American Patriot Financial (APFG) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2009

OR

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

For the transition period from _____________________ to ________________

Commission file number   000-50771

AMERICAN PATRIOT FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Tennessee	20-0307691
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
3095 East Andrew Johnson Highway  Greeneville, Tennessee	37745
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code:  (423) 636-1555
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES o  NO o

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

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

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

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

2

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED BALANCE SHEETS

Part I. FINANCIAL INFORMATION

Item 1.  Financial Statements

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

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

3

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

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

4

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

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

5

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

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

6

AMERICAN PATRIOT FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

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

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 its locations in Greeneville and Maryville, Tennessee and surrounding areas.  The Bank’s primary deposit products are demand deposits, savings accounts, and certificates of deposit.  Its primary lending products are commercial loans, real estate loans, and installment loans.

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

Basis of Presentation:

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

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

Use of Estimates:

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

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Note 2. Stock Options and Awards

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

Note 3. Earnings Per Share of Common Stock

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

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

	Three Months Ended June 30,
	2009					2008
	Income(Loss)			Shares		Income		Shares
	(Numerator)			(Denominator)		(Numerator)		(Denominator)
Basic EPS
Income (loss) available to
common stockholders	$	(925,157	)		2,389,391	$	82,502		2,340,353
Effect of dilutive securities
Stock options outstanding		-			-		-		13,333
Diluted EPS
Income (loss) available to
common shareholders plus
assumed conversions	$	(925,157	)		2,389,391	$	82,502		2,353,686

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	Six Months Ended June 30,
	2009					2008
	Income			Shares		Income		Shares
	(Numerator)			(Denominator)		(Numerator)		(Denominator)
Basic EPS
Income (loss) available to
common stockholders	$	(1,499,192	)		2,389,391	$	216,067		2,340,353
Effect of dilutive securities
Stock options outstanding		-			-		-		15,418
Diluted EPS
Income (loss) available to
common shareholders plus
assumed conversions	$	(1,499,192	)		2,389,391	$	216,067		2,355,771

Note 4. Fair Value Disclosures

Fair Value Measurements:

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

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

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

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Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

Impaired Loans – The Company does not record loans at fair value on a recurring basis.  However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan, (“SFAS 114”).  The fair value of impaired loans is estimated using several methods including collateral value, liquidation value and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  At June 30, 2009, substantially all of the total impaired loans were evaluated (or impaired loans were primarily evaluated) based on the fair value of collateral.  In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on the observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed Assets – Foreclosed assets consisting of properties obtained through foreclosure or in satisfaction of loans is initially recorded at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs.  At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses.  Gains or losses on sale and any subsequent adjustments to the fair value are recorded as a component of foreclosed real estate expense.  Other real estate is included in Level 3 of the valuation hierarchy.

The Company has no assets or liabilities measured at fair value on a recurring basis; however, certain assets and liabilities are measured at fair value on a nonrecurring basis, which means the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

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

			Quoted
			Prices in
			Active		Significant		Significant
	Balance as		Markets for		Other		Other
	of		Identical		Observable		Unobservable
	June 30,		Assets		Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)
Foreclosed Assets	$	2,832,177	$	-	$	-	$	2,832,177
Impaired Loans		7,885,786		-		-		7,885,786

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

Fair Value of Financial Instruments:

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

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

Cash and Cash Equivalents

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

Federal Home Bank Loan Stock

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

Loans

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

Accrued Interest Receivable

The carrying amounts of accrued interest receivable approximate fair value.

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Cash Surrender Value of Bank-Owned Life Insurance

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

Deposits

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

Federal Home Loan Bank Advances

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

Accrued Interest Payable

The carrying amounts of accrued interest payable approximate fair value.

Other Borrowings

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

Off-Balance Sheet Credit-Related Instruments

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

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

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

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

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

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

14

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

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

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

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

15

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

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

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

Forward-Looking Statements

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

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General

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

Liquidity

At June 30, 2009, the Company had liquid assets of approximately $18.3 million in the form of cash and federal funds sold compared to approximately $6.4 million on December 31, 2008.  Management believes that the liquid assets are adequate at June 30, 2009. Additional liquidity should be provided by the growth in deposit accounts and loan repayments.  The Company also has the ability to purchase federal funds and is a member of the Federal Home Loan Bank of Cincinnati that will provide a credit line if necessary. Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material impact on the Company’s short term or long term liquidity and has taken a pro-active approach to develop a larger local deposit base to help minimize any risk.

Results of Operations

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

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Net Interest Income/Margin

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

Provision for / Benefit from Loan Losses

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

 Management believes that the allowance for loan losses is adequate at June 30, 2009. However, there can be no assurance that additional provisions for loan losses will not be required in the future, including as a result of possible changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy, and the residential real estate market in particular, or changes in the circumstances of particular borrowers.  Management intends to pursue more aggressive strategies for problem loan resolution, and is committed to bolster loan loss reserves to levels sufficient to absorb losses recognized in the pursuit of this strategy.

Provision (Benefit) for/from Income Taxes

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

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Noninterest Income

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

Noninterest Expense

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

Financial Condition

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

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

19

Loans

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

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

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

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

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

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

Restricted Equity Investments

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

Deposits

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

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Capital

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

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

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

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

Liability and Asset Management

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

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

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

At June 30, 2009, approximately 69% of the Company’s gross loans had adjustable rates.  Based on the asset/liability modeling, management believes that these loans reprice at a faster pace than liabilities held by the Company.  Because the majority of the Company’s liabilities are 12 months and under and the gap in repricing is asset sensitive, management believes that a rising rate environment would have a positive impact on the Company’s net interest margin.  Floors in the majority of the Company’s adjustable rate assets also mitigate interest rate sensitivity in a decreasing rate environment.  However, there is increasing pressure to adjust the floor rates downward in the adjustable rate portfolio as customers become more cost conscious and competition becomes more aggressive.

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Off-Balance Sheet Arrangements

The Company, at June 30, 2009, had outstanding unused lines of credit and standby letters of credit that totaled approximately $11,451,000.  These commitments have fixed maturity dates and many will mature without being drawn upon, meaning that the total commitment does not necessarily represent the future cash requirements.  The Company has the ability to liquidate Federal funds sold or, on a short-term basis, to purchase Federal funds from another bank and to borrow from the Federal Home Loan Bank.  At June 30, 2009, the Company had established with a correspondent bank the ability to purchase Federal funds if needed.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

The information set forth on pages 14 through 22 of Item 2, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, is incorporated herein by reference.

Item 4.  Controls and Procedures

a)Evaluation of Disclosure Controls and Procedures

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

b)Changes in Internal Controls and Procedures

There were no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2009, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, 2008, as filed with the Securities and Exchange Commission on April 15, 2009.

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

(a) None.

(b) Not applicable.

(c) No repurchases of Company securities were made during the quarter ended June 30, 2009.

The Company's ability to pay dividends is derived from the income of the Bank.  The Bank's ability to declare and pay dividends is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to banks that are regulated by the FDIC and the Tennessee Department of Financial Institutions (“TDFI”).  Pursuant to the terms of the Order, the Bank is prohibited from paying dividends to the Company without the prior written consent of the FDIC and the TDFI. In addition, the Federal Reserve Board may impose restrictions on the Company's ability to pay dividends on its common stock.  As a result, the Company cannot assure its shareholders that it will declare or pay dividends on shares of its common stock in the future. The Company has never paid dividends in the past.

Item 3.  DEFAULTS UPON SENIOR SECURITIES

(a) None.

(b)  None.

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

(a) The annual meeting of the Company’s shareholders was held June 26, 2009.

(b) The following members of the board of directors were each re-elected as Class II directors to serve for an additional three-year term or until their respective successors are duly elected and qualified:

Wendy C. Warner

Michael G. Burns

The term of office for the following members of the board of directors continued after the meeting:  William J. Smead and Roger A. Woolsey (Class III).  The Bank does not currently have a Class I director.

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

Name	Number of Shares Voting		For		Withheld		Broker Non- Vote
Wendy C. Warner		1,346,093		1,296,522		49,571		0
Michael G. Burns		1,346,093		1,330,582		15,511		0

(2) The ratification of the appointment of Hazlett, Lewis & Bieter, PLLC as independent auditors for the Company for the fiscal year 2009 was as follows:

Number of							Broker
Shares Voting	For		Against		Abstain		Non-Votes
1,346,093		1,332,252		2,375		11,466		0

(d)   None.

Item 5.  OTHER INFORMATION

(a)   None.

(b)   None.

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Item 6.   EXHIBITS.

Index to Exhibits.

Exhibit No.	Description
3.1*	Charter of American Patriot Financial Group, Inc.
3.2*	Bylaws of American Patriot Financial Group, Inc.
10.1**	Stipulation and Consent to the Issuance of an Order to Cease and Desist dated May 29, 2009
10.2**	Order to Cease and Desist between American Patriot Bank and the Federal Deposit Insurance Corporation dated June 3, 2009
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, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification pursuant to Rule 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Previously filed as an exhibit to a Current Report on Form 8-K filed by American Patriot Financial Group, Inc. (f/k/a BG Financial Group, Inc.) with the Commission on May 21, 2004.

** Previously filed as an exhibit to a Current Report on Form 8-K filed by American Patriot Financial Group, Inc. with the Commission on June 9, 2009.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AMERICAN PATRIOT FINANCIAL GROUP, INC.
(Registrant)
DATE:           August 14, 2009	/s/ William J. Smead
	William J. Smead
	Interim Chief Executive Officer
DATE:           August 14, 2009	/s/ T. Don Waddell
	T. Don Waddell
	Chief Financial Officer

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