American Patriot Financial (APFG) 10-Q 2008 Q3 Quarterly report

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

OR

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

For the transition period from                    to                  

Commission file number   000-50771

AMERICAN PATRIOT FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

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

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

Not Applicable

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

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

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

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

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

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

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

2

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED BALANCE SHEETS

Part I. FINANCIAL INFORMATION

Item 1.  Financial Statements

	As of		As of
	September 30, 2008		December 31, 2007
	(Unaudited)
ASSETS
Cash and due from banks	$	2,617,452	$	4,462,015
Federal funds sold	3,299,672		10,607,427
Cash and cash equivalents	5,917,124		15,069,442
Federal Home Loan Bank stock, at cost	291,200		258,800
Loans, net of estimated allowance for loan losses of $984,400 in 2008 and $1,094,083 in 2007	101,637,551		91,848,845
Premises and equipment, net	5,394,186		5,571,514
Accrued interest receivable	500,940		548,410
Deferred tax assets, net	300,892		319,297
Foreclosed assets	390,897		475,366
Cash surrender value of bank owned life insurance	2,326,660		2,246,146
Other assets	165,481		196,503
Total Assets	$	116,924,931	$	116,534,323
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand	$	8,226,644	$	12,352,954
Interest-bearing
Money market, interest checking and savings	26,929,064		31,787,128
Time deposits	66,051,846		60,889,257
Total Deposits	101,207,554		105,029,339
Accrued interest payable	417,714		813,069
Other liabilities	472,124		108,887
Federal Home Loan Bank advances	5,615,718		1,926,026
Total Liabilities	107,713,110		107,877,321
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Stock:
Preferred stock, no par value; authorized 1,000,000 shares; none issued and outstanding	—		—
Common stock, $0.333 par value; authorized 6,000,000 shares; issued and outstanding 2,389,391 shares at September 30, 2008 and 2,314,391 shares at December 31, 2007	796,337		771,362
Additional paid-in capital	7,167,260		6,942,260
Retained earnings	1,248,224		943,380
Total Stockholders’ Equity	9,211,821		8,657,002
Total Liabilities and Stockholders’ Equity	$	116,924,931	$	116,534,323

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

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AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

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

4

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

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

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AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

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

6

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

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

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AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.Summary of Significant Accounting Policies

Nature of Business:

American Patriot Financial Group, Inc. (the “Company”) is a bank holding company which owns all of the outstanding common stock of American Patriot Bank (the “Bank”).  The Bank provides a variety of financial services through 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.

The following is a description of the significant policies used in the preparation of the accompanying consolidated financial statements.

Basis of Presentation:

These consolidated financial statements include the accounts of American Patriot Financial Group, Inc. and its wholly owned subsidiary, American Patriot Bank.  Significant intercompany transactions and accounts are eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation  S-X as promulgated by the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.  Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.  For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.  Certain amounts from prior period financial statements have been reclassified to conform to the current period’s presentation.

Use of Estimates:

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  The most significant management accounting estimate is the allowance for loan losses.  The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

8

Note 2.Stock Options and Awards

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

Note 3.Earnings Per Share of Common Stock

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

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

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

9

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

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Impact of Inflation

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

Critical Accounting Estimates

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

Recent Accounting Pronouncements

In 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 will be applied prospectively and is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  SFAS 157 did not  have a material impact on the Company’s consolidated financial statements.

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

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (“SFAS 159”).  This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this standard is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  This statement is effective as of the beginning of fiscal years beginning after November 15, 2007, with early adoption permitted under certain circumstances.  The Company did not choose to early adopt this standard and implementation of SFAS 159 did not have a material impact on its financial position or results of operations.

11

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

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

Forward-Looking Statements

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

General

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

12

Liquidity

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

Results of Operations

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

Net Interest Income/Margin

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

13

Provision for / Benefit from Loan Losses

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

Provision (Benefit) for/from Income Taxes

The Company’s provision for income tax expense for the three and nine months ended September 30, 2008 was $57,939 and $159,709, respectively when compared to a benefit from income taxes of $(20,583) and a provision for income taxes of $133,161 for the same periods in 2007.  Management believes the provision for income taxes for the period ended September 30, 2008 to be adequate.

Noninterest Income

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

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Noninterest Expense

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

Financial Condition

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

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

Loans

Net loans outstanding totaled $101,637,551 at September 30, 2008 compared to $91,848,845 at December 31, 2007.  Commercial and real estate loan growth accounted for almost all of the approximately $9.8 million increase for the first three quarters of 2008. Management feels the overall quality of loans remains solid.  In the event that a loan is 90 days or 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 September 30, 2008, total loans 90 days or more past due and still accruing interest were $0, while total loans in non-accrual status were $359,969.  At December 31, 2007, total loans 90 days or more past due and still accruing interest were $0, while total loans in non-accrual status were $149,244.

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

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

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

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In connection with impaired loans, additional funds are committed to one borrower in an amount not to exceed $392,575 subject to compliance with provisions of the applicable loan agreement which includes a lending base formula.

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

Restricted Equity Investments

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

Deposits

Total deposits, which are the principal source of funds for the Company, were $101,207,554 at September 30, 2008, compared to $105,029,339 at December 31, 2007, representing a decrease of 3.6%.  The Company has targeted local consumers, professional and commercial businesses as its central clientele; therefore, deposit instruments in the form of demand deposits, savings accounts, money market demand accounts, NOW accounts, certificates of deposit and individual retirement accounts are offered to customers.   The Company established a line of credit with the Federal Home Loan Bank secured by a blanket-pledge of 1-4 family residential mortgage loans.   At September 30, 2008 the Company had outstanding advances of $5,615,718 at the Federal Home Loan Bank.  As mentioned previously, competition for deposit accounts has been fierce in our local economy and the overall economic downturn has also contributed to this overall decrease. These two factors have also contributed to the shift from DDA, Money Market and Savings accounts into CD’s and caused us to rely more heavily on FHLB advances.  We anticipate the trends seen over the first three quarters of 2008 to continue through the remainder of the year.

Capital

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

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

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

Liability and Asset Management

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

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

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

At September 30, 2008, approximately 68% of the Company’s gross loans had adjustable rates.  Based on the asset/liability modeling, management believes that these loans reprice at a faster pace than liabilities held by the Company.  Because the majority of the Company’s liabilities are 12 months and under and the gap in repricing is asset sensitive, management believes that a rising rate environment would have a positive impact on the Company’s net interest margin.  Floors in the majority of the Company’s adjustable rate assets also mitigate interest rate sensitivity in a decreasing rate environment.  However, there is increasing pressure to adjust the floor rates downward in the adjustable rate portfolio as customers become more cost conscious and competition becomes more aggressive.

Off-Balance Sheet Arrangements

The Company, at September 30, 2008, had outstanding unused lines of credit and standby letters of credit that totaled approximately $12,569,000.  These commitments have fixed maturity dates and many will mature without being drawn upon, meaning that the total commitment does not necessarily represent the future cash requirements.  The Company has the ability to liquidate Federal funds sold or, on a short-term basis, to purchase Federal funds from other banks and to borrow from the Federal Home Loan Bank.  At September 30, 2008, the Company had established with correspondent banks the ability to purchase Federal funds if needed.

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

The information set forth on pages 11 through 17 of Item 2, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” is incorporated herein by reference.

Item 4.Controls and Procedures

a)Evaluation of Disclosure Controls and Procedures

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

b)Changes in Internal Controls and Procedures

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

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PART II - OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

 None.

Item 1A.RISK FACTORS

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

Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)None.

(b)Not applicable.

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

The Company’s ability to pay dividends is derived from the income of the Bank.  The Bank’s ability to declare and pay dividends is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to banks that are regulated by the FDIC and the Department of Financial Institutions.  In addition, the Federal Reserve Board may impose restrictions on the Company’s ability to pay dividends on its common stock.  As a result, the Company cannot assure its shareholders that it will declare or pay dividends on shares of its common stock in the future and the Company has never paid dividends in the past.

Item 3.DEFAULTS UPON SENIOR SECURITIES

(a)None.

(b)None.

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

None.

Item 5.OTHER INFORMATION

(a)None.

(b)None.

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Item 6.EXHIBITS.

Index to Exhibits.

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

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

**Previously filed as an exhibit to American Patriot Bank’s Registration Statement on Form 10-SB, as filed with the Federal Deposit Insurance Corporation on April 27, 2002, and incorporated herein by reference.

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

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SIGNATURES

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

AMERICAN PATRIOT FINANCIAL GROUP, INC.
(Registrant)
DATE:	November 14, 2008	/s/ Jerry A. Simmerly
		Jerry A. Simmerly
		Chief Executive Officer
DATE:	November 14, 2008	/s/ T. Don Waddell
		T. Don Waddell
		Chief Financial Officer

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