 2008 as compared with 2007. Net charge-offs were $17,973 and $454,836 for 2008 and 2007, respectively. This impacted the Bank's historical loss ratio and
consequently the allowance for loan losses calculation. Gross loans increased from $92,942,928 at December 31, 2007 to $105,701,210 or 13.7% at December 31, 2008. This approximate
$12,800,000 increase in gross loans resulted in the need for additional allowance for loan losses. Finally, loans classified as impaired increased substantially during 2008, primarily in the fourth
quarter of the year. Impaired loans at December 31, 2008 were $7,154,200 as compared to $6,269,888 at December 31, 2007. Management has evaluated its impaired loans and provided
valuation allowances as considered necessary which further contributed to the 2008 provision for loan losses.

Management
feels that the allowance for loan losses is adequate at December 31, 2008. However, there can be no assurance that additional provisions for loan losses will not be
required in the future, including as a result of possible changes in the economic assumptions underlying management's estimates and judgments, adverse developments in the economy, and the residential
real estate market in particular, or changes in the circumstances of particular borrowers. In 2009, management intends to pursue more aggressive strategies for problem loan resolution, and is
committed to bolster loan loss reserves to levels sufficient to absorb losses recognized in the pursuit of this strategy.



Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of the estimated allowance for loan losses and accumulated depreciation. Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of
the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. For further information regarding the provisions for income taxes see Note 7 to
the Consolidated Financial Statements.



The Company's noninterest income consists of service charges on deposit accounts and other fees and commissions. Total noninterest income for 2008 was $673,938
compared to $757,409 in 2007, respectively. Service charge income decreased during 2008 by $36,610 or 6.6% when compared to 2007. This was due to a decreased number of customers utilizing overdraft
protection products in 2008 over those in 2007. Most of the other noninterest income increase is due to earnings on the cash surrender value of bank owned life insurance or ("BOLI"). Earnings on BOLI
for the year 2008 were $107,352 as compared to $46,146 for the year 2007. This difference is due to the year 2008 having BOLI in effect for the entire year, whereas, the year 2007, BOLI was in effect
starting June 2007. Gains in other noninterest income were offset by decreases of $57,045 or 77.4% and $58,113 or 85.7% in fees from origination of mortgage loans sold and investment sale commissions,
respectively. The reason for the decrease in investment sale commissions is due to the elimination of that department in early 2008. Management projects that other fees and service charges will
increase in 2008 due to a more aggressive collection policy for other fees and service charges.

21

---



Table of Contents



Noninterest expense consists of salaries and employee benefits, equipment and occupancy expenses, and other operating expenses. The following shows the comparison
of our noninterest expense for the years ended December 31, 2008 and 2007:

Years ended December 31,

2008-2007
Percent
Increase
(Decrease)2008

2007Noninterest expense:Salaries and employee benefits

$
2,038,169

$
2,186,911


(6.8
)%Occupancy


609,948


602,754


1.2
%Advertising


130,532


123,013


6.1
%Data processing


329,062


277,826


18.4
%Legal and professional


373,261


413,977


(9.8
)%Other operating


718,929


723,208


(0.6
)%Total noninterest expense

$
4,199,901

$
4,327,689


(2.95
)%


The
primary cause of the decrease in noninterest expense between 2008 and 2007 is the decreased costs of salaries and employee benefits. Even though the costs of legal and professional
fees decreased, this amount remains high due to compliance with Section 404 of the Sarbanes-Oxley Act.

Financial Condition

Total assets at December 31, 2008, were $119,592,826, an increase of $3,058,503 or 2.6% over 2007 year end assets of $116,534,323. Deposits
decreased to $103,739,177 at December 31, 2008, a decrease of $1,290,162 or 1.2% from $105,029,339 at December 31, 2007. Gross loans increased by $12,758,282, or 13.7%, to $105,701,210
at year end 2008, from $92,942,928 at year-end 2007. Federal Home Loan Bank (FHLB) Stock increased $32,400 or 12.5% to $291,200 at December 31, 2008 as compared to $258,800 at
year-end 2007. Most of the increase in total assets from 2007 to 2008 is accounted for by the growth in the loan portfolio.

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



Gross loans outstanding totaled $105,701,210 at December 31, 2008 compared to $92,942,928 at December 31, 2007. The growth experienced in 2008 is in
the commercial real estate and residential real estate segments of the portfolio which now encompasses approximately 81 percent of the entire portfolio. Consumer and owner occupied residential
loans increased approximately 8.0% as a percentage of the entire portfolio. Aggregate commercial (non-real estate) loans declined approximately 3.0% as a percentage of the entire
portfolio. The shift from commercial to commercial real estate and residential real estate reflects the acceptable lending opportunities available in the Bank's service area.

In
the event that a loan is 90 days or more past due the accrual of income is generally discontinued when the full collection of principal or interest is in doubt unless the
obligations are both well secured and in the process of collection. At December 31, 2008, there were no loans 90 days or more past due and still accruing interest. Total loans
90 days or more past due and in non-accrual status equaled $599,667.

22

---



Table of Contents



Federal Home Loan Bank (FHLB) stock at December 31, 2008 was carried at cost of $291,200. This represents an increase of $32,400 or 12.5% from 2007. As a
member of the FHLB, the Company is required to maintain stock in an amount equal to 0.15% of total assets and 4% of outstanding FHLB advances. FHLB stock is maintained by the Company at par value of
$100 per share.



Total deposits, which are the principal source of funds for the Company, were $103,739,177 at December 31, 2008 compared to $105,029,339 at
December 31, 2007. The decrease of $1,290,162 from year end 2007 to year end 2008 represents a decrease of 1.2%. The Company has targeted local consumers, professional and commercial businesses
as its central clientele; therefore, deposit instruments in the form of demand deposits, savings accounts, money market demand accounts, NOW accounts, certificates of deposit and individual retirement
accounts are offered to customers. The Company has established a line of credit with the Federal Home Loan Bank secured by a blanket-pledge of 1-4 family residential mortgage loans. At
December 31, 2008, and 2007 the Company had outstanding advances of $5,506,805 and $1,926,026 at the Federal Home Loan Bank, respectively. At December 31, 2008, the Company also had
$1,000,000 in short-term borrowings from Jefferson Federal Bank which is due on demand. Generally, banks classify their funding base as either core funding or non-core funding.
Core funding consists of all deposits, other than public funds and brokered deposits, issued in denominations of $100,000 or less while all other funding is deemed to be non-core.

The
following table represents the balances of our deposits and other fundings and the percentage of each type to the total at December 31, 2008 and December 31, 2007:

December 31,
2008

Percent

December 31,
2007

PercentCore funding:Noninterest-bearing deposit accounts

$
7,937,765


7.2
%
$
12,352,954


11.6
%Interest-bearing demand accounts


3,478,214


3.2
%

2,886,852


2.7
%Savings and money market accounts


21,767,615


19.7
%

28,712,635


26.8
%Time deposits accounts less than $100,000


54,704,395


49.6
%

39,805,013


37.2
%Total core funding

$
87,887,989


79.7
%
$
83,757,454


78.3
%Non-core funding:Time deposit accounts greater than $100,000

$
15,556,207


14.1
%
$
13,045,243


12.2
%Public funds


294,981


0.3
%

437,642


0.4
%Brokered deposits





0.0
%

7,789,000


7.3
%Federal Home Loan Bank advancesand short-term borrowings


6,506,805


5.9
%

1,926,026


1.8
%Total non-core funding


22,357,993


20.3
%

23,197,911


21.7
%Totals

$
110,245,982


100.0
%
$
106,955,365


100.00
%




At December 31, 2008, the Company had liquid assets of approximately $6.7 million in the form of cash, federal funds sold and Federal Home Loan Bank
Stock available for sale compared to approximately $15.3 million on December 31, 2007. Additional liquidity should be provided by anticipated growth in deposit accounts and loan
repayments. The Company also has the ability to purchase federal funds and is a member of the Federal Home Loan Bank of Cincinnati that will provide an additional credit line if necessary. The Company
has been approved to borrow funds at the Federal Discount Window.

23

---



Table of Contents



Total stockholders' equity at December 31, 2008 was $8,348,249, a decrease of $303,753 from $8,657,002 at December 31, 2007. This decrease was due
to a net loss of $558,728 for 2008 that was partially offset by the purchase of 75,000 shares of common stock by key officers of the Company. Common stock increased $24,975 and surplus $225,000 from
the exercise of common stock options.

At
December 31, 2008 and 2007 capital ratios were in excess of the regulatory guidelines with the Company's Tier 1, total risk-based and leverage ratio.

The
Company's actual capital amounts and ratios are as follows:

Actual

For Capital
Adequacy Purposes

To Be Well
Capitalized Under
Prompt Corrective
Action ProvisionsAmount

Ratio

Amount

Ratio

Amount

RatioAs of December 31, 2008 (in Thousands)Tier 1 Capital (To Average Assets)

$
9,305


7.85
%3
$
4,743


4
%3
$
5,928
3

5
%Tier 1 Capital (To Risk Weighted Assets)

$
9,305


9.15
%3
$
4,069


4
%3
$
6,119
3

6
%Total Capital (To Risk Weighted Assets)

$
10,396


10.22
%3
$
8,138


8
%3
$
10,198
3

10
%As of December 31, 2007 (in Thousands)Tier 1 Capital (To Average Assets)

$
8,610


7.66
%3
$
4,49
3

4
%3
$
5,617
3

5
%Tier 1 Capital (To Risk Weighted Assets)

$
8,610


9.01
%3
$
3,822
3

4
%3
$
5,733
3

6
%Total Capital (To Risk Weighted Assets)

$
9,704


10.16
%3
$
7,644
3

8
%3
$
9,552
3

10
%




The Company's Asset/Liability Committee ("ALCO") actively measures and manages interest rate risk using a process developed by the Company. The ALCO is also
responsible for implementing the Company's asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and
reviewing the Company's interest rate sensitivity position.

The
primary tool that management uses to measure short-term interest rate risk is a net interest income simulation model prepared by an independent correspondent institution.
These simulations estimate the impact that various changes in the overall level of interest rates over one- and two-year time horizons would have on net interest income. The
results help the Company develop strategies for managing exposures to interest rate risk.

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

At
December 31, 2008, approximately 69% of the Company's gross loans had adjustable rates. Based on the asset/liability modeling management believes that these loans reprice at a
faster pace than liabilities held at the Company. Because the majority of the institution's liabilities are 12 months and under and the gap in repricing is asset sensitive, with loans repricing
daily, management believes that a rising rate environment would have a positive impact on the Company's net interest margin. Floors in the majority of the Company's adjustable rate assets also
mitigate interest rate sensitivity in a decreasing rate environment.

24

---





Table of Contents

Off-Balance Sheet Arrangements

The Company, at December 31, 2008, had outstanding unused lines of credit and standby letters of credit that totaled $10,918,776. These commitments have
fixed maturity dates and many will mature without being drawn upon, meaning that the total commitment does not necessarily represent the future cash requirements. The Company has the ability to
liquidate federal funds sold or, on a short-term basis, to purchase federal funds from other banks and to borrow from the Federal Home Loan Bank. At December 31, 2008, the Company
had established with correspondent banks the ability to purchase federal funds if needed.

25

---



Table of Contents

The
following table shows the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the
average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets for each of the years in the
two-year period ended December 31, 2008. The table is presented on taxable equivalent basis, if applicable.

2008

2007Average
Balance

Interest
Income/
Expense

Average
Yields/
Rate

Average
Balance

Interest
Income/
Expense

Average
Yields/
RateAssets:Interest-earning assets:Loans (including fees)

$
100,452,306

$
7,227,220


7.19
%
$
83,490,614

$
7,480,371


8.96
%FHLB stock


271,069


14,012


5.17
%

259,167


17,068


6.59
%Deposits


294,865


5,119


1.74
%

61,035


916


1.50
%Federal funds sold


3,418,578


78,626


2.30
%

10,505,740


525,866


5.01
%Total interest-earning assets/interest-income


104,436,818


7,324,977


7.01
%

94,316,556


8,024,221


8.51
%Cash and due from banks


2,819,713








3,066,970Other assets


9,176,930








7,727,255Allowance for loan losses


(1,042,766
)







(653,410
)Total Assets

$
115,390,695







$
104,457,371Liabilities and Stockholder's Equity:Interest-bearing liabilities:Demand deposits

$
24,605,359

$
593,714


2.41
%
$
25,847,380

$
1,043,310


4.04
%Savings deposits


3,417,911


25,755


0.75
%

4,393,937


91,873


2.09
%Other time deposits


64,192,041


2,671,304


4.16
%

52,420,766


2,672,039


5.10
%FHLB advances and fed funds purchased


3,987,947


144,162


3.61
%

2,090,324


72,782


3.48
%Total interest-bearing liabilities/interest-expense


96,203,258


3,434,935


3.57
%

84,752,407


3,880,004


4.58
%Non-interest bearing demand deposits


9,234,573








9,737,015Other liabilities


931,843








929,319Stockholder's equity


9,021,021








9,038,630Total liabilities and stockholder's equity

$
115,390,695







$
104,457,371Net interest earnings




$
3,890,042







$
4,144,217Net interest spread








3.44
%







3.93
%Net interest margin








3.72
%







4.39
%


---

Note:    Average
loan balances include nonaccrual loans. Interest income collected on nonaccrual loans has been included.

26

---



Table of Contents

The
net interest margin for 2008 was 3.72% compared to a net interest margin of 4.39% for the same period in 2007, a decrease of 67 basis points. The net change in the net interest
margin was significant because the net decreases in the yield on interest-earning assets was approximately 150 basis points compared to the decrease in the rate paid on interest-bearing liabilities of
101 basis points. Other matters related to the changes in net interest income, net yields and rate, and net interest margin are presented below:



Net
interest income decreased by $254,175 between the years ended December 31, 2008 and 2007 and increased by $300,311 between the years ended December 31, 2007 and 2006.

The
following is an analysis of the changes in our net interest income comparing the changes attributable to rates and those attributable to volumes:

2008 Compared to 2007
Increase (Decrease) due to

2007 Compared to 2006
Increase (Decrease) due toRate

Volume

Net

Rate

Volume

NetInterest-earning assets:Loans

$
(1,772,919
)
$
1,519,768

$
(253,151
)
$
73,497

$
1,282,339

$
1,355,836FHLB stock


(3,840
)

784


(3,056
)

2,003


545


2,548Deposits


(7,699
)

11,902


4,203


(1,743
)

(30,300
)

(32,043
)Federal funds sold


(92,174
)

(355,066
)

(447,240
)

6,382


5,165


11,547Total interest-earning assets


(1,876,632
)

1,177,388


(699,244
)

80,139


1,257,749


1,337,888Interest-bearing liabilities:Demand deposits


456,564


(906,160
)

(449,596
)

79,768


105,502


185,270Savings deposits


(488,541
)

422,423


(66,118
)

5,525


(11,524
)

(5,999
)Other time deposits


(601,070
)

600,335


(735
)

311,844


585,153


896,997FHLB advances


5,343


66,037


71,380


2,792


(41,483
)

(38,691
)Total interest-bearing liabilities


(627,704
)

182,635


(445,069
)

399,929


637,648


1,037,577Net interest income

$
(1,248,928
)
$
994,753

$
(254,175
)
$
(319,790
)
$
620,101

$
300,311


Changes
in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on
which interest is received or paid. Volume changes have been determined by multiplying the prior years' average rate by the change in average balances outstanding. The rate change is the difference
between the net change and the volume change.

27

---



Table of Contents

The
Company had no debt securities as of December 31, 2008 and 2007.



December 31
2008

December 31
2007Consumer installment

$
3,165,460

$
3,781,485Commercial


16,679,407


17,124,587Commercial real estate


62,532,516


56,192,105Residential mortgage


23,323,827


15,844,751105,701,210


92,942,928Less:Estimated allowance for loan losses


2,373,648


1,094,083Loans, net

$
103,327,562

$
91,848,845


28

---



Table of Contents



The
following schedule details maturities and sensitivities to interest rate changes for loans and deposits as of December 31, 2008:

Within
1 year

1 to 5
years

Over 5
years

TotalUses of Funds:LoansInstallment

$
1,206,644

$
1,941,515

$
17,301

$
3,165,460Commercial


11,691,719


4,222,159


765,529


16,679,407Commercial real estate


30,587,779


27,332,515


4,612,222


62,532,516Mortgage


8,313,228


11,157,124


3,853,475


23,323,827Total Loans


51,799,370


44,653,313


9,248,527


105,701,210FHLB stock


291,200








291,200Deposits


30,546








30,546Bank owned life insurance








2,353,498


2,353,498Federal funds sold


3,706,160








3,706,160Total earning assets

$
55,827,276

$
44,653,313

$
11,602,025

$
112,082,614Sources of funds:Deposits:Interest-bearingMoney market, interest, checking, and savings

$
25,490,810

$


$


$
25,490,810Time deposits


65,726,424


4,584,178





70,310,602Total Deposits


91,217,234


4,584,178





95,801,412Borrowings


1,075,000


5,431,805





6,506,805Total interest-bearing liabilities

$
92,292,234

$
10,015,983

$


$
102,308,217Net repricing gap

$
(36,464,958
)
$
34,637,330

$
11,602,025

$
9,774,397Rate sensitivity gap:Net repricing gap as a percentage of total earning assets


(32.53
)%

30.90
%

10.35
%

8.72
%Cumulative gap:

$
(36,464,958
)
$
(1,827,628
)
$
9,774,397Cumulative gap as a percentage of total earning assets


(32.53
)%

(1.63
)%

8.72
%Rate Risk:Loans with predetermined rates

$
11,095,319

$
20,931,125

$
314,419

$
32,340,863Loans with variable/adjusted rate


40,704,050


23,722,188


8,934,109


73,360,347$
51,799,369

$
44,653,313

$
9,248,528

$
105,701,210


29

---





Table of Contents



The following table presents information regarding nonaccrual, past due and restructured loans at December 31, 2008 and 2007:

2008

2007Loans accounted for on a non-accrual basis:Number


11


8Amount

$
599,667

$
149,244Accruing loans (including consumer loans) which are contractually past due 90 days or more as to principal or interest payments:Number


0


0Amount

$


$
Loans defined as "troubled debt restructurings"Number


0


0Amount

$


$



Accrual
of interest is discontinued on a loan when management of the Company determines upon consideration of economic and business factors affecting collection efforts that collection
of interest is doubtful.

The
Bank has specifically identified and evaluated $6,414,683 and $4,035,939 in impaired loans at December 31, 2008 and 2007, respectively. The Bank has reserved $1,512,511 and
$438,069 related to these specifically evaluated loans as of December 31, 2008 and 2007, respectively.

The
Bank collectively evaluates large groups of smaller balance homogeneous loans for impairment. Loans collectively evaluated for impairment, with a classification of substandard or
doubtful, as of December 31, 2008 and 2007, were $739,517 and $2,233,949, respectively. The Bank has reserved $29,150 and $96,422 related to these loans as of December 31, 2008 and 2007,
respectively.

There
are no other loans which are not disclosed above, but where known, information about possible credit problems of borrowers causes management to have serious doubts as to the
ability of such borrowers to comply with the present loan repayment terms.

30

---



Table of Contents

The
following schedule details selected information related to the estimated allowance for loan loss account of the Company at December 31, 2008 and 2007:

December 312008

2007Balance at beginning of year

$
1,094,083

$
617,956Provision charged to expense


1,297,538


930,963Charge offs:Installment loans


(17,920
)

(39,985
)Commercial


(35,513
)

(341,118
)Mortgage


(11,075
)

(49,335
)Commercial real estate


(7,690
)

Overdrafts


(57,543
)

(66,788
)Credit card





(1,671
)Total Loan Losses


(129,741
)

(498,897
)Recoveries:Installment loans


10,590


16,420Commercial


42,984


14,941Overdrafts


1,031


11,358Mortgage


33,794


1,342Agriculture


22,435


Commercial real estate


934


Total Loan Recoveries


111,768


44,061Net Charge Offs


(17,973
)

(454,836
)Balance at end of year

$
2,373,648

$
1,094,083Ratio of net charge offs during the period to average loans outstanding during the period


0.02
%

0.54
%Allowance for loan losses as a percent of year end loans


2.25
%

1.18
%


At
December 31, 2008 and 2007, the allowance for loan losses was allocated as follows:

December 31, 2008

December 31, 2007Amount

Percentage of loan
in each category
to total loans

Amount

Percentage of loan
in each category
to total loansInstallment

$
36,088


2.95
%
$
33,695


4.04
%Commercial


487,827


15.78
%

371,871


18.42
%Commercial real estate


1,596,195


59.16
%

584,675


60.46
%Mortgage


232,603


22.07
%

88,027


17.05
%Overdrafts


20,935


0.04
%

15,815


0.03
%$
2,373,648


100.00
%
$
1,094,083


100.00
%


31

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Table of Contents

Nonaccrual
and Past Due Loans:

2008

2007Principal:Nonaccrual loans

$
599,667

$
149,244Loans past due 90 days or more and still accruing





$
599,667

$
149,244


The
estimated allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The
average amounts and average interest rates for deposits for 2008 and 2007 are detailed in the following schedule:

Years Ended December 31,2008

2007Deposit Category

Average
Amount

Average Rate
Paid

Average
Amount

Average Rate
PaidNoninterest-bearing demand

$
9,234,573


N/A

$
9,737,015


N/AInterest-bearing demand


24,605,359


2.41
%

25,847,380


4.04
%Savings deposits


3,417,911


0.75
%

4,393,937


2.09
%Time deposits


64,192,041


4.16
%

52,420,766


5.10
%


The
following schedule details the amount outstanding of time certificates of deposit of $100,000 or more and respective maturities for the year ended December 31, 2008:

Certificates of Deposit3 months or less

$
2,347,0113-6 months


5,441,7006-12 months


6,799,712Over 12 months


967,784Total

$
15,556,207


Returns
on average consolidated assets and average consolidated equity for the periods indicated are as follows:

Year Ended December 31,2008

2007Return on average assets


-0.48
%

-0.18
%Return on average equity


-6.19
%

-2.11
%Average equity to average assets ratio


7.82
%

8.65
%Dividend payout ratio


N/A


N/A


32

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Table of Contents



Pursuant to collateral agreements with Federal Home Loan Bank (FHLB), the advances are collateralized by specific first mortgage loans. The FHLB's required unpaid
principal balance of eligible mortgages was $8,807,912 and $3,568,683 at December 31, 2008 and 2007, respectively. The advances at December 31, 2008 and 2007, have the maturity dates as
follows:

Maturity Date

Interest Rate

December 31, 200804/01/10


3.56
%
$
543,13903/20/09


5.18


75,00001/01/11


4.37


388,66606/03/11


3.69


3,000,00008/04/10


3.63


1,500,000$
5,506,805




Maturity Date

Interest Rate

December 31, 200701/01/08


3.50
%
$
14,59904/01/10


3.56


591,34905/01/08


2.64


7,79206/01/08


3.28


637,24008/01/08


2.85


30,06708/01/08


2.99


56,66411/01/08


3.54


93,35503/20/09


5.18


75,00001/01/11


4.37


420,000$
1,926,026




On December 30, 2008, the Company entered into a promissory note and Commercial Loan Agreement with Jefferson Federal Bank whereby the Company borrowed
$1,000,000 from the lender secured by all of the outstanding shares of common stock of American Patriot Bank, pursuant to a Commercial Security Agreement entered into by the parties concurrently with
the loan.

The
loan contemplates a multiple advance draw loan, with the principal balance not to exceed $1,000,000. Interest will accrue on the loan at the rate of 6.00% per year, with payment
required upon demand, but if no demand is made, then payment must be made in quarterly payments of accrued interest calculated on the amount outstanding beginning on March 30, 2009, and
principal due on December 31, 2009. The Company may prepay the loan at any time by paying all principal, interest, escrow, late fees, and all other amounts due in full.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, the Corporation is not required to include this information in this Report.

33

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Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Reports of Independent Registered Public Accounting Firms, Consolidated Financial Statements and supplementary data required by Item 8 are set forth on
pages F-1 through F-23 of this Report and are incorporated herein by reference.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A(T).    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.The Corporation maintains disclosure controls and procedures, as defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by it in the reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and that such information is accumulated
and communicated to the Corporation's management, including its Chief Executive Officer and Chief Financial Officer. The Corporation carried out an evaluation, under the supervision and with the
participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the
end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Interim Chief Executive Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures were effective.

Changes in Internal Controls and Procedures.There were no changes in the Corporation's internal control over financial
reporting during the Corporation's fiscal quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, its internal control over financial
reporting.



The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rule 13a-15(f) promulgated under the Exchange Act. The Corporation's internal control system was designed to provide reasonable assurance to the Corporation's management and Board
of Directors regarding the preparation and fair presentation of published financial statements.

All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.

Management
assessed the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2008. In making this assessment, management used the
criteria set forth in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management
believes that, as of December 31, 2008, the Corporation's internal control over financial reporting is effective based on those criteria.

This
annual report does not include an attestation report of the Corporation's registered public accounting firm regarding internal control over financial reporting. Management's report
was not subject to attestation by the Corporation's registered public accounting firm pursuant to temporary rules of the SEC that permit the Corporation to provide only management's report in this
annual report.

ITEM 9B.    OTHER INFORMATION

None.

34

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Table of Contents

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information relating to our directors and executive officers will be contained in the Corporation's Proxy Statement for its 2009 Annual Meeting of shareholders to
be held June 26, 2009, and such information is incorporated herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION

Information relating to executive compensation will be contained in the Corporation's Proxy Statement for its 2009 Annual Meeting of shareholders to be held
June 26, 2009, and such information is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information relating to security ownership of certain beneficial owners and management will be contained in the Corporation's Proxy Statement for its 2009 Annual
Meeting of shareholders to be held June 26, 2009, and such information is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information relating to certain relationships and related transactions will be contained in the Corporation's Proxy Statement for its 2009 Annual Meeting of
shareholders to be held June 26, 2009, and such information is incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

Information relating to the principal accountant fees and services will be contained in the Corporation's Proxy Statement for its 2009 Annual Meeting of
shareholders to be held June 26, 2009, and such information is incorporated herein by reference.

35

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Table of Contents

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1)    Financial
Statements:



PageReport of Independent Registered Public Accounting Firm

F-1Consolidated Balance Sheets

F-2Consolidated Statements of Income

F-3Consolidated Statements of Changes in Stockholders' Equity

F-4Consolidated Statements of Cash Flows

F-5Notes to Consolidated Financial Statements

F-6




(3)         Exhibits:

Exhibit No.

Description3.1*

Charter of American Patriot Financial Group, Inc.3.2*

Bylaws of American Patriot Financial Group, Inc.10.1*

Share Exchange Agreement between American Patriot Financial Group, Inc. (F/K/A BG Financial Group, Inc.) and American Patriot Bank (F/K/A Bank of Greeneville), effective January 23, 200410.2**

Stock Option Agreement between American Patriot Bank and J. Robert Grubbs10.3**

Stock Option Agreement between American Patriot Bank and T. Don Waddell10.4**

Purchase and Assumption Agreement between American Patriot Bank (F/K/A Bank of Greeneville) and First Community Bank of East Tennessee, dated July 6, 200121.1

Subsidiaries of American Patriot Financial Group, Inc.31.1

Certification pursuant to Rule 13a-14a/15d-14(a)31.2

Certification pursuant to Rule 13a-14a/15d-14(a)32.1

Certification pursuant to Rule 18 U.S.C. Section 1350-Sarbanes-Oxley Act of 200232.2

Certification pursuant to Rule 18 U.S.C. Section 1350-Sarbanes-Oxley Act of 2002


---

36

---





Table of Contents

Signatures

Pursuant to the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

AMERICAN PATRIOT FINANCIAL GROUP, INC.By:

/s/ WILLIAM J. SMEADWilliam J. Smead, Interim Chief Executive OfficerDate: April 15, 2009


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in their capacities as
directors.

By:

/s/ LEONARD B. LAWSON

By:

/s/ WENDY C. WARNERLeonard B. Lawson





Wendy C. WarnerDate: April 15, 2009

Date: April 15, 2009By:

/s/ MICHAEL G. BURNS

By:

/s/ ROGER A. WOOLSEYMichael G. Burns, President





Roger A. WoolseyDate: April 15, 2009

Date: April 15, 2009By:

/s/ WILLIAM J. SMEADWilliam J. SmeadDate: April 15, 2009


37

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Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
American Patriot Financial Group, Inc.
Greeneville, Tennessee

We
have audited the accompanying consolidated balance sheets of American Patriot Financial Group, Inc. and subsidiary (Company) as of December 31, 2008 and 2007, and the
related consolidated statements of income, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Patriot Financial Group, Inc.
and subsidiary as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting
principles.

We
were not engaged to examine management's assessment of the effectiveness of American Patriot Financial Group, Inc.'s internal control over financial reporting as of
December 31, 2008, included inManagement's Report on Internal Control Over Financial Reportingfound in Item 9A(T) of
Form 10-K for the year ended December 31, 2008, and, accordingly, we do not express an opinion thereon.



Chattanooga,
Tennessee
April 13, 2009

F-1

---





Table of Contents



AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY
Greeneville, Tennessee

CONSOLIDATED BALANCE SHEETS

December 31,2008

2007ASSETSCash and due from banks

$
2,690,246

$
4,462,015Federal funds sold


3,706,160


10,607,427Cash and cash equivalents


6,396,406


15,069,442Federal Home Loan Bank stock, at cost


291,200


258,800Loans, net of allowance for loan losses of $2,373,648 in 2008 and $1,094,083 in 2007


103,327,562


91,848,845Premises and equipment, net


5,317,685


5,571,514Accrued interest receivable


505,460


548,410Deferred tax assets, net


788,325


319,297Foreclosed assets


394,579


475,366Cash surrender value of bank owned life insurance


2,353,498


2,246,146Other assets


218,111


196,503Total Assets

$
119,592,826

$
116,534,323LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIESDeposits:Noninterest-bearingDemand

$
7,937,765

$
12,352,954Interest-bearingMoney market, interest checking and savings


25,490,810


31,787,128Time deposits


70,310,602


60,889,257Total Deposits


103,739,177


105,029,339Accrued interest payable


522,592


813,069Other liabilities


476,003


108,887Federal Home Loan Bank and other borrowings


6,506,805


1,926,026Total Liabilities


111,244,577


107,877,321Commitments and Contingencies (Note 9 and 15)STOCKHOLDERS' EQUITYStock: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 December 31, 2008 and 2,314,391 shares at
December 31, 2007


796,337


771,362Additional paid-in capital


7,167,260


6,942,260Retained earnings


384,652


943,380Total Stockholders' Equity


8,348,249


8,657,002Total Liabilities and Stockholders' Equity

$
119,592,826

$
116,534,323


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

F-2

---





Table of Contents



AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY
Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,2008

2007Interest and dividend income:Loans, including fees

$
7,227,220

$
7,480,371Dividends on Federal Home Loan Bank stock


14,012


17,068Federal funds sold and other


83,745


526,782Total interest and dividend income


7,324,977


8,024,221Interest expense:Deposits


3,294,904


3,807,222Borrowed funds


140,031


72,782Total interest expense


3,434,935


3,880,004Net interest income before provision for loan losses


3,890,042


4,144,217Provision for loan losses


1,297,538


930,963Net interest income after provision for loan losses


2,592,504


3,213,254Noninterest income:Customer service fees


515,447


552,057Fees from origination of mortgage loans sold


16,657


73,702Investment sales commissions


9,734


67,847Other


132,100


63,803Total noninterest income


673,938


757,409Noninterest expenses:Salaries and employee benefits


2,038,169


2,186,911Occupancy


609,948


602,754Advertising


130,532


123,013Data processing


329,062


277,826Legal and professional


373,261


413,977Other operating


718,929


723,208Total noninterest expense


4,199,901


4,327,689Net loss before income taxes


(933,459
)

(357,026
)Income tax benefit


(374,731
)

(166,441
)Net loss

$
(558,728
)
$
(190,585
)Per share information:Basic net loss per common share

$
(0.24
)
$
(0.08
)Diluted net loss per common share

$
(0.23
)
$
(0.08
)Weighted average basic shares outstanding


2,365,006


2,312,443Weighted average diluted shares outstanding


2,380,763


2,414,158


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

F-3

---





Table of Contents



AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY
Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2008 and 2007

Number of
Shares

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

TotalBalance, December 31, 2006


2,311,071

$
770,256

$
6,932,307

$
1,133,965

$
8,836,528Comprehensive income:Net loss











(190,585
)

(190,585
)Total comprehensive loss














(190,585
)Issuance of 3,320 shares of common stock under stock option plan


3,320


1,106


9,953





11,059Balance, December 31, 2007


2,314,391

$
771,362

$
6,942,260

$
943,380

$
8,657,002Comprehensive income:Net loss











(558,728
)

(558,728
)Total comprehensive loss














(558,728
)Issuance of 75,000 shares of common stock under stock option plan


75,000


24,975


225,000





249,975Balance, December 31, 2008


2,389,391

$
796,337

$
7,167,260

$
384,652

$
8,348,249


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

F-4

---





Table of Contents



AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY
Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,2008

2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(558,728
)
$
(190,585
)Adjustments to reconcile net loss to net cash provided by operating activities:Provision for loan losses


1,297,538


930,963Write-down of foreclosed assets


37,975


39,809Depreciation


317,162


273,306Gain on sales of premises and equipment


(12,491
)

Realized loss on sales of foreclosed assets


4,598


72,794Deferred income tax benefit


(469,028
)

(152,752
)Federal Home Loan Bank stock dividends


(10,300
)

Increase in cash surrender value of bank owned life insurance


(107,352
)

(46,146
)Net change in:Accrued interest receivable


42,950


(41,504
)Other assets


(21,608
)

(117,732
)Other liabilities


367,116


(138,139
)Accrued interest payable


(290,477
)

114,244Net cash provided by operating activities


597,355


744,258CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of bank owned life insurance





(2,200,000
)Federal Home Loan Bank stock purchases


(22,100
)

Proceeds from sales of foreclosed assets


403,276


157,856Loan originations and principal collections, net


(13,141,317
)

(16,071,905
)Additions to premises and equipment


(65,167
)

(2,045,301
)Proceeds from sales of premises and equipment


14,325


Net cash used in investing activities


(12,810,983
)

(20,159,350
)CASH FLOWS FROM FINANCING ACTIVITIES:Net change in deposits (non-time deposits)


(10,711,507
)

6,316,601Net change in time deposits


9,421,345


16,209,686Net decrease in securitized borrowings





(3,099,091
)Federal Home Loan Bank advances


4,500,000


420,000Federal Home Loan Bank repayments


(919,221
)

(862,133
)Proceeds from other borrowings


1,000,000


Issuance of common stock


249,975


11,059Net cash provided by financing activities


3,540,592


18,996,122Net change in cash and cash equivalents


(8,673,036
)

(418,970
)Cash and cash equivalents at beginning of year


15,069,442


15,488,412Cash and cash equivalents at end of year

$
6,396,406

$
15,069,442SUPPLEMENTARY CASH FLOW INFORMATION:Interest paid on deposits and borrowed funds

$
3,725,412

$
3,765,760Income taxes paid (refunded)

$
(140,050
)
$
238,000SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:Foreclosed/repossessed assets sold during the year and financed through loans

$


$
20,000Transfer of loans to foreclosed/repossessed assets

$
365,062

$
351,925


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

F-5

---





Table of Contents



AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY
Greeneville, Tennessee

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Summary of Significant Accounting Policies

The accounting and reporting policies of American Patriot Financial Group, Inc. and subsidiary (Company) conform with accounting principles generally
accepted in the United States of America and accepted accounting and reporting practices within the banking industry. The significant accounting policies are summarized as follows:

Principles of Consolidation

The consolidated financial statements include the accounts of American Patriot Financial Group, Inc. and its wholly-owned subsidiary, American Patriot Bank
(Bank). All significant intercompany balances and transactions have been eliminated in consolidation.

Nature of Operations

The Company is a bank-holding company which owns all of the outstanding common stock of American Patriot Bank (Bank). The Bank provides a variety of
financial services through their locations in Greeneville and Maryville, Tennessee and surrounding areas. The Bank's primary deposit products are demand deposits, savings accounts, and certificates of
deposit. Its primary lending products are commercial loans, real estate loans, and installment loans.

Use of Estimates

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required
to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for
loan losses and the valuation of deferred tax assets.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks and federal funds sold, all of which
mature within ninety days.

Loans

The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout
Greeneville and Maryville, Tennessee and surrounding areas. The ability of the Bank's debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans
that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal
balances adjusted for charge-offs and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. The Bank does not defer loan fees and related loan
origination costs. Based on management's assessments, the difference between deferral and immediate recognition of such fees and related costs is not material.

F-6

---



Table of Contents

The
accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of
collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest
is considered doubtful.

All
interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due
are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are
charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The
allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The
allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention.
For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the
carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is
maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A
loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when
due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the loan is collateral dependent.

Large
groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans
for impairment disclosures, unless such loans are the subject of a restructuring agreement.

F-7

---



Table of Contents

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to
sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Premises and Equipment

Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation and amortization computed on the straight-line
method over the estimated useful lives of the assets or the expected terms of the leases, if shorter. Expected terms include lease option periods to the extent that the exercise of such options is
reasonably assured. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to
pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Advertising Costs

Advertising costs are expensed as incurred.

Stock Option Plan

The Company recognizes compensation cost relating to share-based payment transactions based on the fair value of the equity or liability instruments issued.
Compensation cost is measured using the fair value of the stock option award on the grant date and is recognized over the employee service period. The Company uses a stock option pricing model to
determine the fair value of the award on the grant date.

Income Taxes

Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred income
taxes related primarily to differences between the tax basis and the financial statement carrying amounts of the allowance for loan losses and accumulated depreciation. The deferred tax assets and
liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets
and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

F-8

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Table of Contents

Segment Reporting

Statement of Financial Accounting Standards No. 131,Disclosures about Segments of an Enterprise and Related
Informationprovides for the identification of reportable segments on the basis of discrete business units and their financial information to the extent such units are reviewed
by an entity's chief decision maker (which can be an individual or group of management persons). The Statement permits aggregation or combination of segments that have similar characteristics. In the
Company's operations, each bank branch is viewed by management as being a separately identifiable business or segment from the perspective of monitoring performance and allocation of financial
resources. Although the branches operate independently and are managed and monitored separately, each is substantially similar in terms of business focus, type of customers, products and services.
Accordingly, the Company's consolidated financial statements reflect the presentation of segment information on an aggregated basis in one reportable segment.

Earnings Per Share

Basic earnings per share represents income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that
would result from the assumed issuance. The effects of outstanding antidilutive stock options are excluded from the computation of diluted earnings per share. There were 33,150 and 35,900 antidilutive
stock options for 2008 and 2007, respectively. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

Recent Accounting Pronouncements

In March 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 156,Accounting for Servicing of Financial
Assets, ("SFAS 156") an Amendment of FASB Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, ("SFAS 140") which requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if
practicable, and requires entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement 140 for
subsequent measurement. SFAS 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company adopted SFAS 156 on
January 1, 2007. The adoption of SFAS 156 did not have any material impact on the Company's consolidated financial condition or results of operation.

In
July 2006, FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, ("FIN 48"). FIN 48
became effective for fiscal years beginning 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 degree of uncertainty.
FIN 48 did not have a material 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 a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies only to fair-value measurements that are already required or
permitted by other accounting standards and is expected to increase the consistency of those measurements. The statement emphasizes that fair value is a market-based measurement; not an
entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The effective
date for SFAS No. 157 was for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS No. 157 effective
January 1, 2008.

F-9

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Table of Contents

In
September 2006, the Financial Accounting Standards Board ratified a consensus opinion reached by the Emerging Issues Task Force on Issue 06-04, Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements,("EITF 06-04") which requires employers that enter into endorsement split-dollar life insurance arrangements that provide an employee with a postretirement benefit to recognize a
liability for the future benefits promised based on the substantive agreement made with the employer. Whether the accrual is based on a death benefit or on the future cost of maintaining the insurance
would depend on what the employer has effectively agreed to provide during the employee's retirement. The purchase of an endorsement-type life insurance policy does not qualify as a
settlement of the liability. The consensus in EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Company adopted EITF 06-4
effective January 1, 2008, and its adoption had no impact on the Company's consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities,("SFAS 159"). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this standard is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. This statement was effective as of January 1, 2008; however, it had no impact on the Company's consolidated financial statements because it did not elect the fair value
option for any financial instrument not presently being accounted for at fair value.

In
March 2007, the EITF reached a final consensus on Issue No. 06-10,Accounting for Deferred Compensation and Postretirement Benefit Aspects
of Collateral Assignment Split-Dollar Life Insurance Arrangements, ("EITF 06-10"). EITF 06-10 requires employers to recognize a liability
for the post-retirement benefit related to collateral assignment split-dollar life insurance arrangements in accordance with SFAS No. 106 or APB Opinion No. 12.
EITF 06-10 also requires employers to recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. The
provisions of EITF 06-10 were effective for the Company on January 1, 2008. EITF 06-10 had no impact on the Company's consolidated financial statements.

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

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

F-10

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Table of Contents

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

Reclassification

Certain amounts in the 2007 consolidated financial statements have been reclassified to conform to the 2008 presentation.

Note 2.    Restrictions On Cash and Due From Banks

The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2008 and 2007, these reserve balances amounted
to $25,000 and $25,000, respectively.

Note 3.    Federal Home Loan Bank Stock

As a member of the Federal Home Loan Bank (FHLB), the Bank is required to maintain stock in an amount equal to at least .15% of total assets and 4% of outstanding
FHLB advances. Federal Home Loan Bank stock is carried at cost and maintained by the Bank at par value of $100 per share.

Note 4.    Loans

A summary of the balances of loans follows:

December 31,
2008

December 31,
2007Consumer installment

$
3,165,460

$
3,781,485Commercial


16,679,407


17,124,587Commercial real estate


62,532,516


56,192,105Residential mortgage


23,323,827


15,844,751105,701,210


92,942,928Less:Estimated allowance for loan losses


(2,373,648
)

(1,094,083
)Loans, net

$
103,327,562

$
91,848,845


An
analysis of the allowance for loan losses follows:

Year Ended
December 31,
2008

Year Ended
December 31,
2007Balance, beginning

$
1,094,083

$
617,956Provision for loan losses


1,297,538


930,963Recoveries of loans previously charged-off


111,768


44,0612,503,389


1,592,980Loans charged-off


129,741


498,897Balance, ending

$
2,373,648

$
1,094,083


F-11

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Table of Contents

The
following is a summary of information pertaining to impaired and non-accrual loans:

December 31,
2008

December 31,
2007Impaired loans with a specific valuation allowance

$
6,414,683

$
4,035,939Total specifically evaluated impaired loans

$
6,414,683

$
4,035,939Specific valuation allowance related to impaired loans

$
1,512,511

$
438,069Past-due loans ninety days or more and still accruing

$


$
Total non-accrual loans

$
599,667

$
149,244




Years Ended December 31,2008

2007Average investment in specifically evaluated impaired loans

$
3,771,924

$
3,920,969Interest income recognized on impaired loans

$
381,454

$
230,007Interest income recognized on a cash basis on impaired loans

$
389,381

$
219,914


In
addition to the specifically evaluated impaired loans above, the Bank collectively evaluates large groups of smaller balance homogeneous loans for impairment. Loans collectively
evaluated for impairment, with a classification of substandard or doubtful, as of December 31, 2008 and 2007, were $739,517 and $2,233,949, respectively. The bank has reserved $29,150 and
$96,422 related to these loans as of December 31, 2008 and 2007, respectively.

No
additional funds are committed to be advanced in connection with impaired loans.

The
Bank's only significant concentration of credit at December 31, 2008, occurred in real estate loans which totaled approximately $86 million. While real estate loans
accounted for 81 percent of total loans, these loans were primarily residential development and construction loans, residential mortgage loans, and commercial loans secured by commercial
properties. Substantially all real estate loans are secured by properties located in Tennessee.

The
amounts of loans due directly from officers and directors of the Company or indirectly from corporations, partnerships or ventures in which these individuals have an interest were
$2,068,606 and $3,780,866 at December 31, 2008 and 2007, respectively. During the years ended December 31, 2008 and 2007, total principal additions were $2,230,241 and $3,920,857,
respectively, and total principal payments were $3,942,501 and $987,421, respectively.

Note 5.    Premises and Equipment

The major classes of premises and equipment and the total accumulated depreciation are as follows:

December 31,
2008

December 31,
2007Land

$
1,670,363

$
1,670,363Land for future development


564,712


564,712Premises and improvements


2,575,058


2,575,058Furniture and equipment


2,305,360


2,274,731Construction in process





22,1867,115,493


7,107,050Less: Accumulated depreciation


(1,797,808
)

(1,535,536
)$
5,317,685

$
5,571,514


F-12

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Table of Contents

Depreciation
and amortization expense of premises and equipment for 2008 and 2007 was $317,162 and $273,306, respectively.

Rental
expense under operating leases for 2008 and 2007 was $49,561 and $48,308, respectively.

Future
minimum rental payments required under noncancellable operating leases for equipment and data processing fees under operating agreements were as follows:

2009

$
24,1462010


24,1462011


20,0862012


9,3802013


$
77,758


Note 6.    Federal Home Loan Bank Advances and Other Borrowings

Pursuant to collateral agreements with Federal Home Loan Bank (FHLB), the advances are collateralized by specific first mortgage loans. The FHLB's required unpaid
principal balance of eligible mortgages was $8,807,912 at December 31, 2008. The advances at December 31, 2008, have maturity dates as follows:

Maturity Date

Interest Rate

December 31, 200804/01/10


3.56

$
543,13903/20/09


5.18


75,00001/01/11


4.37


388,66606/03/11


3.69


3,000,00008/04/10


3.63


1,500,000$
5,506,805


As
of December 31, 2008, the Company had $250,000 available in unfunded letters of credit with the FHLB.

On
December 30, 2008, the Company entered into a promissory note and Commercial Loan Agreement with Jefferson Federal Bank whereby the Company borrowed $1,000,000 from the lender
secured by all of the outstanding shares of common stock of American Patriot Bank, pursuant to a Commercial Security Agreement entered into by the parties concurrently with the loan.

The
loan contemplates a multiple advance draw loan, with the principal balance not to exceed $1,000,000. Interest will accrue on the loan at the rate of 6.000% per year, with payment
required upon demand, but if no demand is made, then payment must be made in quarterly payments of accrued interest calculated on the amount outstanding beginning on March 30, 2009, and
principal due on December 31, 2009. The Company may prepay the loan at any time by paying all principal, interest, escrow, late fees, and all other amounts due in full.

F-13

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Table of Contents

Note 7.    Income Tax Matters

Net deferred tax assets consist of the following components as of December 31, 2008 and 2007:

2008

2007Deferred Tax Assets:Allowance for loan losses

$
908,870

$
418,925Amortization of intangibles, start-up cost and organizational costs


19,145


22,209Interest on non-accrual loans


8,847


8,415Deferred compensation


28,236


6,715Other


28,259


27,721993,357


483,985Deferred Tax Liabilities:FHLB stock dividends


3,943


Earnings on cash surrender value of life insurance


41,105


Depreciable assets


159,984


164,688205,032


164,688Net deferred tax assets

$
788,325

$
319,297


The
provision for income taxes charged to income for the years ended December 31, 2008 and 2007 consists of the following:

2008

2007Current tax expense (benefit)

$
94,297

$
(13,689
)Deferred tax (benefit)


(469,028
)

(152,752
)Total income tax (benefit)

$
(374,731
)
$
(166,441
)


The
income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 2008 and
2007, due to the following:

2008

2007Computed "expected" tax expense (benefit)

$
(317,376
)
$
(121,389
)State income tax (benefit), net of federal benefits


(40,045
)

(15,316
)Other, net


(17,310
)

(29,736
)$
(374,731
)
$
(166,441
)


Note 8.    Deposits

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2008 and 2007, was $15,556,207 and $20,834,243, respectively.

At
December 31, 2008, the scheduled maturities of time deposits are as follows:

2009

$
65,726,4242010


3,958,2622011


573,4942012


52,422$
70,310,602


F-14

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Table of Contents

Deposits
from related parties held by the Bank at December 31, 2008 and 2007, amounted to approximately $851,982 and $683,647 respectively.

Note 9.    Financial Instruments With Off-Balance-Sheet Risk

In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of
credit, which are not included in the accompanying financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for
commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments
as it does for instruments that are included in the balance sheet. At December 31, 2008 and 2007, undisbursed loan commitments aggregated $10,871,376 and $13,853,961, respectively. In addition,
there were outstanding standby letters of credit totaling $47,400 and $144,978, respectively.

Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-
producing commercial properties.

Standby
letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed
expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank's policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

Note 10.    Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank and the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors.

Quantitative
measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).

As
of December 31, 2008, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action according to the most recent notification from
the Federal Deposit Insurance Corporation. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table below.

F-15

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Table of Contents

The Bank's actual capital amounts and ratios are as follows:

Actual

For Capital
Adequacy Purposes

To Be Well
Capitalized Under
Prompt Corrective
Action ProvisionsAmount

Ratio

Amount

Ratio

Amount

RatioAs of December 31, 2008 (in Thousands)Tier 1 Capital (To Average Assets)

$
9,305


7.85%
3
$
4,743


4%
3
$
5,9283


5
%Tier 1 Capital (To Risk Weighted Assets)

$
9,305


9.15%
3
$
4,069


4%
3
$
6,1193


6
%Total Capital (To Risk Weighted Assets)

$
10,396


10.22%
3
$
8,138


8%
3
$
10,1983


10
%As of December 31, 2007 (in Thousands)Tier 1 Capital (To Average Assets)

$
8,610


7.66%
3
$
4,493
3

4%
3
$
5,6173


5
%Tier 1 Capital (To Risk Weighted Assets)

$
8,610


9.01%
3
$
3,822
3

4%
3
$
5,7333


6
%Total Capital (To Risk Weighted Assets)

$
9,704


10.16%
3
$
7,644
3

8%
3
$
9,5523


10
%


As of December 31, 2008, the Bank is also required to maintain minimum capital ratios of Tier 1 capital to average assets of
7 percent, Tier 1 capital to risk-weighted assets ratio of 10 percent and is limited in its ability to pay dividends.

Note 11.    Fair Value Disclosures

Fair
Value Measurements:

On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157,Fair Value Measurements("SFAS 157"), which defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements.
SFAS 157 applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those
measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date. The
statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability.

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

SFAS 157
also establishes a three-tier fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value, as follows:



F-16

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Table of Contents



A
financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a
description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Impaired
LoansThe Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan
losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.
Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114,Accounting by Creditors for Impairment of a
Loan, ("SFAS 114"). The fair value of impaired loans is estimated using several methods including collateral value, liquidation value and discounted cash flows. Those
impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2008,
substantially all of the total impaired loans were evaluated (or impaired loans were primarily evaluated) based on the fair value of collateral. In accordance with SFAS 157, impaired loans
where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on the observable market
price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

The
Company has no assets or liabilities measured at fair value on a recurring basis; however, certain assets and liabilities are measured at fair value on a nonrecurring basis, which
means the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of
impairment). The table below presents information about assets on the balance sheet at December 31, 2008, for which a nonrecurring change in fair value was recorded during 2008.

Balance as of
December 31,
2008

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Other
Unobservable
Inputs
(Level 3)Impaired loans

$
4,902,172

$


$


$
4,902,172


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

Fair
Value of Financial Instruments:

The
fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based
upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Statement of Financial Accounting Standards No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Company.

F-17

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Table of Contents

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

Cash and Cash Equivalents

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

Federal Home Bank Loan Stock

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

Loans

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values
for fixed-rate loans (including non-performing loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.

Accrued Interest Receivable

The carrying amounts of accrued interest receivable approximate fair value.

Cash Surrender Value of Bank-Owned Life Insurance

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

Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate,
fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank Advances

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

Accrued Interest Payable

The carrying amounts of accrued interest payable approximate fair value.

Other Borrowings

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

F-18

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Table of Contents

Off-Balance Sheet Credit-Related Instruments

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

The
estimated fair values of the Company's financial instruments are as follows at December 31:

2008

2007Carrying
Amount

Fair
Value

Carrying
Amount

Fair
ValueFinancial Assets:Cash and cash equivalents

$
6,396,406

$
6,396,406

$
15,069,442

$
15,069,442Federal Home Loan Bank stock


291,200


291,200


258,800


258,800Loans, net


103,327,562


103,366,947


91,848,845


91,708,676Accrued interest receivable


505,460


505,460


548,410


548,410Cash surrender value of BOLI


2,353,498


2,353,498


2,246,146


2,246,146Financial Liabilities:Deposits


103,739,177


104,400,737


105,029,339


105,343,715Accrued interest payable


522,592


522,592


813,069


813,069Federal Home Loan Bank and other borrowings


6,506,805


6,656,364


1,926,026


1,962,166


Note 12.    Employee Benefit Plans

The Company has a retirement savings 401(k) plan in which all employees may participate. To be eligible, an employee must complete six (6) months of
service and reach their entry date. An entry date is the first day of the Plan Year quarter coinciding with or following the date that satisfies the Plan's eligibility requirements. For 2008,
employees may make pretax, voluntary contributions in amounts up to $15,500 (age 49 or less) and $20,500 (age 50 and older). The Company may make discretionary matching contributions equal to a
uniform percentage of tiered salary deferrals. This percentage will be determined each year. The Company's expense for the plan was $45,147 and $3,484 for the years ended December 31, 2008 and
2007, respectively.

Note 13.    Stock Option Plan

The Company has an employee Stock Option Plan (the Plan) under which certain employees may be granted options to purchase shares of the Company's authorized but
unissued common stock. The maximum number of shares of the Company's common stock available for issuance under the Plan is 375,000 shares. The maximum number of shares available for future grants
under the Plan was 166,859 shares for the year ended December 31, 2008 and 106,390 shares for the year ended December 31, 2007. Under the Plan, the option exercise price is equal to the
fair market value of the Company's common stock at the date of the grant. The options expire on the tenth anniversary of the date of the option. Proceeds received by the Company from exercises of the
stock options are credited to common stock and additional paid-in capital. No stock options were granted and no compensation expense was recognized during 2008 or 2007.

F-19

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Table of Contents

A
summary of the status of the Company's stock option plan is presented below:

Years Ended December 31,2008

2007Shares

Average
Exercise
Price

Aggregate
Intrinsic
Value(1)

Shares

Average
Exercise
Price

Aggregate
Intrinsic
Value(1)Outstanding at beginning of year


206,619

$
5.01





242,629

$
5.12Granted














Exercised


(75,000
)

3.33





(3,320
)

3.33Forfeited


(60,469
)

4.86





(32,690
)

5.95Outstanding at end of year


71,150

$
6.92

$
63,460


206,619

$
5.01

$
596,539Options exercisable at year-end


71,150

$
6.92

$
63,460


206,619

$
5.01

$
596,539






The
following tables summarize the information about the stock options outstanding and exercisable at December 31, 2008:

Stock Options OutstandingExercise Price

Number of
Options
Outstanding

Weighted Average
Remaining
Contractual
Life in Years$  3.33


38,000


2.5$  5.33


15,000


3.0$  7.67


2,400


3.8$13.00


100


4.8$17.00


550


5.7$17.00


15,000


5.7$19.00


100


6.371,150


3.4


Note 14.    Salary Deferral Plan

During 2007, the Company adopted a nonqualified salary deferral plan for certain directors and key officers. As a result, the Company is the owner of single
premium life insurance policies on the life of each participant and is the beneficiary of the policy values, which have an aggregate face value amount of $6,244,029. The cash surrender value of the
policies, which is reflected in the accompanying consolidated balance sheets as of December 31, 2008 and 2007 are $2,353,498 and $2,246,146, respectively. Additionally, the associated net
non-cash income, which is included in the cash surrender value, are $107,352 and $46,146 for the years ended December 31, 2008 and 2007, respectively.

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Table of Contents

The Company recognized $56,206 and $30,536 in compensation expense related to the salary deferral plan for the years ended December 31, 2008 and 2007,
respectively, which is included in salaries and employee benefits in the accompanying consolidated statements of income. The net present value of future obligations owed the participants in the salary
deferral plan, which is included in other liabilities in the accompanying consolidated balance sheets at December 31, 2008 and 2007, are $73,504 and $30,536, respectively.

Note 15.    Contingencies

The Bank is involved in certain claims arising from normal business activities. Management believes that those claims are without merit and that the ultimate
liability, if any, resulting from them will not materially affect the Bank's financial condition or the Company's consolidated financial position.

Note 16.    Liquidity and Capital Resources

The Company's primary source of funds with which to pay its future obligations is the receipt of dividends from its subsidiary bank. Banking regulations provide
that the Bank must maintain capital sufficient to enable it to operate as a viable institution and, as a result, may limit the amount of dividends the Bank may pay without prior approval. It is
management's intention to limit the amount of dividends paid in order to maintain compliance with capital guidelines and to maintain a strong capital position in the Bank.

Note 17.    Capital Structure

Common Stock

The Board of Directors of the Holding Company is authorized to issue up to 6,000,000 shares of common stock. Holders of common stock have unlimited voting rights
and are entitled to receive the net assets of the Holding Company upon dissolution.

Preferred Stock

The Board of Directors of the Holding Company is authorized to issue up to 1,000,000 shares of preferred stock. Shares of the preferred stock may be issued from
time to time in one or more series, each such series to be so designated as to distinguish the shares thereof from the shares of all other series and classes. The Board of Directors has the authority
to divide any or all classes of preferred stock into series and to fix and determine the relative rights and preferences of the shares of any series so established. The preferred stock is not
redeemable.

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Table of Contents

Note 18.    Condensed Financial Statements of Parent Company

Financial information pertaining only to American Patriot Financial Group, Inc. is as follows:

Balance Sheets

December 31,
2008

December 31,
2007AssetsCash and due from banks

$
2,338

$
2,042Investment in American Patriot Bank


9,305,528


8,610,321Other assets


63,308


47,140Total assets

$
9,371,174

$
8,659,503Liabilities and Stockholders' EquityAccrued expenses

$
22,925

$
2,501Note payable


1,000,000


Total liabilities


1,022,925


2,501Stockholders' EquityStock:Preferred stock, no par value; authorized 1,000,000 shares; none issued and outstandingCommon stock, $0.333 par value; authorized 6,000,000 shares; issued and outstanding 2,389,391 shares in 2008; 2,314,391 shares in 2007


796,337


771,362Additional paid-in capital


7,167,260


6,942,260Retained earnings


384,652


943,380Total Stockholders' Equity


8,348,249


8,657,002Total Liabilities and Stockholders' Equity

$
9,371,174

$
8,659,503


Statements of Income

Year Ended
December 31,
2008

Year Ended
December 31,
2007IncomeDividends from American Patriot Bank

$
22,000

$
80,000Total income


22,000


80,000Operating expenses


113,579


101,908Loss before income taxes and equity in undistributed earnings of American Patriot Bank


(91,579
)

(21,908
)Applicable income tax benefit


(62,644
)

(46,017
)(28,935
)

(24,109
)Equity in undistributed net loss


(529,793
)

(214,694
)Net loss

$
(558,728
)
$
(190,585
)


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Table of Contents

Statements of Cash Flows

Year Ended
December 31,
2008

Year Ended
December 31,
2007Cash flows from operating activities:Net loss

$
(558,728
)
$
(190,585
)Adjustments to reconcile net loss to net cash used in operating activities:Equity in undistributed loss of American Patriot Bank


529,793


214,694Depreciation





98Deferred income tax expense


664


459Increase in other liabilities


20,424


2,401Increase in other assets


(16,832
)

(38,700
)Net cash used in operating activities


(24,679
)

(11,633
)Cash flows from investing activities:Capital contribution to subsidiary


(1,225,000
)

Net cash used by investing activities


(1,225,000
)

Cash flows from financing activities:Issuance of common stock


249,975


11,059Proceeds from debt issuance


1,000,000


Net cash provided by financing activities


1,249,975


11,059Net increase (decrease) in cash and cash equivalents


296


(574
)Cash and cash equivalents at beginning of year


2,042


2,616Cash and cash equivalents at end of year

$
2,338

$
2,042


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