**U.
        S. SECURITIES AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 **FORM
        10 - K**
 
 [
                  X
                  ]
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT
                OF
                  1934
 
 For
        the
        Fiscal Year Ended December 31, 2006
  [  
                  ]
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES
                    EXCHANGE ACT OF 1934
 
 **Commission
        file number 000-29599**
 
 **PATRIOT
        NATIONAL BANCORP, INC.**
 (Exact
        name of registrant as specified in its charter)
 
 **Connecticut**
              **06-1559137**(State
                  or other jurisdiction of incorporation or organization)
              (IRS
                  Employer Identification Number)**900
                  Bedford Street****Stamford,
                  Connecticut**
              **06901**(Address
                  of principal executive offices)
              (Zip
                  Code)Registrant’s
                  telephone number, including area code:
              **(203)
                  324-7500**
 
 Securities
        registered under Section 12(b) of the Exchange Act: None
 
 Securities
        registered under Section 12(g) of the Exchange Act: Common Stock, par value
        $2.00 per share
 
 Indicate
        by check mark if the registrant in a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act of 1933.  Yes o 
        No þ
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 of 15(d) of the Securities Exchange Act of 1934. Yes o 
        No þ
 
 Check
        whether the registrant (1) filed all reports required to be filed by
        Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
        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  þ 
        No o
 
 Check
        if
        disclosure of delinquent filers in response to Item 405 of Regulation S-K
        is not
        contained in this form, and no disclosure will be contained, to the best
        of
        registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K.      [   ]
 
 Check
        whether the registrant is a large accelerated filer, an accelerated filer
        or a
        non-accelerated filer in Rule 12(b) of the Exchange Act.
 Large
        accelerated filer o       Accelerated
        filer  o       Non-accelerated
        filer    þ
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12B-2 of the Act).
 Yes o No þ
 
 Aggregate
        market value of the voting stock held by nonaffiliates of the registrant
        as of
        February 28, 2007 based on the last sale price as reported on the
        NASDAQ Global Market: $ 87,306,174.
 
 Number
        of
        shares of the registrant’s Common Stock, par value $2.00 per share, outstanding
        as of February 28, 2007:  4,739,494.
 
 Documents
        Incorporated by Reference
 
 Proxy
        Statement for 2006 Annual Meeting of Shareholders. (A definitive proxy statement
        will be filed with the Securities and Exchange Commission within 120 days
        after
        the close of the fiscal year covered by this Form 10-K.)
 
 Incorporated
        into Part III of this Form 10-K.
 **Patriot
        National Bancorp, Inc.**
 **2006
        Form 10-K Annual Report**
 
 **TABLE
        OF CONTENTS**
 
 **Part
                  I**Item
                  1.
              Business
              2Item
                  1A.
              Risk
                  Factors
              9Item
                  1B.
              Unresolved
                  Staff Comments
              15Item
                  2.
              Properties
              15Item
                  3.
              Legal
                  Proceedings
              15Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              15**Part
                  II**Item
                  5.
              Market
                  for Common Equity, Related Shareholder Matters and IssuerPurchases
                  of Equity Securities
              16Item
                  6.
              Selected
                  Financial Data
              19Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition andResults
                  of Operation
              20Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              38Item
                  8.
              Financial
                  Statements and Supplementary Data
              41Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting andFinancial
                  Disclosure
              42Item
                  9A.
              Controls
                  and Procedures
              42Item
                  9B.
              Other
                  Information
              42**Part
                  III**Item
                  10
              Directors,
                  Executive Officers and Corporate Governance
              43Item
                  11
              Executive
                  Compensation
              43Item
                  12
              Security
                  Ownership of Certain Beneficial Owners and Management andRelated
                  Shareholder Matters
              43Item
                  13
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              43Item
                  14
              Principal
                  Accountant Fees and Services
              43**Part
                  IV**Item
                  15
              Exhibits
                  and Financial Statement Schedules
              44























**“Safe
      Harbor” Statement Under Private Securities Litigation Reform Act of
      1995**





Certain
      statements contained in Bancorp’s public reports, including this report, and in
      particular in “Management’s Discussion and Analysis of Financial Condition and
      Results of Operation,” may be forward looking and subject to a variety of risks
      and uncertainties. These factors include, but are not limited to, (1) changes
      in
      prevailing interest rates which would affect the interest earned on Bancorp’s
      interest earning assets and the interest paid on its interest bearing
      liabilities, (2) the timing of repricing of Bancorp’s interest earning assets
      and interest bearing liabilities, (3) the effect of changes in governmental
      monetary policy, (4) the effect of changes in regulations applicable to Bancorp
      and the Bank and the conduct of its business, (5) changes in competition
      among financial service companies, including possible further encroachment
      of
      non-banks on services traditionally provided by banks, (6) the ability of
      competitors that are larger than Bancorp to provide products and services which
      it is impracticable for Bancorp to provide, (7) the effect of Bancorp’s
      opening of branches, (8) the effect of any decision by Bancorp to engage in
      any
      business not historically operated by it and (9) the ability of Bancorp to
      timely and successfully deploy the capital raised in the 2006 offering and
      any
      future offerings. Other such factors may be described in Bancorp’s other filings
      with the SEC.





Although
      Bancorp believes that it offers the loan and deposit products and has the
      resources needed for continued success, future revenues and interest spreads
      and
      yields cannot be reliably predicted. These trends may cause Bancorp to adjust
      its operations in the future. Because of the foregoing and other factors, recent
      trends should not be considered reliable indicators of future financial results
      or stock prices.












1


**PART
      I**





Item
      1. Business





General





Patriot
      National Bancorp, Inc. (“ *Bancorp* ”),
      a
      Connecticut corporation, was organized in 1999 for the purpose of becoming
      a
      one-bank holding company (the “ *Reorganization* ”)
      for
      Patriot National Bank, a national banking association headquartered in Stamford,
      Fairfield County, Connecticut (the “ *Bank* ”).
      Following receipt of regulatory and shareholder approvals, the Reorganization
      became effective as of the opening of business on December 1, 1999.
      Upon consummation of the Reorganization, each outstanding share of Common Stock,
      par value $2.00 per share, of the Bank (“ *Bank
      Common Stock* ”),
      was
      converted into the right to receive one share of Common Stock, par value $2.00
      per share, of Bancorp (“ *Bancorp
      Common Stock* ”),
      and
      each outstanding option or warrant to purchase Bank Common Stock became an
      option or warrant to purchase an equal number of shares of Bancorp Common
      Stock.





The
      Bank
      was granted preliminary approval by the Comptroller of the Currency (the *“OCC”* )
      on
      March 5, 1993. It received its charter and com-menced operations as a
      national bank on August 31, 1994. Since then, the Bank has opened
      branch offices in Greenwich and Old Greenwich, Connecticut, two branch
      offices in Norwalk, Connecticut, a second Stamford location, two branch offices
      in Wilton, Connecticut, a branch office in Darien, Connecticut, a branch office
      in Southport, Connecticut, a branch office in Milford, Connecticut and two
      branch offices in Fairfield, Connecticut. The Bank also expanded into New York
      State through the purchase of a small branch office in New York City. The Bank
      recently received regulatory approval to open six additional branch
      offices.





On
      June 30, 1999, the Bank through its wholly-owned subsidiary, PinPat
      Acquisition Corporation, acquired all of the outstanding capital stock of
      Pinnacle Financial Corp., a Connecticut corporation, Pinnacle Financial Corp.,
      a
      New Jersey corporation, and Pinnacle Financial Corp., a New York corporation
      (collectively, “ *Pinnacle* ”),
      a
      residential mortgage broker. Pinnacle surrendered its mortgage licenses and
      the
      mortgage brokerage business of Pinnacle is now conducted through the lending
      function of Patriot National Bank.





PinPat
      Acquisition Corporation currently holds one commercial property as other real
      estate owned transferred from the bank upon the conclusion of foreclosure
      proceedings in the third quarter of 2006.





On
      March
      11, 2003, Bancorp formed Patriot National Statutory Trust I (the “Trust”) for
      the sole purpose of issuing trust preferred securities and investing the
      proceeds in subordinated debentures issued by Bancorp. Bancorp primarily
      invested the funds from the issuance of the debt in the Bank, which in turn
      used
      the proceeds to fund general operations of the Bank.





On
      November 17, 2006 the Bank acquired a small branch office and related deposits
      at 45 West End Avenue, New York, New York, from Millennium bcpbank, a
      national bank headquartered in Newark, New Jersey. The acquisition is in
      furtherance of Bancorp’s growth


2


strategy
      and will permit the Bank to establish additional branches in New York State.
      The
      Bank assumed the existing lease and plans to operate from the branch at 45
      West
      End Avenue.





As
      of the
      date hereof, the only business of Bancorp is its ownership of all of the issued
      and outstanding capital stock of the Bank and the Trust. Except as specifically
      noted otherwise herein, the balance of the description of Bancorp’s business is
      a description of the Bank’s business.





Commercial
      Banking





The
      Bank
      conducts business at its main office located at 900 Bedford Street, Stamford,
      Connecticut and at branch offices located at: 838 High Ridge Road, Stamford,
      Connecticut, 100 Mason Street, Greenwich, Connecticut, 184 Sound Beach
      Avenue, Old Greenwich, Connecticut, 16 River Street and 365 Westport Avenue
      in
      Norwalk, Connecticut, One Danbury Road and 5 River Road in Wilton, Connecticut,
      800 Post Road in Darien, Connecticut, 3695 Post Road in Southport,
      Connecticut, 771 Boston Post Road in Milford, Connecticut, 45 West End
      Avenue in New York City, New York and 1127 Post Road and 1755 Black Rock
      Turnpike in Fairfield, Connecticut. The Bank also operates loan origination
      offices at 1177 Summer Street, Stamford, Connecticut and 200 Broad Hollow
      Road, Melville, New York.





The
      Bank
      offers a broad range of consumer and commercial banking services with an
      emphasis on serving the needs of individuals, small and medium-sized businesses
      and professionals. The Bank offers consumer and commercial deposit accounts
      that
      include: checking accounts, interest-bearing “NOW” accounts, insured money
      market accounts, time certificates of deposit, savings accounts, IRA’s
      (Individual Retirement Accounts) and health savings accounts (HSA’s). Other
      services include money orders, traveler’s checks, ATM’s (automated teller
      machines), internet banking and debit cards. In addition, the Bank may in the
      future offer Keogh accounts and other financial services.





The
      Bank
      offers commercial real estate and construction loans to area businesses and
      developers. Real estate loans made to individuals include home mortgages, home
      improvement loans, bridge loans and home equity lines of credit. Other personal
      loans include lines of credit, installment loans and credit cards. Commercial
      loans offered to small and medium-sized businesses include secured and unsecured
      loans to service companies, real estate developers, manufacturers, restaurants,
      wholesalers, retailers and professionals doing business in the region. The
      Bank
      also offers residential mortgages; the bank solicits and processes mortgage
      loan
      applications from consumers on behalf of permanent investors and originates
      loans for sale.





Competition





The
      Bank
      competes with a variety of financial institutions in its market area. Most
      have
      greater financial resources and capitalization, which gives them higher lending
      limits and the ability to conduct larger advertising campaigns to attract
      business. Generally the larger institutions offer services such as trust and
      international banking which the Bank is not equipped to offer directly. When
      the
      need arises, arrangements are made with correspondent institutions to provide
      such services. In the future, if the Bank desires to offer trust services,
      prior
      approval of the OCC will be required. To attract business in this competitive
      environment, the Bank relies on local


3


promotional
      activities and personal contact by officers, directors and shareholders and
      on
      its ability to offer personalized services.





The
      customer base of the Bank is diversified so that there is not a concentration
      of
      either loans or deposits within a single industry, a group of industries, a
      single person or groups of people. The Bank is not dependent on one or a few
      major customers for either its deposit or lending activities, the loss of any
      one of which would have a material adverse effect on the business of the
      Bank.





Residents
      and businesses in Stamford, Greenwich, Norwalk, Wilton, Darien, Southport,
      Fairfield and Milford, Connecticut provide the majority of the Bank’s deposits.
      The Bank has focused its attention on serving the segments of its market area
      historically served by community banks. The Bank competes in its market by
      providing a high level of personalized and responsive banking service for which
      the Bank believes there is a need. This area is bordered by New York State
      to
      the west, the Town of Ridgefield to the north, the Town of Orange to the east,
      and the Long Island Sound to the south.





The
      Bank’s loan customers extend beyond Stamford, Greenwich, Norwalk, Wilton,
      Darien, Southport, Milford and Fairfield to include nearby towns in Fairfield
      County, Connecticut, and towns in Westchester County, New York, although the
      Bank’s loan business is not necessarily limited to these areas. The Bank’s
      mortgage brokerage business is concentrated primarily in the areas surrounding
      its loan origination offices. While the Bank does not currently hold or intend
      to attract significant deposit or loan business from major corporations with
      headquarters in the Fairfield County area, the Bank believes that the service,
      professional and related busi-nesses which have been attracted to this area,
      as
      well as the individuals that reside in this area, represent current and
      potential customers of the Bank.





As
      the
      Bank expands with full service branch banking offices into Westchester County,
      New York, it will solicit deposits from residents and businesses located within
      the New York metropolitan area in addition to further developing its loan
      production efforts. This expansion effort will involve material deployment
      of
      the Bank’s capital.





In
      the
      normal course of business and subject to applicable government regulations,
      the
      Bank invests a portion of its assets in investment securities, which may include
      certain debt and equity securities, including government securities. An
      objective of the Bank’s investment policy is to seek to optimize its return on
      assets while limiting its exposure to interest rate movements and to maintain
      adequate levels of liquidity.





The
      Bank’s employees perform most routine day-to-day banking transactions at the
      Bank. However, the Bank has entered into a number of arrangements with third
      parties for banking services such as correspondent banking, check clearing,
      data
      pro-cessing services, credit card processing and armored carrier
      service.





The
      cities of Stamford and Norwalk and the towns of Greenwich, Wilton, Darien,
      Southport, Milford and Fairfield are presently served by over 200 branches
      of
      commercial banks and savings banks, most of which are offices of banks which
      have headquarters outside of the state or area or are subsidiaries of bank
      or
      financial holding companies whose headquarters are outside of


4


the
      areas
      served by the Bank. In addition to banks with branches in the same areas as
      the
      Bank, there are numerous banks and financial institutions serving the
      communities surrounding these areas, which also draw customers from Stamford,
      Greenwich, Norwalk, Wilton, Darien, Southport, Milford and Fairfield, posing
      significant competition to the Bank for deposits and loans. Many of those banks
      and financial institutions are well established and well
      capitalized.





In
      recent
      years, intense market demands, economic pressures and significant legislative
      and regulatory actions have eroded banking industry classifications which were
      once clearly defined and have increased competition among banks, as well as
      other financial institutions including non-bank competitors. This increase
      in
      competition has caused banks and other financial service institutions to
      diversify their services and become more cost effective. The impact on Bancorp
      of federal legislation authorizing increased services by financial holding
      companies and interstate branching of banks has also resulted in increased
      competition. These events have resulted in increasing homogeneity in the
      financial services offered by banks and other financial institutions. The impact
      on banks and other finan-cial institutions of these market dynamics and
      legislative and regulatory changes has been increased customer awareness of
      product and service dif-ferences among competitors and increased merger
      activity.





Supervision
      and Regulation





As
      a bank
      holding company, Bancorp’s operations are subject to regulation, supervision and
      examination by the Board of Governors of the Federal Reserve Board (the
“ *Federal
      Reserve Board* ”).
      The
      Federal Reserve Board has established capital adequacy guidelines for bank
      holding companies that are similar to the OCC’s capital guidelines applicable to
      the Bank. The Bank Holding Company Act of 1956, as amended (the “ *BHC
      Act* ”),
      limits the types of companies that a bank holding company may acquire or
      organize and the activities in which it or they may engage. In general, bank
      holding companies and their subsidiaries are only permitted to engage in, or
      acquire direct control of, any company engaged in banking or in a business
      so
      closely related to banking as to be a proper incident thereto. Federal
      legislation enacted in 1999 authorizes certain entities to register as financial
      holding companies. Registered financial holding companies are permitted to
      engage in businesses, including securities and investment banking businesses,
      which are prohibited to bank holding companies. While the creation of financial
      holding companies is evolving, to date there has been no significant impact
      on
      Bancorp.





Under
      the
      BHC Act, Bancorp is required to file annually with the Federal Reserve Board
      a
      report of its operations. Bancorp, the Bank and any other subsidiaries are
      subject to examination by the Federal Reserve Board. In addition, Bancorp will
      be required to obtain the prior approval of the Federal Reserve Board to
      acquire, with certain exceptions, more than 5% of the outstanding voting stock
      of any bank or bank holding company, to acquire all or substantially all of
      the
      assets of a bank or to merge or consolidate with another bank holding company.
      Moreover, Bancorp, the Bank and any other subsidiaries are prohibited from
      engaging in certain tying arrangements in connection with any extension of
      credit or provision of any property or services. The Bank is also subject to
      certain restrictions imposed by the Federal Reserve Act on issuing any extension
      of credit to Bancorp or any of its subsidiaries or making any investments in
      the
      stock or other securities thereof and on the taking of such stock or securities
      as collateral for loans to any borrower. If Bancorp wants to engage in
      businesses permitted to financial holding companies


5


but
      not
      to bank holding companies, it would need to register with the Federal Reserve
      Board as a financial holding company.





The
      Federal Reserve Board has issued a policy statement on the payment of cash
      dividends by bank holding companies, which expresses its view that a bank
      holding company should pay cash dividends only to the extent that the bank
      holding company’s net income for the past year is sufficient to cover both the
      cash dividend and a rate of earnings retention that is consistent with the
      bank
      holding company’s capital needs, asset quality and overall financial condition.
      The Federal Reserve Board has also indicated that it would be inappropriate
      for
      a company experiencing serious financial problems to borrow funds to pay
      dividends. Furthermore, under the prompt corrective action regulations adopted
      by the Federal Reserve Board pursuant to applicable law, the Federal Reserve
      Board may prohibit a bank holding company from paying any dividends if its
      bank
      subsidiary is classified as “undercapitalized.”





A
      bank
      holding company is required to give the Federal Reserve Board prior written
      notice of any purchase or redemption of its outstanding equity securities if
      the
      gross consideration for the purchase or redemption, when combined with the
      net
      consideration paid for all such purchases or redemptions during the preceding
      12
      months, is equal to 10% or more of its consolidated retained earnings. The
      Federal Reserve Board may disapprove such a purchase or redemption if it
      determines that the proposal would constitute an unsafe or unsound practice
      or
      would violate any law, regulation, Federal Reserve Board order, or any condition
      imposed by, or written agreement with, the Federal Reserve Board.





The
      Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,
      (“ *Riegle-Neal
      Act* ”)
      was
      enacted to ease restrictions on interstate banking. Effective
      September 29, 1995, the Riegle-Neal Act allows the Federal Reserve
      Board to approve an application of an adequately capitalized and adequately
      managed bank holding company to acquire control of, or acquire all or
      substantially all of the assets of, a bank located in a state other than such
      holding company’s state, without regard to whether the transaction is prohibited
      by the laws of any state. The Federal Reserve Board may not approve the
      acquisition of a bank that has not been in existence for the minimum time period
      (not exceeding five years) specified by the statutory law of the host state.
      The
      Riegle-Neal Act also prohibits the Federal Reserve Board from approving an
      application if the applicant (and its depository institution affiliates)
      controls or would control more than 10% of the insured deposits in the United
      States or 30% or more of the deposits in the target bank’s home state or in any
      state in which the target bank maintains a branch. The Riegle-Neal Act does
      not
      affect the authority of states to limit the percentage of total insured deposits
      in the state which may be held or controlled by a bank or bank holding company
      to the extent that such limitation does not discriminate against out-of-state
      banks or bank holding companies. Individual states may also waive the 30%
      statewide concentration limits contained in the Riegle-Neal Act. The Riegle-Neal
      Act also allows banks to establish branch offices in other than the bank’s home
      state if the target state has “opted in” to interstate branching. Connecticut
      has “opted in”; New York has not, so at the present time the bank cannot
      establish a branch (deposit taking and loan making facility) in New York State
      except through the purchase of an existing New York bank or branch of a New
      York
      bank. The bank consummated such a purchase in
      November 2006.


6


Bancorp
      is subject to capital adequacy rules and guidelines issued by the OCC, the
      Federal Reserve Board and the Federal Deposit Insurance Corporation
      (“ *FDIC* ”),
      and
      the Bank is subject to capital adequacy rules and guidelines issued by the
      OCC.
      These substantially identical rules and guidelines require Bancorp to maintain
      certain minimum ratios of capital to adjusted total assets and/or risk-weighted
      assets. Under the provisions of the Federal Deposit Insurance Corporation
      Improvements Act of 1991, the Federal regulatory agencies are required to
      implement and enforce these rules in a stringent manner. Bancorp is also subject
      to applicable provisions of Connecticut law insofar as they do not conflict
      with, or are not otherwise preempted by, Federal banking law.





Bancorp
      is subject to the reporting requirements of the Securities Exchange Act of
      1934,
      as amended (the “ *Exchange
      Act”* ),
      and,
      in accordance with the Exchange Act, files periodic reports, proxy statements
      and other information with the Securities and Exchange Commission
      (the *“SEC”* ).





The
      Bank’s operations are subject to regulation, supervision and examination by the
      OCC and the FDIC.





Federal
      and state banking regulations regulate, among other things, the scope of the
      business of a bank, a bank holding company or a financial holding company,
      the
      investments a bank may make, deposit reserves a bank must maintain, the
      establishment of branches and the activities of a bank with respect to mergers
      and acquisitions. The Bank is a member of the Federal Reserve System and is
      subject to applicable provisions of the Federal Reserve Act and regulations
      thereunder. The Bank is subject to the federal regulations promulgated pursuant
      to the Financial Institutions Supervisory Act to prevent banks from engaging
      in
      unsafe and unsound practices, as well as various other federal and state laws
      and consumer protection laws. The Bank is also subject to the comprehensive
      provisions of the National Bank Act.





The
      OCC
      regulates the number and locations of the branch offices of a national bank.
      The
      OCC may only permit a national bank to maintain branches in locations and under
      the conditions imposed by state law upon state banks. At this time, applicable
      Connecticut banking laws do not impose any material restrictions on the
      establishment of branches by Connecticut banks throughout Connecticut. New
      York
      State law is similar; however, the Bank cannot establish a branch in a town
      with
      a population of less than 50,000 that is the headquarter town of another
      bank.





The
      earnings and growth of Bancorp, the Bank and the banking industry are affected
      by the monetary and fiscal policies of the United States Government and its
      agencies, particularly the Federal Reserve Board. The Open Market Committee
      of
      the Federal Reserve Board implements national monetary policy to curb inflation
      and combat recession. The Federal Reserve Board uses its power to adjust
      interest rates in United States Government securities, the Discount Rate and
      deposit reserve retention rates. The actions of the Federal Reserve Board
      influence the growth of bank loans, investments and deposits. They also affect
      interest rates charged on loans and paid on deposits. The nature and impact
      of
      any future changes in monetary policies cannot be predicted.


7


In
      addition to other laws and regulations, Bancorp and the Bank are subject to
      the
      Community Reinvestment Act (“ *CRA”* ),
      which
      requires the Federal bank regulatory agencies, when considering certain
      applications involving Bancorp or the Bank, to consider Bancorp’s and the Bank’s
      record of helping to meet the credit needs of its entire community, including
      low- and moderate-income neighborhoods. The CRA was originally enacted because
      of concern over unfair treatment of prospective borrowers by banks and over
      unwarranted geographic differences in lending patterns. Existing banks have
      sought to comply with CRA in various ways; some banks have made use of more
      flexible lending criteria for certain types of loans and borrowers (consistent
      with the requirement to conduct safe and sound operations), while other banks
      have increased their efforts to make loans to help meet identified credit needs
      within the consumer community, such as those for home mortgages, home
      improvements and small business loans. This may include participation in various
      government insured lending programs, such as Federal Housing Administration
      insured or Veterans  Administration
      guaranteed mortgage loans, Small Business Administration loans, and
      participation in other types of lending programs such as high loan-to-value
      ratio conventional mortgage loans with private mortgage insurance. To date,
      the
      market area from which the Bank draws much of its business is Stamford,
      Greenwich, Norwalk, Wilton, Darien, Southport and Milford, which are
      characterized by a very diverse ethnic, economic and racial cross-section of
      the
      population. As the Bank expands further, the market areas served by the Bank
      will continue to evolve. Bancorp and the Bank have not and will not adopt any
      policies or practices, which discourage credit applications from, or unlawfully
      discriminate against, individuals or segments of the communities served by
      the
      Bank.





On
      October 26, 2001, the United and Strengthening America by Providing Tools
      Required to Intercept and Obstruct Terrorism Act of 2001, or the *USA
      Patriot Act,* was
      enacted to further strengthen domestic security following the September 11,
      2001
      attacks. This Act amends various federal banking laws, particularly the Bank
      Secrecy Act, with the intent to curtail money laundering and other activities
      that might be undertaken to finance terrorist actions. The Act also requires
      that financial institutions in the United States enhance already established
      anti-money laundering policies, procedures and audit functions and ensure that
      controls are reasonably designed to detect instances of money laundering through
      certain correspondent or private banking accounts. Verification of customer
      identification, maintenance of said verification records and cross checking
      names of new customers against government lists of known or suspected terrorists
      is also required. The Patriot Act was recently reauthorized and modified with
      the enactment of The USA Patriot Act Improvement and Reauthorization Act of
      2005.





On
      July
      20, 2002, the Sarbanes-Oxley Act of 2002 was enacted, the primary purpose of
      which is to protect investors through improved corporate governance and
      responsibilities of, and disclosures by, public companies. The Act contains
      provisions for the limitations of services that external auditors may provide
      as
      well as requirements for the credentials of Audit Committee members. In
      addition, the principal executive and principal financial officers are required
      to certify in quarterly and annual reports that they have reviewed the report;
      and based on the officers’ knowledge, the reports accurately present the
      financial condition and results of operations of the company and contain no
      untrue statement or omission of material fact. The officers also certify their
      responsibility for establishing and maintaining a system of internal controls
      which insure that all material information is made known to the officers; this
      certification also includes the evaluation of the effectiveness of disclosure
      controls and


8


procedures
      and their impact upon financial reporting. Section 404 of the Act entitled
      Management Assessment of Internal Controls, requires that each annual report
      include an internal control report which states that it is the responsibility
      of
      management for establishing and maintaining an adequate internal control
      structure and procedures for financial reporting, as well as an assessment
      by
      management of the effectiveness of the internal control structure and procedures
      for financial reporting. This section further requires that the external
      auditors attest to, and report on, the assessment made by management. On
      September 21, 2005, the SEC extended the Section 404 compliance dates
      for non-accelerated filers (those issuers with non-affiliated public float
      of
      less than $75 million) to fiscal years ending on or after
      July 15, 2007.





Bancorp
      does not anticipate that compliance with applicable federal and state banking
      laws will have a material adverse effect on its business or the business of
      the
      Bank. Neither Bancorp nor the Bank has any material patents, trademarks,
      licenses, franchises, concessions and royalty agreements or labor contracts,
      other than the charter granted to the Bank by the OCC.





Employees





As
      of
      December 31, 2006, Bancorp had 107 full-time employees and five
      part-time employees. None of the employees of Bancorp is covered by a collective
      bargaining agreement.





Item
      1A. Risk
      Factors





**Management
      intends to continue Bancorp’s emphasis on growth over earnings for the
      foreseeable future.**





Management
      has actively sought growth of the institution in recent years by opening
      additional branches, one through acquisition, initiating internal growth
      programs, and completing one acquisition of a mortgage company. Bancorp may
      not
      be able to sustain its historical rate of growth or may not even be able to
      continue to grow at all. Various factors, such as economic conditions and
      competition, or the unavailability of suitable sites, may impede or prohibit
      the
      Bank from opening new branches. In addition, Bancorp may not be able to obtain
      the financing necessary to fund additional growth and may not be able to find
      suitable candidates for acquisition. Sustaining Bancorp’s growth has placed
      significant demands on management as well as on administrative, operational
      and
      financial resources. For Bancorp to continue to grow, it must: attract and
      retain qualified management and experienced bankers, find suitable markets
      for
      expansion, find suitable, affordable branch locations, attract funding to
      support additional growth, maintain high asset quality levels, maintain adequate
      regulatory capital and maintain adequate controls.





Although
      management believes that earnings will increase as the franchise is expanded,
      the rate of increase in earnings will be adversely affected by the costs
      associated with opening new branches and the time necessary to build a customer
      base in each new branch’s market area.





If
      Bancorp is unable to continue its historical levels of growth, or if growth
      comes at greater financial expense than has been incurred in the past, Bancorp
      may not be able to achieve its financial goals and profitability may be
      adversely affected.


9


**Bancorp
      intends to expand into a new geographic market in which current senior
      management has limited experience.**





Bancorp
      intends to expand into Westchester County and the surrounding counties in New
      York State. In November 2006, Bancorp acquired a small branch office in New
      York
      City, New York from another financial institution. This acquisition will allow
      Bancorp to establish additional bank branch offices in Westchester County,
      New
      York, which was the primary purpose for the acquisition. Bancorp does not plan
      further branch expansion in New York City at this time. Bancorp has received
      regulatory approval for and entered into a lease agreement to establish a branch
      in Bedford, New York; management anticipates that this office will open during
      the second quarter of 2007.





The
      vast
      majority of Bancorp’s deposits and loans are derived from and made to customers
      who live and work in Fairfield County, Connecticut. Although management believes
      that the demographics for Westchester County, New York closely resemble those
      of
      Fairfield County Connecticut, the Bank does not currently conduct significant
      deposit activity in New York State. The senior management team includes several
      individuals with substantial banking experience in Connecticut, but with less
      experience in New York. Bancorp’s ability to compete effectively in New York
      State will depend in part on management’s ability to hire and retain key
      employees who have extensive banking experience in the Westchester
      County.





**Bancorp
      has no experience opening bank branch offices in Westchester County, New
      York.**





Historically,
      Bancorp’s investment in capital equipment to establish a new branch office has
      ranged between $315,000 and $450,000; however, total branch operating costs
      also
      include a variety of variable costs, including the prevailing rental rates
      in
      the local branch office area, the size of the branch, the availability of
      facilities that are ready to be operated as bank branches, and the number of
      employees. Bancorp has not opened branches in Westchester County in the past
      and
      may not be able to accurately estimate the variable costs associated with
      opening branch offices in this area. If management underestimates these variable
      costs, then the branches Bancorp establishes in these areas may prove to be
      more
      costly than anticipated and, as a further consequence, Bancorp’s branch
      expansion program may be delayed or reduced in scope, or both, which may have
      an
      adverse effect on Bancorp’s business and results of operations.





**Because
      Bancorp intends to increase its commercial real estate, construction and
      commercial business loan originations, its lending risk will increase, and
      downturns in the real estate market could adversely affect its
      earnings.**





Commercial
      real estate, construction and commercial business loans generally have more
      risk
      than residential mortgage loans. Both commercial real estate and construction
      loans, for example, often involve larger loan balances concentrated with single
      borrowers or groups of related borrowers as compared to single-family
      residential loans. Construction loans are secured by the property under
      construction, the value of which is uncertain prior to completion. Thus, it
      is
      more difficult to evaluate accurately the total loan funds required to complete
      a project and the related loan-to-value ratios. Speculative construction loans
      involve additional risk because the builder does not have a contract for the
      sale of the property at the time of construction.


10


Because
      the repayment of commercial real estate, construction and commercial business
      loans depends on the successful management and operation of the borrower’s
      properties or related businesses, repayments of such loans can be affected
      by
      adverse conditions in the real estate market or local economy. A significant
      portion of Bancorp’s total loan portfolio is secured by real estate located in
      Fairfield County, Connecticut and Westchester County, New York. As a result,
      a
      downturn in the real estate market, especially within Bancorp’s market area,
      could adversely impact the value of properties securing these loans. Bancorp’s
      ability to recover on defaulted loans by selling the underlying real estate
      would be diminished, and Bancorp would be more likely to suffer losses on
      defaulted loans. As its commercial real estate, construction and commercial
      business loan portfolios increase, the corresponding risks and potential for
      losses from these loans may also increase.





**Bancorp’s
      business is subject to various lending and other economic risks that could
      adversely impact Bancorp’s results of operations and financial
      condition.**





Changes
      in economic conditions, particularly an economic slowdown in Fairfield County,
      Connecticut and the New York metropolitan area, could hurt Bancorp’s financial
      performance. Bancorp’s business is directly affected by political and market
      conditions, broad trends in industry and finance, legislative and regulatory
      changes and changes in governmental monetary and fiscal policies and inflation,
      all of which are beyond Bancorp’s control. A deterioration in economic
      conditions, in particular an economic slowdown within Fairfield County,
      Connecticut and/or the New York metropolitan area, could result in the following
      consequences, any of which may hurt the business of Bancorp materially: loan
      delinquencies may increase; problem assets and foreclosures may increase; demand
      for the Bank’s products and services may decline; and assets and collateral
      associated with the Bank’s loans, especially real estate, may decline in value,
      thereby reducing a customer’s borrowing power.





The
      Bank
      may suffer losses in its loan portfolio despite its underwriting practices.
      The
      Bank seeks to mitigate the risks inherent in its loan portfolio by adhering
      to
      specific underwriting practices. These practices include analysis of a
      borrower’s prior credit history, financial statements, tax returns and cash flow
      projections, valuation of collateral based on reports of independent appraisers
      and verification of liquid assets. Although the Bank believes that its
      underwriting criteria is appropriate for the various types of loans the Bank
      makes, the Bank may still incur losses on loans, and these losses may exceed
      the
      amounts set aside as reserves in the allowance for loan losses.





**Bancorp’s
      allowance for loan losses may not be adequate to cover actual
      losses.**





Like
      all
      financial institutions, the Bank maintains an allowance for loan losses to
      provide for loan defaults and non-performance. The allowance for loan losses
      may
      not be adequate to cover actual loan losses and future provisions for loan
      losses could materially and adversely affect Bancorp’s operating results. The
      allowance for loan losses is based on an evaluation of the risks associated
      with
      the Bank’s loans receivable as well as the Bank’s prior loss experience.
      A substantial portion of the Bank’s loans are unseasoned and lack an
      established record of performance. To date, losses have been negligible. The
      amount of future losses is susceptible to


11


changes
      in economic, operating and other conditions, including changes in interest
      rates
      that may be beyond the Bank’s control and these losses may exceed current
      estimates. Federal regulatory agencies, as an integral part of their examination
      process, review the Bank’s loans and assess the adequacy of the allowance for
      loan losses. While management believes that the allowance for loan losses is
      adequate to cover current losses, management cannot assure shareholders that
      there will not be a need to increase the allowance for loan losses or that
      the
      regulators will not require management to increase this allowance. Either of
      these occurrences could materially and adversely affect Bancorp’s earnings and
      profitability.





**Bancorp’s
      business is subject to interest rate risk and variations in interest rates
      may
      negatively affect Bancorp’s financial performance.**





Bancorp
      is unable to predict fluctuations of market interest rates, which are affected
      by many factors including: inflation, recession, a rise in unemployment, a
      tightening money supply and domestic and international disorder and instability
      in domestic and foreign financial markets. Changes in the interest rate
      environment may reduce Bancorp’s profits. Bancorp realizes income from the
      differential or “spread” between the interest earned on loans, securities and
      other interest-earning assets, and interest paid on deposits, borrowings and
      other interest-bearing liabilities. Net interest spreads are affected by the
      difference between the maturities and repricing characteristics of
      interest-earning assets and interest-bearing liabilities. Bancorp is vulnerable
      to a decrease in interest rates because its interest-earning assets generally
      have shorter durations than its interest-bearing liabilities. As a result,
      material and prolonged decreases in interest rates would decrease Bancorp’s net
      interest income. In contrast, an increase in the general level of interest
      rates
      may adversely affect the ability of some borrowers to pay the interest on and
      principal of their obligations. Accordingly, changes in levels of market
      interest rates could materially and adversely affect Bancorp’s net interest
      spread, asset quality, levels of prepayments and cash flow as well as the market
      value of its securities portfolio and overall profitability.





Mortgage
      brokerage activity is also affected by interest rate fluctuations. Generally,
      increases in interest rates often lead to decreases in home refinancing
      activity, thus reducing the number of mortgage loans that Bancorp
      originates.





**Bancorp’s
      investment portfolio includes securities which are sensitive to interest rates
      and variations in interest rates may adversely impact Bancorp’s profitability.**





Bancorp’s
      securities portfolio is classified as available-for-sale, and is comprised
      of
      mortgage-backed securities which are insured or guaranteed by U.S. government
      agencies or government-sponsored enterprises, U.S. government agency securities
      and money market preferred equity securities. These securities are sensitive
      to
      interest rate fluctuations. Unrealized gains or losses in the available-for-sale
      portfolio are reported as a separate component of shareholders’ equity.
      As a result, future interest rate fluctuations may impact shareholders’
equity, causing material fluctuations from quarter to quarter. Failure to hold
      its securities until: payments are received on mortgage-backed securities,
      other
      investments mature or market conditions are favorable for a sale could adversely
      affect Bancorp’s earnings and profitability.


12


**Bancorp
      is dependent on its management team, and the loss of its senior executive
      officers or other key employees could impair its relationship with its customers
      and adversely affect its business and financial results.**





Bancorp’s
      success is dependent upon the continued services and skills of Angelo De Caro,
      Charles F. Howell, Robert F. O’Connell, Philip W. Wolford and other senior
      officers including Martin G. Noble, its chief lender, Marcus Zavattaro, its
      sales manager of retail brokerage, and John Kantzas, a founder and an executive
      vice president. While Bancorp has employment agreements containing
      non-competition provisions with Messrs. Howell, O’Connell and Zavattaro, these
      agreements do not prevent any of them from terminating their employment with
      Bancorp. The unexpected loss of services of one or more of these key personnel
      could have an adverse impact on Bancorp’s business because of their skills,
      knowledge of Bancorp’s market, years of industry experience and the difficulty
      of promptly finding qualified replacement personnel.





Bancorp’s
      success also depends, in part, on its continued ability to attract and retain
      experienced commercial lenders and residential mortgage originators, as well
      as
      other management personnel. The loss of the services of several of such key
      personnel could adversely affect Bancorp’s growth strategy and prospects to the
      extent it is unable to replace such personnel. In the past year, Bancorp has
      hired several experienced commercial loan officers who have strong business
      relationships in order to expand and enhance its current deposit and commercial
      banking operations. Competition for commercial lenders and residential mortgage
      originators is strong within the commercial banking and mortgage banking
      industries, and Bancorp may not be successful in retaining or attracting
      additional personnel necessary to maintain its growth plans.





**A
      breach of information security could negatively affect Bancorp’s
      earnings** .





Bancorp
      increasingly depends upon data processing, communications and information
      exchange on a variety of computing platforms and networks, and over the internet
      to conduct its business. Bancorp cannot be certain that all of its systems
      are
      entirely free from vulnerability to attack, despite safeguards it has
      instituted. In addition, Bancorp relies on the services of a variety of vendors
      to meet its data processing and communication needs. If information security
      is
      breached, information can be lost or misappropriated; this could result in
      financial loss or costs to Bancorp or damages to others. These costs or losses
      could materially exceed the amount of insurance coverage, if any, which would
      have an adverse effect on Bancorp’s results of operations and financial
      condition. In addition, the Bank’s reputation could be harmed, which also could
      materially adversely affect Bancorp’s financial condition and results of
      operation.


13


**Risks
      Related to Bancorp’s industry**





**Strong
      competition within Bancorp’s market area may limit the growth and profitability
      of the Company.**





Competition
      in the banking and financial services industry is intense. The Fairfield County,
      Connecticut and the New York City metropolitan areas have a high concentration
      of financial institutions including large money center and regional banks,
      community banks and credit unions. Some of Bancorp’s competitors offer products
      and services that the Bank currently does not offer, such as private banking
      and
      trust services. The Bank’s recent purchase of a small branch in New York City,
      New York and future expansion into Westchester County, New York, will expose
      the
      Bank to more competition in markets where it is not well known. Many of these
      competitors have substantially greater resources and lending limits than Bancorp
      and may offer certain services that it does not or cannot provide. Price
      competition for loans and deposits might result in the Bank earning less on
      its
      loans and paying more for deposits, which reduces net interest income. Bancorp
      expects competition to increase in the future as a result of legislative,
      regulatory and technological changes. Bancorp’s profitability depends upon its
      continued ability to successfully compete in its market area.





**Government
      regulation may have an adverse effect on Bancorp’s profitability and
      growth** .





Bancorp
      is subject to extensive regulation, supervision and examination by the Office
      of
      the Comptroller of the Currency, or the OCC, as the Bank’s chartering authority,
      by the FDIC, as insurer of the deposits, and by the Federal Reserve Board as
      regulator of Bancorp. Changes in state and federal banking laws and regulations
      or in federal monetary policies could adversely affect the Bank’s ability to
      maintain profitability and continue to grow. For example, new legislation or
      regulation could limit the manner in which Bancorp may conduct its business,
      including the Bank’s ability to obtain financing, attract deposits, make loans
      and achieve satisfactory interest spreads. Many of these regulations are
      intended to protect depositors, the public and the FDIC, not shareholders.
      In
      addition, the burden imposed by federal and state regulations may place the
      Company at a competitive disadvantage compared to competitors who are less
      regulated. The laws, regulations, interpretations and enforcement policies
      that
      apply to Bancorp have been subject to significant, and sometimes retroactively
      applied, changes in recent years, and may change significantly in the future.
      Future legislation or government policy may also adversely affect the banking
      industry or Bancorp’s operations.





**Changing
      regulation of corporate governance and public disclosure.**





Recently
      enacted laws, regulations and standards relating to corporate governance and
      public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations
      and NASDAQ rules, are adding to the responsibilities that companies, such as
      Bancorp, have. These laws, regulations and standards are subject to varying
      interpretations, and as a result, their application in practice may evolve
      over
      time as new guidance is provided by regulatory and governing bodies, which
      could
      make compliance more difficult and result in higher costs. Bancorp is committed
      to maintaining high standards of corporate governance and public disclosure.
      As
      a result, Bancorp’s efforts to comply with evolving laws, regulations and
      standards have resulted in, and are likely to


14


continue
        to result in, increased general and administrative expenses and a diversion
        of
        management time and attention from revenue-generating activities to compliance
        activities. In addition, during the fiscal year ending December 31, 2007,
        Bancorp will be required to comply with Section 404 of the Sarbanes-Oxley
        Act of
        2002 and the related regulations regarding its required assessment of its
        internal controls over financial reporting and its external auditors’ audit of
        that assessment. In order to prepare for this, Bancorp began committing
        significant financial and managerial resources to this effort in 2006. If
        Bancorp does not effectively comply with these laws, regulations and standards,
        its reputation may be harmed.





Item
      1B.  Unresolved Staff Comments





Bancorp
      has no unresolved comments from the SEC staff.





Item
      2. Properties





Patriot
      National Bancorp Inc.’s corporate headquarters and main branch banking office is
      located at 900 Bedford Street in Stamford, Connecticut. The building is leased
      by the Bank as are its thirteen other branch banking offices and two loan
      origination offices. The Bank also leases space at its main office for
      additional parking. Lease commencement dates for office locations range from
      July 2002 to January 2007 and lease expiration dates fall between
      June 30, 2007 and January 2022. Subsequent to December 31, 2006 the Bank
      entered into two leases for new branch locations scheduled to open in 2007.
      Most
      of the leases contain rent escalation provisions as well as renewal options
      for
      one or more periods.





The
      Bank
      has sublet and licensed excess space in three of its locations, two to an
      attorney and one to a retail eyeglass store. See also, “Item 12. Certain
      Relationships and Related Transactions.” For additional information regarding
      the Bank’s lease obligations, see Note 9 to the Consolidated Financial
      Statements.





All
      leased properties are in good condition.





Item
      3. Legal
      Proceedings





Neither
      Bancorp nor the Bank has any pending legal proceedings, other than ordinary
      routine litigation incidental to its business, to which Bancorp or the Bank
      is a
      party or any of its property is subject.





Item
      4. Submission
      of Matters to a Vote of Security Holders





During
      the fourth quarter of 2006, no matter was submitted to a vote of
      shareholders.


15


**PART
      II**





Item
      5. Market
      for Common Equity, Related Shareholder Matters and Issuer


Purchases
      of Equity Securities





Market
      Information





Bancorp
      Common Stock is traded on the NASDAQ Global Market under the Symbol “PNBK.” On
      December 31, 2006, the last sale price for Bancorp Common Stock on the
      NASDAQ Global Market was $26.45.





The
      following table sets forth the high and low sales price and dividends per share
      of Bancorp Common Stock for the last two fiscal years for each quarter as
      reported on the NASDAQ Small Cap Market and the NASDAQ Global Market. Bancorp’s
      common stock has traded on the NASDAQ Global Market since August 29, 2006;
      previously, it was traded on the NASDAQ Small Cap Market.




2006
                
                2005Cash
                
                
                
                
                
                CashSales
                    Price
                
                
                Dividends
                
                
                Sales
                    Price
                
                
                DividendsQuarter
                    Ended
                
                
                High
                
                
                Low
                
                
                Declared
                
                
                High
                
                
                Low
                
                
                DeclaredMarch
                    31
                
                $
                26.05
                
                $
                20.00
                
                $
                0.040
                
                $
                18.40
                
                $
                17.00
                
                $
                0.035June
                    30
                
                
                30.24
                
                
                23.75
                
                
                0.045
                
                
                19.96
                
                
                18.05
                
                
                0.040September
                    30
                
                
                30.50
                
                
                23.00
                
                
                0.045
                
                
                19.45
                
                
                18.01
                
                
                0.040December
                    31
                
                
                27.25
                
                
                23.50
                
                
                0.045
                
                
                21.64
                
                
                18.50
                
                
                0.040




Holders





There
      were approximately 666 shareholders of record of Bancorp Common Stock as of
      December 31, 2006. This number does not reflect the number of persons
      or entities holding stock in nominee name through banks, brokerage firms or
      other nominees.





Dividends





2001
      marked the first year in which Bancorp paid a dividend on Bancorp Common Stock;
      since then, the Company has consistently paid dividends.





Bancorp’s
      ability to pay future dividends on its Common Stock depends on the Bank’s
      ability to pay dividends to Bancorp. In accordance with OCC rules and
      regulations, the Bank may continue to pay dividends only if the total amount
      of
      all dividends that will be paid, including the proposed dividend in any calendar
      year does not exceed the total of the Bank’s retained net income of that year to
      date, combined with the retained net income of the preceding two years, unless
      the proposed dividend is approved by the OCC. In addition, the OCC and/or the
      FDIC may impose further restrictions on dividends. Future dividends depend
      on
      many factors,


16


including
      management’s estimates of future earnings and Bancorp’s need for capital. At
      December 31, 2006, Patriot National Bank was in compliance with all applicable
      minimum capital requirements and had the ability to pay dividends of $ 4.2
      million to Bancorp without obtaining the prior approval of the OCC.





Recent
      Sales of Unregistered Securities





During
      the fourth quarter of 2006, Bancorp did not have any sales of unregistered
      securities.





Purchases
      of Equity Securities by the Issuer and Affiliated Purchasers





During
      the fourth quarter of 2006 there were no such purchases of Bancorp Common
      Stock.





Securities
      Authorized for Issuance under Equity Compensation Plans





The
      following table presents information as of December 31, 2006 for equity
      compensation plans maintained by Bancorp.





**Equity
      Compensation Plan Information**


Number
                of securities to
              be
                issued upon
              exercise
                of outstanding
              options,
                warrants and
              rights
              
              (a)
            Weighted-average
              exercise
                price of
              outstanding
                options,
              warrants
                and rights
              
              (b)
            Number
                of securities
              remaining
                available for
              future
                issuance under
              equity
                compensation
              plans
                (excluding
              securities
                reflected in
              column
                (a))
              
              (c)Equity
                compensation
              plans
                approved by
              security
                holders
            65,000
            $10.13
            -Equity
                compensation
              plans
                not approved by
              security
                holders
            -
            -
            -Total
            65,000
            $10.13
            -


17


Performance
      Graph





The
      performance graph compares the yearly percentage change in Bancorp’s cumulative
      total shareholder return on its common stock over the last five fiscal years
      to
      the cumulative total return of the S&P 500 Index and the NASDAQ Bank Index.
      Total shareholder return is measured by dividing the sum of the cumulative
      amount of dividends for the measurement period (assuming dividend reinvestment)
      and the difference between Bancorp’s share price at the end and the beginning of
      the measurement period, by the share price at the beginning of the measurement
      period.




**Comparison
                  of Five Year Cumulative Total Return Among****Patriot
                  National Bancorp, Inc., S & P 500 Index and NASDAQ Bank
                  Index**









**Period
                Ending****Index**
            
            **12/31/01**
            ****
            **12/31/02**
            ****
            **12/31/03**
            ****
            **12/31/04**
            ****
            **12/31/05**
            ****
            **12/31/06**Patriot
                National Bancorp, Inc.
            
            
            100.00
            
            
            114.51
            
            
            153.54
            
            
            228.58
            
            
            261.74
            
            
            333.46S
                & P 500
            
            
            100.00
            
            
            77.90
            
            
            100.24
            
            
            111.15
            
            
            116.60
            
            
            135.02NASDAQ
                Bank Index
            
            
            100.00
            
            
            104.52
            
            
            135.80
            
            
            150.73
            
            
            144.20
            
            
            160.07


18


Item
      6.  Selected
      Financial Data




**At
                  or for the year ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****Operating
                  Data:**Interest
                  and dividend income
              
              $
              38,009,526
              
              $
              25,148,701
              
              $
              18,678,251
              
              $
              15,214,702
              
              $
              12,604,718Interest
                  expense
              
              
              18,069,648
              
              
              10,269,625
              
              
              7,008,508
              
              
              5,588,255
              
              
              4,764,693Net
                  interest income
              
              
              19,939,878
              
              
              14,879,076
              
              
              11,669,743
              
              
              9,626,447
              
              
              7,840,025Provision
                  for loan losses
              
              
              1,040,000
              
              
              1,110,000
              
              
              556,000
              
              
              563,000
              
              
              468,000Noninterest
                  income
              
              
              2,359,149
              
              
              3,229,037
              
              
              2,702,204
              
              
              4,813,740
              
              
              4,113,820Noninterest
                  expense
              
              
              17,576,872
              
              
              14,634,487
              
              
              12,256,550
              
              
              11,659,467
              
              
              9,812,838Provision
                  for income taxes
              
              
              1,267,000
              
              
              957,000
              
              
              633,000
              
              
              877,000
              
              
              621,000Net
                  income
              
              
              2,415,155
              
              
              1,406,626
              
              
              926,397
              
              
              1,340,720
              
              
              1,052,007**Per
                  Share Data:**Basic
                  income per share
              
              
              0.67
              
              
              0.52
              
              
              0.38
              
              
              0.56
              
              
              0.44Diluted
                  income per share
              
              
              0.66
              
              
              0.51
              
              
              0.37
              
              
              0.55
              
              
              0.43Dividends
                  per share
              
              
              0.175
              
              
              0.155
              
              
              0.135
              
              
              0.115
              
              
              0.095**Balance
                  Sheet Data3/22/2007**Cash
                  and due from banks
              
              
              3,868,670
              
              
              7,220,577
              
              
              6,670,409
              
              
              4,023,732
              
              
              5,385,757Federal
                  funds sold
              
              
              27,000,000
              
              
              6,500,000
              
              
              37,500,000
              
              
              15,000,000
              
              
              3,000,000Short
                  term investments
              
              
              24,605,869
              
              
              2,247,028
              
              
              11,460,057
              
              
              10,430,939
              
              
              3,348,968Investment
                  securities
              
              
              70,222,035
              
              
              80,991,068
              
              
              78,258,775
              
              
              92,330,533
              
              
              61,720,716Loans,
                  net
              
              
              506,884,155
              
              
              364,243,777
              
              
              263,874,820
              
              
              214,420,528
              
              
              170,794,939Total
                  assets
              
              
              645,982,795
              
              
              470,641,162
              
              
              405,046,955
              
              
              342,469,049
              
              
              248,496,753Total
                  deposits
              
              
              561,451,664
              
              
              419,075,288
              
              
              367,005,325
              
              
              289,992,182
              
              
              217,911,260Total
                  borrowings
              
              
              16,248,000
              
              
              17,248,000
              
              
              16,248,000
              
              
              31,301,385
              
              
              10,292,675Total
                  shareholders' equity
              
              
              64,283,345
              
              
              31,374,615
              
              
              19,756,434
              
              
              18,779,913
              
              
              18,544,955


19


Item
      7. Management’s
      Discussion and Analysis of Financial Condition and


Results of Operation





**Summary**





During
      2006 Bancorp’s subsidiary, Patriot National Bank established two additional
      branch banking offices, one through acquisition, increasing its branch banking
      network to 12 offices. In addition, Bancorp successfully completed a stock
      offering during September 2006 resulting in an increase in capital of $30.7
      million, net of offering fees and expenses. Bancorp received subscriptions
      for a
      total of 1,500,000 shares.





Bancorp
      reported earnings of $2,415,000 ($0.67 basic income per share and
      $0.66 diluted income per share) for 2006 compared to $1,407,000 ($0.52
      basic income per share and $0.51 diluted income per share) for 2005. Total
      assets ended the year at a record high of $646.0 million, an increase of
      $175.4 million from December 31, 2005.




Net
      interest income for the year ended December 31, 2006 increased $5.0 million
      or 34% to $19.9 million as compared to $14.9 million for the year
      ended December 31, 2005.





Total
      assets increased by 37% during the year as total loans increased from $364.2
      million at December 31, 2005 to $506.9 million at
      December 31, 2006. The available for sale securities portfolio
      decreased $11.6 million or 15% to $67.1 million from $78.7 million at
      December 31, 2005; due to the current interest rate environment,
      management deemed it prudent to maintain funds from the decrease in the
      investment portfolio in short term investments. Loan growth was funded
      through deposit growth and the proceeds raised in the stock offering. Deposits
      increased $142.4 million to $561.5 million at
      December 31, 2006; interest bearing deposits increased $134.5 million,
      or 36%, and non-interest bearing deposits increased $7.9 million or 16%.
      Shareholders’ equity increased $32.9 million; this increase is the result
      of the stock offering, the exercise of certain stock options, the increase
      in
      retained earnings from net income, net of dividend payments and the decrease
      in
      accumulated other comprehensive loss due to a decrease in unrealized losses
      on
      the available for sale securities portfolio.





**FINANCIAL
      CONDITION**





***Assets***





Bancorp’s
      total assets increased $175.3 million or 37% from $470.6 million at
      December 31, 2005 to $646.0 million at
      December 31, 2006. The growth in total assets was funded primarily by
      deposit growth of $142.4 million and $30.7 million in capital raised
      through the September 2006 stock offering and options exercised. Federal
      funds sold and short term investments increased $20.5 million and
      $22.4 million, respectively; these increases are due to the rapid rate of
      deposit growth, particularly during the fourth quarter.


20


***Investments***





The
      following table is a summary of Bancorp’s investment portfolio at December 31
      for the years shown.




2006
              2005
              2004U.
                  S. Government SponsoredAgency
                  Obligations
              $
                  16,566,822
              $
                  16,476,684
              $
                  14,823,295Mortgage-backed
                  securities
              43,476,313
              56,195,384
              52,446,180Marketable
                  equity securities
              7,050,000
              6,000,000
              9,000,000Federal
                  Reserve Bank stock
              1,911,700
              1,022,300
              692,600Federal
                  Home Loan Bank stock
              1,217,200
              1,296,700
              1,296,700Total
                  Investments
              $
                  70,222,035
              $
                  80,991,068
              $
                  78,258,775





Total
      investments decreased $10.7 million to $70.2 million; principal
      payments on mortgage-backed securities were partially offset by an increase
      in
      marketable equity securities as management decided to maintain its liquidity
      position over increasing the investment portfolio due to the interest rate
      environment.





The
      following table presents the maturity distribution of available for sale
      investment securities at December 31, 2006 and the weighted average
      yield of such securities. The weighted average yields were calculated on the
      amortized cost and effective yields to maturity of each security.





Over
                  one
              
              Over
                  five
              
              
              
              
              
              
              
              WeightedOne
                  year
              
              through
              
              through
              
              Over
                  ten
              
              
              
              
              
              Averageor
                  less
              
              five
                  years
              
              ten
                  years
              
              years
              
              No
                  maturity
              
              Total
              
              YieldU.
                  S. Government SponsoredAgency
                  Obligations
              
              $
              -
              
              $
              16,999,984
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              16,999,984
              
              
              3.59
              %Mortgage-backed
                  securities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              44,141,476
              
              
              44,141,476
              
              
              4.37
              %Money
                  market preferredequity
                  securities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              7,050,000
              
              
              7,050,000
              
              
              4.20
              %Total
              
              $
              -
              
              $
              16,999,984
              
              $
              -
              
              $
              -
              
              $
              51,191,476
              
              $
              68,191,460
              
              
              4.16
              %Weighted
                  average yield
              
              
              -
              
              
              3.59
              %
              
              -
              
              
              -
              
              
              4.35
              %
              
              4.16
              %






The
      following table presents a summary of investments for any issuer that exceeds
      10% of shareholders’ equity at December 31, 2006:




Amortized
                  Cost
              Fair
                  ValueAvailable
                  for sale securities:U.
                  S. Government Sponsored Agency Obligations
              $
                  16,999,984
              $
                  16,566,822Mortgage-backed
                  securities
              44,141,476
              43,476,313


21


***Loans***





The
      following table is a summary of Bancorp’s loan portfolio at December 31 for the
      years shown.




2006
              
              2005
              
              2004Real
                  EstateCommercial
              
              $
              166,799,341
              
              $
              129,178,889
              
              $
              106,771,441Residential
              
              
              91,077,687
              
              
              77,391,833
              
              
              36,965,661Construction
              
              
              203,828,453
              
              
              107,232,587
              
              
              74,598,919Commercial
              
              
              23,997,640
              
              
              15,591,818
              
              
              17,562,523Consumer
                  installment
              
              
              1,251,300
              
              
              1,106,648
              
              
              1,386,709Consumer
                  home equity
              
              
              26,933,277
              
              
              39,097,450
              
              
              30,874,894Total
                  loans
              
              
              513,887,698
              
              
              369,599,225
              
              
              268,160,147Premiums
                  on purchased loans
              
              
              292,543
              
              
              367,491
              
              
              313,754Net
                  deferred fees
              
              
              (1,665,654
              )
              
              (1,134,604
              )
              
              (1,117,556
              )Allowance
                  for loan losses
              
              
              (5,630,432
              )
              
              (4,588,335
              )
              
              (3,481,525
              )Loans,
                  net
              
              $
              506,884,155
              
              $
              364,243,777
              
              $
              263,874,820





Bancorp’s
      net loan portfolio increased $142.7 million or 39% to $506.9 million
      at December 31, 2006 from $364.2 million at
      December 31, 2005. Loan growth was funded through an increase in total
      deposits as well as by the proceeds raised in the September 2006 stock
      offering. Significant increases in the portfolio include a $96.6 million
      increase in construction loans, $30.0 million of which represents
      construction phase to permanent financing arrangements, a $37.6 million
      increase in commercial real estate loans, a $13.7 million increase in
      residential real estate loans and an $8.4 million increase in commercial
      and industrial loans. The growth in these segments of the loan portfolio were
      partially offset by a decrease in home equity loans of $12.2 million due in
      part to an increase in the prime rate, to which these loans are tied, prompting
      a number of borrowers to refinance and roll home equity debt into first mortgage
      loans.





The
      Bank
      has continued to hire additional lenders and credit analysts while offering
      a
      competitively priced and expanded product line which contributed to the growth
      in the portfolio. Although short term rates have increased, the growth in loans
      reflects the continued strong demand for real estate based financing in the
      Fairfield County, Connecticut and Westchester County, New York areas where
      the
      Bank primarily conducts its lending business. The Bank plans to further increase
      its lending and credit staff as it expands its franchise which should result
      in
      sustained strong loan demand, but from a wider market area.





At
      December 31, 2006, the net loan to deposit ratio was 90% and the net
      loan to asset ratio was 78%. At December 31, 2005, the net loan to
      deposit ratio was 87%, and the net loan to asset ratio was 77%.


22


Maturities
      and Sensitivities of Loans to Changes in Interest Rates





The
      following table presents the maturities of loans in Bancorp’s portfolio at
      December 31, 2006, by type of loan:




Due
                  afterDue
                  in
              
              one
                  yearone
                  year
              
              through
              
              Due
                  after(thousands
                  of dollars)
              
              or
                  less
              
              five
                  years
              
              five
                  years
              
              TotalCommercial
                  real estate
              
              $
              37,075
              
              $
              30,969
              
              $
              98,755
              
              $
              166,799Residential
                  real estate
              
              
              4,084
              
              
              3,997
              
              
              82,997
              
              
              91,078Construction
                  loans
              
              
              118,274
              
              
              54,247
              
              
              31,307
              
              
              203,828Commercial
                  loans
              
              
              10,056
              
              
              12,419
              
              
              1,523
              
              
              23,998Consumer
                  installment
              
              
              1,146
              
              
              105
              
              
              -
              
              
              1,251Consumer
                  home equity
              
              
              27
              
              
              3,450
              
              
              23,457
              
              
              26,934Total
              
              $
              170,662
              
              $
              105,187
              
              $
              238,039
              
              $
              513,888Fixed
                  rate loans
              
              $
              23,551
              
              $
              27,211
              
              $
              3,675
              
              $
              54,437Variable
                  rate loans
              
              
              147,111
              
              
              77,976
              
              
              234,364
              
              
              459,451Total
              
              $
              170,662
              
              $
              105,187
              
              $
              238,039
              
              $
              513,888





Loan
      Concentrations





The
      Bank
      has no concentrations of loans other than those disclosed in the summary loan
      portfolio table.





Critical
      Accounting Policies





In
      the
      ordinary course of business, Bancorp has made a number of estimates and
      assumptions relating to reporting results of operations and financial condition
      in preparing its financial statements in conformity with accounting principles
      generally accepted in the United States of America. Actual results could differ
      significantly from those estimates under different assumptions and conditions.
      The Company believes the following discussion addresses Bancorp’s only critical
      accounting policy, which is the policy that is most important to the
      presentation of Bancorp’s financial results. This policy requires management’s
      most difficult, subjective and complex judgments, often as a result of the
      need
      to make estimates about the effect of matters that are inherently uncertain.





Allowance
      for Loan Losses





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


23


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





The
      allowance consists of specific, general and unallocated components. The specific
      component relates to loans that are considered impaired. A risk rating system
      is
      utilized to measure the adequacy of the general component of the allowance
      for
      loan losses. Under this system, each loan is assigned a risk rating between
      one
      and nine, which has a corresponding loan loss factor assigned, with a rating
      of
“one” being the least risk and a rating of “nine” reflecting the most risk or a
      complete loss. Risk ratings are assigned based upon the recommendations of
      the
      credit analyst and originating loan officer and confirmed by the loan committee
      at the initiation of the transactions, and are reviewed and changed, when
      necessary, during the life of the loan. Loan loss reserve factors which are
      based on historical loss experience adjusted for qualitative factors are
      multiplied against the balances in each risk rating category to arrive at the
      appropriate level for the allowance for loan losses. Loans assigned a risk
      rating of “six” or above are monitored more closely by the credit administration
      officers. The unallocated portion of the allowance reflects management’s
      estimate of probable but undetected losses inherent in the portfolio; such
      estimates are influenced by uncertainties in economic conditions, delays in
      obtaining information, including unfavorable information about a borrower’s
      financial condition, difficulty in identifying triggering events that correlate
      perfectly to subsequent loss rates, and risk factors that have not yet
      manifested themselves in loss allocation factors. Loan quality control is
      continually monitored by management subject to oversight by the board of
      directors through its members who serve on the loan committee. Loan quality
      control is also reviewed by the full board of directors on a monthly basis.
      The
      methodology for determining the adequacy of the allowance for loan losses is
      consistently applied; however, revisions may be made to the methodology and
      assumptions based on historical information related to charge-off and recovery
      experience and management’s evaluation of the current loan
      portfolio.





Based
      upon this evaluation, management believes the allowance for loan losses of
      $5.6
      million, at December 31, 2006, which represents 1.10% of gross loans
      outstanding, is adequate, under prevailing economic conditions, to absorb losses
      on existing loans. At December 31, 2005, the allowance for loan losses
      was $4.6 million or 1.25% of gross loans outstanding.





The
      accrual of interest income on loans is discontinued whenever reasonable doubt
      exists as to its collectibility and generally is discontinued when loans are
      past due 90 days, based on contractual terms, as to either principal or
      interest. When the accrual of interest income is discontinued, all previously
      accrued and uncollected interest is reversed against interest income. The
      accrual of interest on loans past due 90 days or more, including impaired loans,
      may be continued if the loan is well secured, and it is believed all principal
      and accrued interest income due on the loan will be realized, and the loan
      is in
      the process of collection. A non-accrual loan is restored to accrual status
      when
      it is no longer delinquent and collectibility of interest and principal is
      no
      longer in doubt.


24


Management
      considers all non-accrual loans and restructured loans to be impaired. In most
      cases, loan payments that are past due less than 90 days, based on contractual
      terms, are considered minor collection delays and the related loans are not
      considered to be impaired. The Bank considers consumer installment loans to
      be
      pools of smaller balance homogeneous loans, which are collectively evaluated
      for
      impairment.





Analysis
      of Allowance for Loan Losses




2006
              
              2005
              
              2004
              
              2003
              
              2002(thousands
                  of dollars)Balance
                  at beginning of period
              
              $
              4,588
              
              $
              3,481
              
              $
              2,934
              
              $
              2,372
              
              $
              1,894Charge-offs
              
              
              (1
              )
              
              (3
              )
              
              (9
              )
              
              (1
              )
              
              -Recoveries
              
              
              3
              
              
              -
              
              
              -
              
              
              -
              
              
              10Net
                  recoveries (charge-offs)
              
              
              2
              
              
              (3
              )
              
              (9
              )
              
              (1
              )
              
              10Additions
                  charged to operations
              
              
              1,040
              
              
              1,110
              
              
              556
              
              
              563
              
              
              468Balance
                  at end of period
              
              $
              5,630
              
              $
              4,588
              
              $
              3,481
              
              $
              2,934
              
              $
              2,372Ratio
                  of net recoveries (charge-offs)during
                  the period to average loansoutstanding
                  during the period
              
              
              0.00
              %
              
              (0.00
              %)
              
              (0.01
              %)
              
              (0.00
              %)
              
              0.01
              %





Allocation
      of the Allowance for Loan Losses




Percent
                  of loans in eachBalance
                  at end of each
              
              
              Amounts
                  (thousands of dollars)
              
              
              category
                  to total loansperiod
                  applicable to:
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003
              
              
              2002
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003
              
              
              2002Real
                  Estate:Commercial
              
              $
              1,943
              
              $
              1,607
              
              $
              1,319
              
              $
              1,183
              
              $
              893
              
              
              32.46
              %
              
              34.95
              %
              
              39.82
              %
              
              44.15
              %
              
              37.97
              %Residential
              
              
              245
              
              
              511
              
              
              304
              
              
              230
              
              
              276
              
              
              17.72
              %
              
              20.94
              %
              
              13.78
              %
              
              9.98
              %
              
              15.54
              %Construction
              
              
              2,998
              
              
              1,963
              
              
              1,358
              
              
              972
              
              
              726
              
              
              39.67
              %
              
              29.01
              %
              
              27.82
              %
              
              26.17
              %
              
              22.56
              %Commercial
              
              
              290
              
              
              164
              
              
              185
              
              
              155
              
              
              129
              
              
              4.67
              %
              
              4.22
              %
              
              6.55
              %
              
              7.12
              %
              
              7.49
              %Consumer
                  installment
              
              
              31
              
              
              10
              
              
              11
              
              
              12
              
              
              11
              
              
              0.24
              %
              
              0.30
              %
              
              0.52
              %
              
              0.85
              %
              
              1.01
              %Consumer
                  home equity
              
              
              72
              
              
              260
              
              
              233
              
              
              285
              
              
              283
              
              
              5.24
              %
              
              10.58
              %
              
              11.51
              %
              
              11.73
              %
              
              15.43
              %Unallocated
              
              
              51
              
              
              73
              
              
              71
              
              
              97
              
              
              54
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/ATotal
              
              $
              5,630
              
              $
              4,588
              
              $
              3,481
              
              $
              2,934
              
              $
              2,372
              
              
              100.00
              %
              
              100.00
              %
              
              100.00
              %
              
              100.00
              %
              
              100.00
              %


25


Non-Accrual,
      Past Due and Restructured Loans





The
      following table is a summary of non-accrual and past due loans at the end of
      each of the last five years.




2006
              
              2005
              
              2004
              
              2003
              
              2002(thousands
                  of dollars)Loans
                  delinquent over 90days
                  still accruing
              
              $
              1,897
              
              $
              275
              
              $
              373
              
              $
              165
              
              $
              1,172Non-accruing
                  loans
              
              
              2,904
              
              
              1,935
              
              
              3,669
              
              
              150
              
              
              201$
              4,801
              
              $
              2,210
              
              $
              4,042
              
              $
              315
              
              $
              1,373%
                  of Total Loans
              
              
              0.93
              %
              
              0.60
              %
              
              1.51
              %
              
              0.14
              %
              
              0.79
              %%
                  of Total Assets
              
              
              0.74
              %
              
              0.47
              %
              
              1.00
              %
              
              0.09
              %
              
              0.56
              %Additional
                  income on non-accrualloans
                  if recognized on an accrualbasis
              
              $
              141
              
              $
              6
              
              $
              18
              
              $
              18
              
              $
              67





There
      were no loans in either 2006 or 2005 considered as “troubled debt
      restructurings.”





Potential
      Problem Loans





The
      $2.9 million of non-accruing loans at December 31, 2006 is comprised of
      three loans, all to the same borrower of which $1.07 million was guaranteed
      by
      the U.S. Small Business Administration. The loans are secured by commercial
      and
      residential real estate as well as all associated business assets. Based on
      the
      Bank’s analysis for loan impairment, a specific reserve in the amount of
      $250,000 has been established; however, management believes that the business
      is
      viable and subsequent to December 31, 2006 issued a proposal to the borrower
      for
      a modification under consideration by the Bank.





Loans
      delinquent over 90 days and still accruing are comprised of six loans, five
      of
      which totaling $1.2 million were past maturity, but current as to loan payments;
      the remaining loan in the amount of $695,000 was subsequently paid
      off.





At
      December 31, 2006, Bancorp had no loans other than those described above, as
      to
      which management has significant doubts as to the ability of the borrower to
      comply with the present repayment terms.


26


***Deposits***





The
      following table is a summary of Bancorp’s deposits at December 31 for each of
      the years shown.




2006
              
              2005
              
              2004Non-interest
                  bearing
              
              $
              56,679,836
              
              $
              48,797,389
              
              $
              42,584,120Interest
                  bearingTime
                  certificates, less than $100,000
              
              
              248,414,014
              
              
              168,565,756
              
              
              131,764,662Time
                  certificates, $100,000 or more
              
              
              162,546,807
              
              
              98,440,248
              
              
              71,287,106Money
                  markets
              
              
              40,935,628
              
              
              57,798,772
              
              
              72,450,663Savings
              
              
              25,993,452
              
              
              20,089,889
              
              
              22,104,121NOW
              
              
              26,881,927
              
              
              25,383,234
              
              
              26,814,653Total
                  interest bearing
              
              
              504,771,828
              
              
              370,277,899
              
              
              324,421,205Total
                  deposits
              
              $
              561,451,664
              
              $
              419,075,288
              
              $
              367,005,325




Total
      deposits increased $142.4 million or 34% to $561.4 million at December 31,
      2006. Non-interest bearing deposits increased $7.9 million or 16% to
      $56.7 million at December 31, 2006; interest bearing deposits
      increased $134.5 million or 36% to $504.8 million at
      December 31, 2006.





Due
      to
      the Bank’s continued expansion and the increased penetration into the areas
      served by the Bank, commercial demand accounts increased $5.7 million, a
      20% increase as compared to last year, and personal demand accounts increased
      $5.4 million, an increase of 39% when compared to last year. Internal
      accounts decreased $3.3 million or 60% from $5.5 million at
      December 31, 2005 to $2.2 million at December 31, 2006; this
      decrease is due primarily to fewer outstanding official checks at the end of
      2006 as compared to 2005.





During
      2006, the Bank established two additional branch banking offices, a new office
      in Milford, Connecticut and the acquisition of one in New York City, New York.
      The promotional campaign run in conjunction with the grand opening of the
      Milford branch was also a contributing factor to the growth of deposits in
      established branches. Certificates of deposit increased $144.0 million which
      represents an increase of 54% when compared to last year; much of the growth
      in
      certificates of deposit is attributable to the promotional campaign run in
      conjunction with the new branch opening as well as the transfer of funds from
      lower rate money market fund products, which decreased as compared to last
      year.
      The increase in certificates of deposit greater than $100 thousand of
      $64.1 million is the result of successful sales efforts and branch
      expansion. At December 31, 2006 the bank had no brokered deposits.
      Savings accounts increased $5.9 million, an increase of 29% as compared to
      last
      year; this increase is due to a more competitively priced commercial savings
      product introduced during 2006. Money market fund accounts decreased
      $16.8 million or 29%; a portion of this decrease represents transfers to
      certificates of deposit as a result of promotional campaigns and general
      increases in interest rates offered on certificates of deposit accounts. The
      Bank continues to offer attractive interest rates


27


in
      the
      very competitive Fairfield County marketplace in order to attract additional
      deposits to fund loan growth.





As
      of
      December 31, 2006, the Bank’s maturities of time deposits were:




$100,000
                  or
              Less
                  thangreater
              $100,000
              Totals(thousands
                  of dollars)Three
                  months or less
              $        
                  39,441
              $      
                  55,475
              $     
                    94,916Three
                  to six months
              42,712
              69,094
              111,806Six
                  months to one year
              47,822
              72,695
              120,517Over
                  one year
              32,572
              51,150
              83,722Total
              $       162,547
              $   
                  248,414
              $     
                  410,961








***Borrowings***





Borrowings
      decreased $1.0 million to $16.2 million at December 31, 2006.





Borrowings
      are comprised of Federal Home Loan Bank Advances and junior subordinated
      debentures.





The
      following table sets forth certain information concerning short term borrowing
      amounts arising from Federal Home Loan Bank advances at the dates and for the
      years indicated:




December
                  31, 2006
              
              December
                  31, 2005Average
              
              
              
              
              Averageamount
              
              
              
              
              amountAmount
              Maturity
              Rate
              outstanding
              
              Amount
              Maturity
              Rate
              outstanding$
                  5,000,000
              4/12/2007
              5.240%
              $
                  3,630,137
              
              $
                  5,000,000
              3/13/2006
              4.490%
              $
                  273,9731,000,000
              4/30/2007
              2.960%
              $
                  1,000,000
              
              1,000,000
              5/1/2006
              2.490%
              $
                  1,000,0002,000,000
              5/14/2007
              5.110%
              2,000,000$
                  8,000,000
              
              4.923%
              $
                  6,630,137
              
              $
                  6,000,000
              
              4.157%
              $
                  1,273,973





The
      maximum amount of short term borrowings outstanding under Federal Home Loan
      Bank
      advances during 2006 and 2005 was $46,000,000 and $15,000,000,
      respectively.


28


***Other***





The
      increase in premises and equipment is due primarily to the capitalized costs
      associated with leasehold improvements and equipment for a new branch office
      as
      well as construction in progress for branches under renovation that are planned
      to open early in 2007.





The
      increase in accrued interest receivable is due primarily to higher outstanding
      balances in loans at December 31, 2006 as compared to those in effect
      at December 31, 2005.





The
      increase in goodwill and other intangible assets relates to the goodwill and
      core deposit intangible recorded in conjunction with the acquisition of the
      New
      York City branch banking office.





The
      increase in other assets includes other real estate owned of $834,000 which
      is
      comprised of one commercial property obtained through loan foreclosure
      proceedings completed at the end of the third quarter of 2006. Subsequent to
      December 31, 2006 the Bank entered into a contract with a buyer for the
      property. Management anticipates that the sale should be consummated in 2007
      in
      an amount in excess of the recorded investment in the property.





The
      increase in accrued expenses and other liabilities is due primarily to increases
      in accruals for sales and performance based incentive programs and higher
      balances in accrual estimates for other unpaid expenses.


29


The
      following table presents average balance sheets (daily averages), interest
      income, interest expense and the corresponding yields earned and rates
      paid:




**Distribution
                    of Assets, Liabilities and Shareholder's
                    Equity****Interest
                    Rates and Interest Differential and Rate Volume Variance
                    Analysis****(thousands
                    of dollars)****(1)**2006
                
                2005
                
                2004
                
                2006
                    vs. 2005 Fluctuations
                2005
                    vs. 2004 FluctuationsInterest
                
                
                
                
                
                Interest
                
                
                
                
                
                Interest
                
                
                
                Interest
                    Income/Expense (3)
                Interest
                    Income/Expense (3)Average
                
                Income/
                
                Average
                
                Average
                
                Income/
                
                Average
                
                Average
                
                Income/
                
                Average
                
                Due
                    to Change in:
                Due
                    to Change in:Balance
                
                Expense
                
                Rate
                
                Balance
                
                Expense
                
                Rate
                
                Balance
                
                Expense
                
                Rate
                
                Volume
                
                Rate
                
                Total
                
                Volume
                Rate
                TotalInterest
                    earning assets:Loans
                    (2)
                $
                442,612
                
                $
                34,052
                
                7.69
                    %
                
                $
                316,058
                
                $
                21,561
                
                
                6.82
                    %
                
                $
                239,239
                
                $
                15,632
                
                
                6.53
                    %
                
                $
                7,789
                
                $
                4,702
                
                $
                12,491
                
                $
                4,824
                
                $
                1,105
                
                $
                5,929Federal
                    funds sold andother
                    cash equivalents
                
                18,661
                
                
                955
                
                5.12
                    %
                
                
                16,777
                
                
                494
                
                
                2.94
                    %
                
                
                21,089
                
                
                294
                
                
                1.39
                    %
                
                
                50
                
                
                411
                
                
                461
                
                
                (49
                )
                
                249
                
                
                200Investments
                    (4)
                
                75,869
                
                
                3,003
                
                3.96
                    %
                
                
                87,164
                
                
                3,094
                
                
                3.55
                    %
                
                
                87,631
                
                
                2,752
                
                
                3.14
                    %
                
                
                (376)
                
                
                285
                
                
                (91)
                
                
                (15
                )
                
                357
                
                
                342Total
                    interest earning assets
                $
                537,142
                
                $
                38,010
                
                7.08
                    %
                
                $
                419,999
                
                $
                25,149
                
                
                5.99
                    %
                
                $
                347,959
                
                $
                18,678
                
                
                5.37
                    %
                
                
                7,463
                
                
                5,398
                
                
                12,861
                
                
                4,760
                
                
                1,711
                
                
                6,471Cash
                    and due from banks
                
                5,231
                
                
                
                
                
                
                
                5,117
                
                
                
                
                
                
                
                
                4,159Allowance
                    for loan losses
                
                (5,324
                )
                
                
                
                
                
                
                (3,897
                )
                
                
                
                
                
                
                
                (3,190
                )Other
                    assets
                
                9,671
                
                
                
                
                
                
                
                8,446
                
                
                
                
                
                
                
                
                8,017Total
                    Assets
                $
                546,720
                
                
                
                
                
                
                $
                429,665
                
                
                
                
                
                
                
                $
                356,945Interest
                    bearing liabilities:Time
                    certificates
                $
                325,522
                
                $
                14,687
                
                4.51
                    %
                
                $
                224,526
                
                $
                8,040
                
                
                3.58
                    %
                
                $
                156,623
                
                $
                4,901
                
                
                3.13
                    %
                
                $
                3,018
                
                $
                3,629
                
                $
                6,647
                
                $
                1,895
                
                $
                1,244
                
                $
                3,139Savings
                    accounts
                
                23,291
                
                
                435
                
                1.87
                    %
                
                
                21,792
                
                
                277
                
                
                1.27
                    %
                
                
                23,666
                
                
                294
                
                
                1.24
                    %
                
                
                18
                
                
                140
                
                
                158
                
                
                (22
                )
                
                5
                
                
                (17)Money
                    market accounts
                
                44,876
                
                
                646
                
                1.44
                    %
                
                
                67,943
                
                
                862
                
                
                1.27
                    %
                
                
                70,264
                
                
                867
                
                
                1.23
                    %
                
                
                (265)
                
                
                49
                
                
                (216
                )
                
                (29
                )
                
                24
                
                
                (5)NOW
                    accounts
                
                26,838
                
                
                383
                
                1.43
                    %
                
                
                26,072
                
                
                188
                
                
                0.72
                    %
                
                
                23,107
                
                
                152
                
                
                0.66
                    %
                
                
                6
                
                
                189
                
                
                195
                
                
                19
                
                
                17
                
                
                36FHLB
                    advances
                
                24,496
                
                
                1,241
                
                5.07
                    %
                
                
                10,422
                
                
                374
                
                
                3.59
                    %
                
                
                14,197
                
                
                372
                
                
                2.62
                    %
                
                
                346
                
                
                521
                
                
                867
                
                
                (84
                )
                
                86
                
                
                2Subordinated
                    debt
                
                8,248
                
                
                673
                
                8.16
                    %
                
                
                8,248
                
                
                528
                
                
                6.40
                    %
                
                
                8,248
                
                
                380
                
                
                4.61
                    %
                
                
                -
                
                
                145
                
                
                145
                
                
                -
                
                
                148
                
                
                148Other
                    borrowings
                
                96
                
                
                5
                
                5.21
                    %
                
                
                34
                
                
                1
                
                
                2.94
                    %
                
                
                2,469
                
                
                42
                
                
                1.70
                    %
                
                
                1
                
                
                3
                
                
                4
                
                
                (23
                )
                
                (18
                )
                
                (41)Total
                    interest bearing liabilities
                $
                453,367
                
                $
                18,070
                
                3.99
                    %
                
                $
                359,037
                
                $
                10,270
                
                
                2.86
                    %
                
                $
                298,574
                
                $
                7,008
                
                
                2.35
                    %
                
                
                3,124
                
                
                4,676
                
                
                7,800
                
                
                1,756
                
                
                1,506
                
                3,262Demand
                    deposits
                
                48,455
                
                
                
                
                
                
                
                43,813
                
                
                
                
                
                
                
                
                36,456Accrued
                    expenses and other liabilities
                
                4,418
                
                
                
                
                
                
                
                3,380
                
                
                
                
                
                
                
                
                2,362Shareholder's
                    equity
                
                40,480
                
                
                
                
                
                
                
                23,435
                
                
                
                
                
                
                
                
                19,553Total
                    liabilities and equity
                $
                546,720
                
                
                
                
                
                
                $
                429,665
                
                
                
                
                
                
                
                $
                356,945Net
                    interest income
                
                
                
                $
                19,940
                
                
                
                
                
                
                $
                14,879
                
                
                
                
                
                
                
                $
                11,670
                
                
                
                
                $
                4,339
                
                $
                722
                
                $
                5,061
                
                $
                3,004
                
                $
                205
                
                $
                3,209Interest
                    margin
                
                
                
                
                
                
                3.71
                    %
                
                
                
                
                
                
                
                
                3.54
                    %
                
                
                
                
                
                
                
                
                3.35
                    %Interest
                    spread
                
                
                
                
                
                
                3.09 
                    %
                
                
                
                
                
                
                
                
                3.13
                    %
                
                
                
                
                
                
                
                
                3.02
                    %(1)The rate volume analysis reflects the changes in net interest
                    income arising from changes in interest rates and from asset
                    and liability
                    volume, including mix. The change in interest attributable to
                    volume
                    includes changes in interest attributable to mix.(2)Includes non-accruing loans.(3) 
                    Favorable/(unfavorable) fluctuations.(4) 
                    Yields are calculated at historical cost and excludes the effects
                    of
                    unrealized gains or losses on available for sale
                    securities.


30


**RESULTS
      OF OPERATIONS**





For
      the
      year ended December 31, 2006, Bancorp earned $2,415,000 ($0.67 basic income
      per
      share and $0.66 diluted income per share) an increase of 72% as compared to
      2005
      when Bancorp earned $1,407,000 ($0.52 basic income per share and $0.51 diluted
      income per share).





Interest
      and dividend income increased $12.9 million to $38.0 million in 2006
      as compared to 2005 when interest and dividend income was $25.1 million.
      This increase is due primarily to the growth in the loan portfolio combined
      with
      a general increase in interest rates.





Interest
      expense increased $7.8 million or 76% to $18.1 million in 2006 compared to
      $10.3 million in 2005. The increase in interest expense is due largely to
      the increase in total deposits as well as to a general increase in interest
      rates.





Noninterest
      income decreased $870,000 or 26% to $2.4 million in 2006 as compared to
      $3.2 million in 2005. Noninterest expenses for 2006 totaled $17.6 million
      which represents an increase of $2.9 million or 20% over the prior year.
      The higher operating costs were primarily the result of increases in employee
      expenses related to staff additions primarily in the lending area which
      contributed to the growth in the loan portfolio, occupancy expenses associated
      with securing additional branch locations in furtherance of the Bank’s growth
      strategy and increased advertising expenses related to increasing name
      recognition.





The
      following are measurements relating to Bancorp’s earnings.


2006
              2005
              2004Return
                  on average assets
              0.44%
              0.33%
              0.26%Return
                  on average equity
              5.97%
              6.00%
              4.74%Dividend
                  payout ratio
              26.12%
              29.81%
              35.26%Average
                  equity to average assets
              7.41%
              5.46%
              5.48%Basic
                  income per share
              $
                  0.67
              $
                  0.52
              $
                  0.38Diluted
                  income per share
              $
                  0.66
              $
                  0.51
              $
                  0.37




***Interest
      income and expense***





Bancorp’s
      net interest income increased $5.0 million or 34%, to $19.9 million in 2006
      from $14.9 million in 2005. An increase in average earning assets of $117.1
      million, or 28%, increased Bancorp’s interest income $12.9 million or 51% from
      $25.1 million in 2005 to $38.0 million in 2006. Average loans outstanding
      increased $126.6 million, or 40%, led by growth in construction and real
      estate loans, which reflects the continuing strength of the local real estate
      market. The increase in the yields on investments partially offset the decrease
      in the volume of investments which resulted in a net decrease in interest and
      dividends on investments of $91,000. Higher yields on federal funds sold and
      short term investments combined with an increase in the average balances of
      both
      resulted in an increase in interest income of $461,000.


31


Total
      average interest bearing liabilities increased by $94.0 million or 26%;
      average certificates of deposit increased by $101.0 million or 45%; average
      money market deposits decreased $23.1 million or 34%; average FHLB advances
      increased $14.1 million or 135%. Interest expense increased
      $7.8 million or 76% from $10.3 million in 2005 to
      $18.1 million in 2006. Interest expense on certificates of deposit
      increased $3.6 million as a result of an increase in the cost of funds for
      that portfolio from 3.58% in 2005 to 4.51% in 2006; and increased
      $3.0 million in 2006 due to higher average outstanding balances. Increases
      in both the interest rates paid and the average balances outstanding of FHLB
      advances resulted in increases in interest expense of $521,000 and $346,000,
      respectively, during 2006 over amounts paid in 2005. Rising interest rates
      also
      contributed to the increase in the interest expense on subordinated debentures
      of $145,000 or 27% from $528,000 in 2005 to $673,000 in 2006 resulting in an
      increase in the cost of the debt from 6.40% in 2005 to 8.16% in
      2006.





Management
      regularly reviews loan and deposit rates and attempts to price Bancorp’s
      products competitively. Bancorp tracks its mix of asset/liability maturities
      and
      strives to maintain a reasonable match. Performance ratios are reviewed monthly
      by management and the Board and are used to set strategies.





***Provision
      for loan losses***





The
      provision for loan losses charged to operations for the year ended December
      31,
      2006 of $1.0 million represents a decrease of $70,000 when compared to the
      provision of $1.1 million for the year ended December 31, 2005. This change
      is due to the credit risk factors applied against the portfolio and not to
      any
      adverse or more favorable changes in the credit quality of the loan portfolio
      or
      changes in non-performing loans.





An
      analysis of the changes in the allowance for loan losses is presented under
      the
      discussion entitled “Allowance for Loan Losses.”





***Noninterest
      income***





Noninterest
      income decreased $870,000 or 27% from $3.2 million in 2005 to
      $2.4 million in 2006. A decrease in the volume of loans placed with outside
      investors resulted in a decrease in mortgage brokerage and referral fee income
      of $864,000 or 41% and a decrease in loan application, inspection and processing
      fee income of $102,000 or 25%. Increases in deposit accounts and transaction
      volumes resulted in an increase in fees and service charges of $83,000 or 15%
      from $562,000 for the year ended December 31, 2005 to $645,000 for the
      year ended December 31, 2006. Other noninterest income increased 8% or
      $12,000 to $173,000 for the year ended December 31, 2006 from $161,000 for
      the
      year ended December 31, 2005; this increase is due mainly to increased fees
      from
      debit card transactions.


32


***Noninterest
      expenses***





Noninterest
      expenses increased $3.0 million or 20% in 2006 from $14.6 million in
      2005 to $17.6 million in 2006. Salaries and benefits increased
      $1.4 million or 16% in 2006 as compared to 2005, due primarily to higher
      compensation levels and performance related incentive programs, as well as
      staff
      additions resulting primarily from the full year impact in 2006 of the branch
      opened in 2005 and the two new branches opened in 2006. Higher staffing levels
      and incentive compensation also resulted in higher payroll taxes, employee
      benefit costs and the expenses associated with training programs. Occupancy
      and
      equipment expenses increased $714,000 or 34% from $2.1 million in 2005 to
      $2.8 million in 2006; this increase is due primarily to the full year
      impact in 2006 of opening one new branch office in 2005, opening two branches
      in
      2006 and the lease expenses associated with new branches scheduled to open
      in
      2007 that are under renovation. Increased marketing campaigns and related
      activities, such as mailings and solicitations, and the sponsorship of community
      events resulted in an increase in advertising and promotional expense of
      $283,000 or 67% to $703,000 for the year ended December 31, 2006 as
      compared to $420,000 for the year ended December 31, 2005. For the
      year ended December 31, 2006 data processing and other outside services
      increased $175,000 or 15% to $1.3 million from $1.1 million for the
      year ended December 31, 2005; this increase is due primarily to increases in
      data processing services, correspondent banking charges and an increase in
      personnel placement fees. The increases in data processing and correspondent
      banking expenses were a result of the growth in the branch network as well
      as
      increased ongoing maintenance charges for the implementation of new products
      and
      services.





Management
      believes that additional branch offices will contribute to the future growth
      and
      earnings of Bancorp. While the opening of these new branches will result in
      increased operating expenses, the openings will be strategically planned to
      maintain profitable operations.





***Income
      Taxes***





The
      provision for income taxes represents the tax expense recognized for both
      federal and state income taxes. The income tax provision for 2006 of $1,267,000
      represents an effective tax rate of 34.4%; the income tax provision for 2005
      of
      $957,000 represents an effective tax rate of 40.5%.





**Comparison
      of Results of Operations for the years 2005 and 2004**





For
      the
      year ended December 31, 2005, Bancorp earned $1,407,000 ($0.52 basic income
      per
      share and $0.51 diluted income per share) an increase of 52% as compared to
      2004
      when Bancorp earned $926,000 ($0.38 basic income per share and $0.37 diluted
      income per share).





Interest
      and dividend income increased $6.4 million to $25.1 million in 2005 as
      compared to 2004 when interest and dividend income was $18.7 million. This
      increase was due primarily to the growth in the loan portfolio combined with
      a
      general increase in interest rates.


33


Interest
      expense increased $3.3 million or 47% to $10.3 million in 2005 compared to
      $7.0 million in 2004. The increase in interest expense was due largely to
      the increase in total deposits as well as to a general increase in interest
      rates.





Noninterest
      income increased $527,000 or 20% to $3.2 million in 2005 as compared to
      $2.7 million in 2004. An increase in the volume and size of loan
      transactions resulted in an increase in mortgage brokerage and referral fee
      income of $386,000 or 22%.





Noninterest
      expenses for 2005 totaled $14.6 million which represents an increase of
      $2.3 million or 19% over 2004. The higher operating costs were primarily
      the result of the full year impact in 2005 of the two branch offices opened
      in
      2004, the new branch office opened in 2005 and increased commission
      expense.





***Interest
      income and expense***





Bancorp’s
      net interest income increased $3.2 million or 28%, to $14.9 million in 2005
      from $11.7 million in 2004. An increase in average earning assets of $72.0
      million, or 21%, increased Bancorp’s interest income $6.5 million or 35% from
      $18.7 million in 2004 to $25.1 million in 2005. Average loans outstanding
      increased $76.8 million, or 32%, led by growth in construction and real
      estate loans, which reflected the strength of the local real estate market.
      The
      increase in the yields on investments was partially offset by a decrease in
      the
      volume of investments resulting in a net increase in interest and dividends
      on
      investments of $342,000. Higher yields on federal funds sold and short term
      investments, partially offset by a decrease in the average balances of both,
      resulted in an increase in interest income of $127,000 and $73,000,
      respectively. Total average interest bearing liabilities increased by
      $60.4 million or 20%; average certificates of deposit and NOW accounts
      increased by $67.9 million and $3.0 million, respectively; average money
      market deposits and savings deposits decreased $2.3 million and $1.9
      million, respectively; average FHLB advances and other borrowings decreased
      $3.8 million and $2.4 million respectively. Interest expense increased
      from $7.0 million in 2004 to $10.3 million in 2005. Interest
      expense on certificates of deposit increased $3.1 million as a result of
      higher average outstanding balances combined with an increase in the cost of
      funds for that portfolio from 3.13% in 2004 to 3.58% in 2005. Rising interest
      rates also contributed to the increase in the interest expense on subordinated
      debentures of $148,000 or 39% from $380,000 in 2004 to $528,000 in 2005
      resulting in an increase in the cost of the debt from 4.61% in 2004 to 6.40%
      in
      2005.





***Provision
      for loan losses***





The
      provision for loan losses charged to operations for the year ended December
      31,
      2005 of $1.1 million represented an increase of $554,000 when compared to
      the provision of $556,000 for the year ended December 31, 2004. This increase
      was due to the loan growth and the credit risk factors applied against the
      portfolio and not to any adverse changes in the credit quality of the loan
      portfolio or in non-performing loans.





An
      analysis of the changes in the allowance for loan losses is presented under
      the
      discussion entitled “Allowance for Loan Losses.”


34


***Noninterest
      income***





Noninterest
      income increased $527,000 or 20% from $2.7 million in 2004 to
      $3.2 million in 2005. An increase in the volume and size of loan
      transactions and loan origination staff resulted in an increase in mortgage
      brokerage and referral fees of $386,000 or 22% from $1.7 million in 2004 to
      $2.1 million in 2005. Increases in deposit accounts and transaction volumes
      resulted in an increase in fees and service charges of $97,000 or 21% from
      $465,000 for the year ended December 31, 2004 to $562,000 for the year
      ended December 31, 2005. Other noninterest income increased 44% or
      $50,000 to $161,000 for the year ended December 31, 2005 from $111,000 for
      the
      year ended December 31, 2004; this increase is due mainly to increased fees
      from
      debit card transactions and the settlement of an insurance claim.





***Noninterest
      expenses***





Noninterest
      expenses increased $2.3 million in 2005 from $12.3 million in 2004 to
      $14.6 million in 2005. Salaries and benefits increased $1.5 million or
      19% in 2005 as compared to 2004, due primarily to staff additions resulting
      from
      the full year impact in 2005 of the two branches opened in 2004 and one branch
      opened in 2005 and higher levels of commissions as a direct result of the
      increase in the revenue generated by mortgage brokerage operations. Higher
      staffing levels and incentive compensation also resulted in higher payroll
      taxes, employee benefit costs and the expenses associated with training
      programs. Occupancy and equipment expenses increased $375,000 from
      $1.7 million in 2004 to $2.1 million in 2005; this increase was due
      primarily to the full year impact in 2005 of opening two new branch offices
      in
      2004 and of opening one branch in 2005. For the year ended December 31, 2005
      data processing and other outside services increased $345,000 or 43% to
      $1.1 million from $0.8 million for the year ended December 31, 2004;
      much of this increase is due to an increase in personnel placement fees, data
      processing expenses and information technology consulting. The increase in
      data
      processing expenses is a result of the growth in the branch network as well
      as
      to increases due to ongoing maintenance charges for the implementation of
      additional products and services.





***Income
      Taxes***





The
      provision for income taxes of $957,000 in 2005 and $633,000 for 2004 represents
      the tax expense recognized for both federal and state income tax. The effective
      tax rate for both 2005 and 2004 was 40.5%.





**LIQUIDITY**





Bancorp’s
      liquidity position was 19% and 20% at December 31, 2006 and 2005, respectively.
      The liquidity ratio is defined as the percentage of liquid assets to total
      assets. The following categories of assets as described in the accompanying
      balance sheets are considered liquid assets: cash and due from banks, federal
      funds sold, short-term investments and available-for-sale securities. Liquidity
      is a measure of Bancorp’s ability to generate adequate cash to meet financial
      obligations. The principal cash requirements of a financial institution are
      to
      cover increases in its loan portfolio and downward fluctuations in deposit
      accounts. Management


35


believes
      Bancorp’s short-term assets have sufficient liquidity to satisfy loan demand,
      cover potential fluctuations in deposit accounts and to meet other anticipated
      cash requirements.





At
      December 31, 2006, cash and cash equivalents and securities classified as
      available for sale were $55.5 million and $67.1 million, respectively.
      In addition to Federal Home Loan Bank advances outstanding at December 31,
      2006,
      the Bank had the ability to borrow an additional $102.0 million from the Federal
      Home Loan Bank of Boston, which included a $2.0 million overnight line of
      credit. At December 31, 2006, the Bank had $8.0 million in Federal Home Loan
      Bank advances, none of which were under the overnight line of credit. At
      December 31, 2006 the Bank also had available a $3.0 million overnight
      line of credit from a correspondent bank as well as the ability to borrow $10.0
      million under a repurchase agreement. There were no amounts outstanding under
      either arrangement at December 31, 2006.





The
      following table presents Bancorp’s contractual obligations as of December 31,
      2006:


Less
                  than
              
              One
                  to
              
              Three
                  to
              
              Over
                  fiveTotal
              
              one
                  year
              
              three
                  years
              
              five
                  years
              
              yearsCertificates
                  of deposit
              
              $
              410,960,821
              
              $
              327,238,523
              
              $
              64,043,306
              
              $
              19,678,992
              
              $
              -Junior
                  subordinated debt owed tounconsolidated
                  trust
              
              
              8,248,000
              
              
              -
              
              
              -
              
              
              -
              
              
              8,248,000FHLB
                  Advances
              
              
              8,000,000
              
              
              8,000,000
              
              
              -
              
              
              -
              
              
              -Operating
                  lease obligations
              
              
              14,632,741
              
              
              1,884,072
              
              
              3,344,683
              
              
              3,163,707
              
              
              6,240,279Total
                  contractual obligations
              
              $
              441,841,562
              
              $
              337,122,595
              
              $
              67,387,989
              
              $
              22,842,699
              
              $
              14,488,279




The
      following table presents Bancorp’s off-balance sheet commitments as of
      December 31, 2006. These commitments generally have fixed expiration
      dates or other termination clauses and may require payment of a fee by the
      borrower. Since these commitments could expire without being drawn upon or
      are
      contingent upon the customer adhering to the terms of the agreements, the total
      commitment amounts do not necessarily represent future cash
      requirements.




Future
                  loan commitments
              
              $
                  54,134,247Unused
                  lines of credit
              
              43,900,007Undisbursed
                  construction loans
              
              97,977,899Financial
                  Standby letters of credit
              
              264,483Total
                  commitments
              
              $
                  196,276,636
 36
 **CAPITAL**





The
      following table illustrates Bancorp’s regulatory capital ratios for each of the
      years shown:




December
                  31,2006
              2005
              2004Total
                  Risk-Based Capital
              15.34%
              12.70%
              10.70%Tier
                  1 Risk- Based Capital
              14.22%
              11.45%
              9.04%Leverage
                  Capital
              11.63%
              8.56%
              6.79%
   The
          following table illustrates the Bank’s regulatory capital ratios for each of the
          years shown:
  December
                  31,2006
              2005
              2004Total
                  Risk-Based Capital
              15.02%
              12.52%
              10.50%Tier
                  1 Risk- Based Capital
              13.90%
              11.27%
              9.29%Leverage
                  Capital
              11.37%
              8.42%
              6.98%





Capital
      adequacy is one of the most important factors used to determine the safety
      and
      soundness of individual banks and the banking system. Based on the above ratios,
      the Bank is considered to be “well capitalized” under applicable regulations. To
      be considered “well-capitalized,” an institution must generally have a leverage
      capital ratio of at least 5%, a Tier 1 risk-based capital ratio of at least
      6%
      and a total risk-based capital ratio of at least 10%.





The
      increase in capital ratios during 2006 was due primarily to the issuance of
      additional capital stock combined with the increase in retained earnings and
      partially offset by the growth of the Bank.





Management
      continuously assesses the adequacy of the Bank’s capital with the goal to
      maintain its “well capitalized” classification. Management’s strategic and
      capital plans contemplate various alternatives to raise additional capital
      to
      support the planned growth of the Bank which includes the opening of additional
      branches in 2007.


37


Item
      7A. Quantitative
      and Qualitative Disclosures About Market Risk





**MARKET
      RISK**





Market
      risk is defined as the sensitivity of income to fluctuations in interest rates,
      foreign exchange rates, equity prices, commodity prices and other market-driven
      rates or prices. Based upon the nature of Bancorp’s business, market risk is
      primarily limited to interest rate risk, which is the impact that changing
      interest rates have on current and future earnings.





**Qualitative
      Aspects of Market Risk**





Bancorp’s
      goal is to maximize long term profitability while minimizing its exposure to
      interest rate fluctuations. The first priority is to structure and price
      Bancorp’s assets and liabilities to maintain an acceptable interest rate spread
      while reducing the net effect of changes in interest rates. In order to
      accomplish this, the focus is on maintaining a proper balance between the timing
      and volume of assets and liabilities re-pricing within the balance sheet. One
      method of achieving this balance is to originate variable rate loans for the
      portfolio and purchase short term investments to offset the increasing short
      term re-pricing of the liability side of the balance sheet. In fact, a number
      of
      the interest bearing deposit products have no contractual maturity. Therefore,
      deposit balances may run off unexpectedly due to changing market conditions.
      Additionally, loans and investments with longer term rate adjustment frequencies
      are matched against longer term deposits and borrowings to lock in a desirable
      spread.





The
      exposure to interest rate risk is monitored by the Management Asset and
      Liability Committee consisting of senior management personnel. The Committee
      meets on a monthly basis, but may convene more frequently as conditions dictate.
      The Committee reviews the interrelationships within the balance sheet to
      maximize net interest income within acceptable levels of risk. This Committee
      reports to the Board of Directors on a monthly basis regarding its activities.
      In addition to the Management Asset Liability Committee, there is a Board Asset
      and Liability Committee *(“ALCO”)* which
      meets quarterly. ALCO monitors the interest rate risk analyses, reviews
      investment transactions during the period and determines compliance with Bank
      policies.





**Quantitative
      Aspects of Market Risk**





Management
      analyzes Bancorp’s interest rate sensitivity position to manage the risk
      associated with interest rate movements through the use of interest income
      simulation and GAP analysis. The matching of assets and liabilities may be
      analyzed by examining the extent to which such assets and liabilities are
“interest sensitive.” An asset or liability is said to be interest sensitive
      within a specific time period if it will mature or reprice within that time
      period.





Management’s
      goal is to manage asset and liability positions to moderate the effects of
      interest rate fluctuations on net interest income. Interest income simulations
      are completed quarterly and presented to ALCO. The simulations provide an
      estimate of the impact of changes in interest rates on net interest income
      under
      a range of assumptions. Changes to these assumptions can significantly affect
      the results of the simulations. The simulation incorporates assumptions


38


regarding
      the potential timing in the repricing of certain assets and liabilities when
      market rates change and the changes in spreads between different market
      rates.





Simulation
      analysis is only an estimate of Bancorp’s interest rate risk exposure at a
      particular point in time. Management regularly reviews the potential effect
      changes in interest rates could have on the repayment of rate sensitive assets
      and funding requirements of rate sensitive liabilities.





Management
      has established interest rate risk guidelines measured by behavioral GAP
      analysis calculated at the one year cumulative GAP level and a net interest
      income and economic value of portfolio equity simulation model measured by
      a 200
      basis point interest rate shock.





The
      table
      below sets forth an approximation of Bancorp’s exposure to changing interest
      rates using management’s behavioral GAP analysis and as a percentage of
      estimated net interest income and estimated net portfolio value using interest
      income simulation. The calculations use projected repricings of assets and
      liabilities at December 31, 2006 and 2005 on the basis of contractual
      maturities, anticipated repayments and scheduled rate adjustments.


Basis
              Interest
                  Rate
              December
                  31,Points
              Risk
                  Guidelines
              2006
              2005Gap
                  percentage total
              
              +/-
                  15%
              1.53%
              4.98%Net
                  interest income
              200
              +/-
                  15%
              11.22%
              14.49%-200
              +/-
                  15%
              -12.04%
              -14.24%Net
                  portfolio value
              200
              +/-
                  25%
              -3.25%
              0.45%-200
              +/-
                  25%
              1.19%
              -7.89%





Bancorp
      benefited during 2006 from a rising interest rate environment as assets
      re-priced faster than liabilities and, combined with a 39% increase in the
      loan
      portfolio, resulted in an expanding net interest margin. These factors
      contributed to higher levels of net interest income and net portfolio value
      in
      the base case scenario at December 31, 2006 as compared to
      December 31, 2005 using Bancorp’s interest income simulation model.
      Bancorp’s interest rate risk position was within guidelines in all categories at
      December 31, 2006. The interest rate risk position is monitored on an
      ongoing basis and management reviews strategies to maintain all categories
      within guidelines.


39


The
      table
      below sets forth examples of changes in estimated net interest income and the
      estimated net portfolio value based on projected scenarios of interest rate
      increases and decreases. The analyses indicate the rate risk embedded in
      Bancorp’s portfolio at the dates indicated should all interest rates
      instantaneously rise or fall. The results are derived by adding to or
      subtracting from all current rates; however there are certain limitations to
      these types of analyses. Rate changes are rarely instantaneous and these
      analyses may also overstate the impact of short term repricings.




**Net
                  Interest Income and Economic Value****Summary
                  Performance**December
                  31, 2006Net
                  Interest Income
              
              Net
                  Portfolio ValueProjected
                  Interest
              Estimated
              $
                  Change
              %
                  Change
              
              Estimated
              $
                  Change
              %
                  ChangeRate
                  Scenario
              Value
              from
                  Base
              from
                  Base
              
              Value
              from
                  Base
              from
                  Base+
                  200
              23,940
              2,415
              11.22%
              
              68,230
              (2,290)
              -3.25%+
                  100
              22,750
              1,225
              5.69%
              
              69,491
              (1,029)
              -1.46%BASE
              21,525
              
              
              
              70,520-
                  100
              20,307
              (1,218)
              -5.66%
              
              71,533
              1,013
              1.44%-
                  200
              18,934
              (2,591)
              -12.04%
              
              71,359
              839
              1.19%December
                  31, 2005Net
                  Interest Income
              
              Net
                  Portfolio ValueProjected
                  Interest
              Estimated
              $
                  Change
              %
                  Change
              
              Estimated
              $
                  Change
              %
                  ChangeRate
                  Scenario
              Value
              from
                  Base
              from
                  Base
              
              Value
              from
                  Base
              from
                  Base+
                  200
              18,650
              2,360
              14.49%
              
              47,153
              211
              0.45%+
                  100
              17,478
              1,188
              7.29%
              
              47,606
              664
              1.41%BASE
              16,290
              
              
              
              46,942-
                  100
              15,115
              (1,175)
              -7.21%
              
              45,432
              (1,510)
              -3.22%-
                  200
              13,970
              (2,320)
              -14.24%
              
              43,239
              (3,703)
              -7.89%





**Impact
      of Inflation and Changing Prices**





Bancorp’s
      financial statements have been prepared in terms of historical dollars, without
      considering changes in relative purchasing power of money over time due to
      inflation. Unlike most industrial companies, virtually all of 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 effect of general levels of inflation. Interest rates
      do
      not necessarily move in the same direction or in the same magnitude as the
      prices of goods and services. Notwithstanding this, inflation can directly
      affect the value of loan collateral, in particular, real estate. Inflation,
      or
      disinflation, could significantly affect Bancorp’s earnings in future
      periods.


40


Item
      8. Financial
      Statements and Supplementary Data





The
      consolidated balance sheets of Bancorp as of December 31, 2006 and
      December 31, 2005 and the related consolidated statements of income,
      shareholders’ equity and cash flows for the years ended
      December 31, 2006, December 31, 2005 and December 31, 2004,
      together with the report thereon of McGladrey & Pullen, LLP dated March
      26, 2007, are included as part of this Form 10-K in the “Financial Report”
following page 48 hereof.





The
      following table presents selected quarterly financial information
      (unaudited):


**First**
              
              **Second**
              
              **Third**
              
              **Fourth****Quarter**
              
              **Quarter**
              
              **Quarter**
              
              **Quarter****2006:**Interest
                  income
              
              $
              8,040,092
              
              $
              9,152,592
              
              $
              9,856,854
              
              $
              10,959,988Interest
                  expense
              
              
              3,428,785
              
              
              4,185,462
              
              
              4,821,600
              
              
              5,633,801Net
                  interest income
              
              
              4,611,307
              
              
              4,967,130
              
              
              5,035,254
              
              
              5,326,187Provision
                  for loan losses
              
              
              572,800
              
              
              350,700
              
              
              116,500
              
              
              -Noninterest
                  income
              
              
              630,265
              
              
              581,329
              
              
              632,563
              
              
              514,992Noninterest
                  expenses
              
              
              4,038,829
              
              
              4,394,967
              
              
              4,490,679
              
              
              4,652,397Income
                  before income taxes
              
              
              629,943
              
              
              802,792
              
              
              1,060,638
              
              
              1,188,782Income
                  taxes
              
              
              231,000
              
              
              295,000
              
              
              390,000
              
              
              351,000Net
                  income
              
              $
              398,943
              
              $
              507,792
              
              $
              670,638
              
              $
              837,782**Net
                  income per common share:**Basic
              
              $
              0.12
              
              $
              0.16
              
              $
              0.20
              
              $
              0.19Diluted
              
              
              0.12
              
              
              0.16
              
              
              0.20
              
              
              0.18**2005:**Interest
                  income
              
              $
              5,594,456
              
              $
              5,809,046
              
              $
              6,439,258
              
              $
              7,305,941Interest
                  expense
              
              
              2,179,914
              
              
              2,315,236
              
              
              2,733,111
              
              
              3,041,364Net
                  interest income
              
              
              3,414,542
              
              
              3,493,810
              
              
              3,706,147
              
              
              4,264,577Provision
                  for loan losses
              
              
              260,000
              
              
              100,000
              
              
              350,000
              
              
              400,000Noninterest
                  income
              
              
              711,015
              
              
              820,881
              
              
              985,582
              
              
              711,559Noninterest
                  expenses
              
              
              3,383,376
              
              
              3,624,595
              
              
              3,870,018
              
              
              3,756,498Income
                  before income taxes
              
              
              482,181
              
              
              590,096
              
              
              471,711
              
              
              819,638Income
                  taxes
              
              
              195,000
              
              
              239,000
              
              
              191,000
              
              
              332,000Net
                  income
              
              $
              287,181
              
              $
              351,096
              
              $
              280,711
              
              $
              487,638**Net
                  income per common share:**Basic
              
              $
              0.12
              
              $
              0.14
              
              $
              0.11
              
              $
              0.15Diluted
              
              
              0.11
              
              
              0.14
              
              
              0.11
              
              
              0.15


41


Item
      9. Changes
      in and Disagreements with Accountants on Accounting and


Financial Disclosure





None.





Item
      9A. Controls
      and Procedures





Based
      on
      an evaluation of the effectiveness of Bancorp’s disclosure controls and
      procedures performed by Bancorp’s management, with the participation of
      Bancorp’s Chief Executive Officer and its Chief Financial Officer as of the end
      of the period covered by this report, Bancorp’s Chief Executive Officer and
      Chief Financial Officer concluded that Bancorp’s disclosure controls and
      procedures have been effective.





As
      used
      herein, “disclosure controls and procedures” mean controls and other procedures
      of Bancorp that are designed to ensure that information required to be disclosed
      by Bancorp in the reports that it files or submits under the Securities Exchange
      Act is recorded, processed, summarized and reported, within the time periods
      specified in the Commission’s rules and forms. Disclosure controls and
      procedures include, without limitation, controls and procedures designed to
      ensure that information required to be disclosed by Bancorp in the reports
      that
      it files or submits under the Securities Exchange Act is accumulated and
      communicated to Bancorp’s management, including its principal executive, and
      principal financial officers, or persons performing similar functions, as
      appropriate to allow timely decisions regarding required
      disclosure.





There
      were no changes in Bancorp’s internal control over financial reporting
      identified in connection with the evaluation described in the preceding
      paragraph that occurred during Bancorp’s fiscal year ended
      December 31, 2006 that has materially affected, or is reasonably
      likely to materially affect, Bancorp’s internal control over financial
      reporting.





Item
      9B. Other
      Information





None.


42


**PART
      III**





Item
      10. Directors,
      Executive Officers and Corporate Governance





The
      information required by Items 401, 405, 406 and 407 (c)(3); (d)(4) and (d)(5)
      of
      Regulation S-K is incorporated into this Form 10-K by reference to
      Bancorp’s definitive proxy statement (the “ *Definitive
      Proxy Statement”* )
      for its
      2007 Annual Meeting of Shareholders, to be filed within 120 days following
      December 31, 2006.





The
      Company has adopted a Code of Ethics for its senior financial officers. The
      information required by Item 406 is contained in Exhibit 14 to this Form 10-K.
      A
      copy of this Code of Ethics will be provided to any person so requesting by
      writing to Patriot National Bancorp, Inc., 900 Bedford Street, Stamford,
      Connecticut 06901, Attn: Robert F. O’Connell, Chief Financial
      Officer.





Item
      11. Executive
      Compensation





The
      information required by Item 402 of Regulation S-K is incorporated into this
      Form 10-K by reference to the Definitive Proxy Statement.





Item
      12. Security
      Ownership of Certain Beneficial Owners and Management and


Related Shareholder Matters





The
      information required by Item 201(d) and Item 403 of Regulation S-K is
      incorporated into this Form 10-K by reference to the Definitive Proxy
      Statement.





Item
      13. Certain
      Relationships and Related Transactions, and Director
      Independence





The
      information required by Items 404 and 407(a) of Regulation S-K is incorporated
      into this Form 10-K by reference to the Definitive Proxy Statement.





Item
      14. Principal
      Accountant Fees and Services





The
      information required by Item 9(e) of Schedule 14A of Regulation S-K is
      incorporated into this Form 10-K by reference to the Definitive Proxy
      Statement.





43


**Part
      IV**





Item
                15.
            Exhibits
                and Financial Statement Schedules(a)
            ExhibitsExhibit
                No.
            Description2
            Agreement
                and Plan of Reorganization dated as of June 28, 1999 between Bancorp
                and
                the Bank (incorporated by reference to Exhibit 2 to Bancorp’s Current
                Report on Form 8-K dated December 1, 1999 (Commission File No.
                000-29599)).3(i)
            Certificate
                of Incorporation of Bancorp, (incorporated by reference to Exhibit
                3(i) to
                Bancorp’s Current Report on Form 8-K dated December 1, 1999 (Commission
                File No. 000-29599)).3(i)(A)
            Certificate
                of Amendment of Certificate of Incorporation of Patriot National
                Bancorp,
                Inc. dated July 16, 2004 (incorporated by reference to Exhibit 3(i)(A)
                to
                Bancorp's Annual Report on Form 10-KSB for the year ended December
                31,
                2004 (Commission File No. 000-29599)).3(i)(B)
            Certificate
                of Amendment of Certificate of Incorporation of Patriot National
                Bancorp,
                Inc. dated June 15, 2006 (incorporated by reference to Exhibit 3(i)(B)
                to
                Bancorp's Quarterly Report on Form 10-Q for the quarter ended
                September 30, 2006 (Commission File No.
                000-29599)).3(ii)
            By-laws
                of Bancorp (incorporated by reference to Exhibit 3(ii) to Bancorp’s
                Current Report on Form 8-K dated December 1, 1999 (Commission File
                No.
                000-29599)).4
            Reference
                is made to the Rights Agreement dated April 19, 2004 by and between
                Patriot National Bancorp, Inc. and Registrar and Transfer Company
                filed as
                Exhibit 99.2 to Bancorp’s Report on Form 8-K filed on April 19, 2004,
                which is incorporated herein by reference.10(a)(1)
            2001
                Stock Appreciation Rights Plan of Bancorp (incorporated by reference
                to
                Exhibit 10(a)(1) to Bancorp’s Annual Report on Form 10-KSB for the year
                ended December 31, 2001 (Commission File No.
                000-29599)).10(a)(3)
            Employment
                Agreement, dated as of October 23, 2000, as amended by a First Amendment,
                dated as of March 21, 2001, among the Bank, Bancorp and Charles F.
                Howell (incorporated by reference to Exhibit 10(a)(4) to Bancorp’s Annual
                Report on Form 10-KSB for the year ended December 31, 2000 (Commission
                File No. 000-29599)).


44


Exhibit
                No.
            Description10(a)(4)
            Change
                of Control Agreement, dated as of January 1, 2007 among
                Angelo De Caro, and Patriot National Bank and
                Bancorp.10(a)(5)
            Employment
                Agreement dated as of November 3, 2003 among Patriot National Bank,
                Bancorp and Robert F. O’Connell (incorporated by reference to Exhibit
                10(a)(5) to Bancorp’s Annual Report on Form 10-KSB for the year ended
                December 31, 2003 (Commission File No. 000-29599)).10(a)(6)
            Change
                of Control Agreement, dated as of January 1, 2007 among
                Robert F. O’Connell and Patriot National Bank and
                Bancorp.10(a)(8)
            Employment
                Agreement dated as of January 1, 2007 between Patriot National Bank
                and
                Marcus Zavattaro.10(a)(9)
            License
                agreement dated July 1, 2003 between Patriot National Bank and
                L. Morris Glucksman (incorporated by reference to Exhibit 10(a)(9) to
                Bancorp’s Annual Report on Form 10-KSB for the year ended December 31,
                2003 (Commission File No. 000-29599)).10(a)(10)
            Employment
                Agreement dated as of January 1, 2007 among the Bank, Bancorp
                and Charles F. Howell.10(a)(11)
            Change
                of Control Agreement, dated as of January 1, 2007 among
                Charles F. Howell, Patriot National Bank and
                Bancorp.10(a)(12)
            2005
                Director Stock Award Plan (incorporated by reference to Exhibit 10(a)(12)
                to Bancorp’s Quarterly Report on Form 10-Q for the quarter ended
                June 30, 2006 (Commission File No. 000-295999)).10(a)(13)
            Change
                of Control Agreement, dated as of January 1, 2007 between
                Martin G. Noble and Patriot National Bank.10(a)(14)
            Change
                of Control Agreement, dated as of January 1, 2007 among
                Philip W. Wolford, Patriot National Bank and
                Bancorp.10(c)
            1999
                Stock Option Plan of the Bank (incorporated by reference to Exhibit
                10(c)
                to Bancorp’s Current Report on Form 8-K dated December 1, 1999 (Commission
                File No. 000-29599)).14
            Code
                of Conduct for Senior Financial Officers (incorporated by reference
                to
                Exhibit 14 to Bancorp’s Annual Report on Form 10-KSB for the year ended
                December 31, 2004 (Commission File No.
                000-29599)).


45


Exhibit
                No.
            Description21
            Subsidiaries
                of Bancorp (Incorporated by reference to Exhibit 21 to Bancorp’s Annual
                Report on Form 10-KSB for the year ended December 31, 1999 (Commission
                File No. 000-29599)).23
            Consent
                of McGladrey & Pullen, LLP.31(1)
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive
                Officer31(2)
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial
                Officer32
            Section
                1350 Certification



















46


**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.





Patriot
                National Bancorp, Inc.(Registrant)By:/s/
                Angelo De CaroName:
                Angelo De CaroTitle:
                Chairman & Chief Executive Officer





Date:
      March 28, 2007





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in capacities and on the
      dates
      indicated.








/s/
                Angelo De Caro
            March
                28, 2007Angelo
                De Caro, Chairman, Chief Executive
            DateOfficer
                and Director/s/
                Robert F. O’Connell
            March
                28, 2007Robert
                F. O’Connell
            DateSenior
                Executive Vice President,Chief
                Financial Officer and Director/s/
                Michael A. Capodanno
            March
                28, 2007Michael
                A. Capodanno
            DateSenior
                Vice President & Controller/s/
                John J. Ferguson
            March
                28, 2007John
                J. Ferguson
            DateDirector/s/
                Brian A. Fitzgerald
            March
                28, 2007Brian
                A. Fitzgerald
            DateDirector




47





**Form
      10 K - Signatures continued**











John
                A. Geoghegan
            DateDirector/s/
                L. Morris Glucksman
            March
                28, 2007L.
                Morris Glucksman
            DateDirector/s/
                Charles F. Howell
            March
                28, 2007Charles
                F. Howell
            DateDirector/s/
                Michael F. Intrieri
            March
                28, 2007Michael
                F. Intrieri
            DateDirector/s/
                Philip W. Wolford
            March
                28, 2007Philip
                W. Wolford
            DateDirector





48





**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
 
 **FINANCIAL
        REPORT**
 **DECEMBER
        31, 2006 and 2005**
   
  
  
 
 **CONTENTS**
 
 
 **REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
              1**CONSOLIDATED
                  FINANCIAL STATEMENTS**Consolidated
                  balance sheets
              2Consolidated
                  statements of income
              3Consolidated
                  statements of shareholders’ equity
              4Consolidated
                  statements of cash flows
              5
                  -6Notes
                  to consolidated financial statements
              7
                  -
                  41
 
   
 
 **McGladrey
          & Pullen**
 **Certified
          Public Accountants**
  **REPORT
            OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
            the
            Shareholders and Board of Directors
 Patriot
            National Bancorp, Inc. and Subsidiary
 Stamford,
            Connecticut
 
 
 We
            have
            audited the accompanying consolidated balance sheets of Patriot National
            Bancorp, Inc. and Subsidiary (the "Company") as of December 31, 2006 and
            2005, and the related consolidated statements of income, shareholders'
            equity
            and cash flows for each of the three years in the period ended December 31,
            2006. These consolidated financial statements are the responsibility
            of the
            Company's management. Our responsibility is to express an opinion on
            these
            consolidated financial statements based on our audits.
 
 We
            conducted our audits in accordance with the standards of the Public Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audits to obtain reasonable assurance about whether the
            financial statements are free of material misstatement. An audit includes
            examining, on a test basis, evidence supporting the amounts and disclosures
            in
            the financial statements. An audit also includes assessing the accounting
            principles used and significant estimates made by management, as well
            as
            evaluating the overall financial statement presentation. We believe that
            our
            audits provide a reasonable basis for our opinion.
 
 In
            our
            opinion, the consolidated financial statements referred to above present
            fairly,
            in all material respects, the financial position of Patriot National
            Bancorp,
            Inc. and Subsidiary as of December 31, 2006 and 2005, and the results of
            their operations and their cash flows for each of the three years in
            the period
            ended December 31, 2006, in conformity with U.S. generally accepted accounting
            principles.
 
 As
            discussed in Note 1, the Company adopted Financial Accounting Standards
            No.
            123(R) on January 1, 2006 and changed its method of accounting for share-based
            payments.
 
 
 /S/
            McGladrey & Pullen, LLP
 
 New
            Haven, Connecticut
 March
            26,
            2007
   McGladrey
            & Pullen, LLP is a member firm of RSM International,
 an
            affiliation of separate and independent legal entities.
 
 **PATRIOT
                  NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
                  BALANCE SHEETS****December
                  31, 2006 and 2005****2006**
              
              
              2005**ASSETS**Cash
                  and due from banks (Note 2):Noninterest
                  bearing deposits and cash
              
              **$**
              **3,865,468**
              
              $
              7,180,391Interest
                  bearing deposits
              
              
              **3,202**
              
              
              40,186Federal
                  funds sold
              
              
              **27,000,000**
              
              
              6,500,000Short-term
                  investments
              
              
              **24,605,869**
              
              
              2,247,028**Cash
                  and cash equivalents**
              
              
              **55,474,539**
              
              
              15,967,605Available
                  for sale securities (at fair value) (Note 3)
              
              
              **67,093,135**
              
              
              78,672,068Federal
                  Reserve Bank stock
              
              
              **1,911,700**
              
              
              1,022,300Federal
                  Home Loan Bank stock (Note 8)
              
              
              **1,217,200**
              
              
              1,296,700Loans
                  receivable (net of allowance for loan losses: 2006
                  $5,630,432;2005
                  $4,588,335) (Note 4)
              
              
              **506,884,155**
              
              
              364,243,777Accrued
                  interest and dividends receivable
              
              
              **3,542,173**
              
              
              2,445,417Premises
                  and equipment, net (Notes 5 and 9)
              
              
              **3,690,861**
              
              
              2,474,153Deferred
                  tax asset (Note 10)
              
              
              **2,914,562**
              
              
              2,675,595Goodwill
                  and other intangible assets (Note 11)
              
              
              **1,487,651**
              
              
              930,091Other
                  assets (Notes 6 and 8)
              
              
              **1,766,819**
              
              
              913,456**Total
                  assets**
              
              **$**
              **645,982,795**
              
              $
              470,641,162**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**LiabilitiesDeposits
                  (Note 7):Noninterest
                  bearing deposits
              
              **$**
              **56,679,836**
              
              $
              48,797,389Interest
                  bearing deposits
              
              
              **504,771,828**
              
              
              370,277,899**Total
                  deposits**
              
              
              **561,451,664**
              
              
              419,075,288Federal
                  Home Loan Bank borrowings (Note 8)
              
              
              **8,000,000**
              
              
              9,000,000Junior
                  subordinated debt owed to unconsolidated trust (Note 8)
              
              
              **8,248,000**
              
              
              8,248,000Accrued
                  expenses and other liabilities
              
              
              **3,999,786**
              
              
              2,943,259**Total
                  liabilities**
              
              
              **581,699,450**
              
              
              439,266,547Commitments
                  and Contingencies (Notes 8, 9 and 14)Shareholders'
                  equity (Notes 12 and 15)Preferred
                  stock, no par value; 1,000,000 shares authorized,no
                  shares issued
              
              
              **-**
              
              
              -Common
                  stock, $2 par value: 60,000,000 shares authorized; sharesissued
                  and outstanding: 2006 4,739,494; 2005 3,230,649
              
              
              **9,478,988**
              
              
              6,461,298Additional
                  paid-in capital
              
              
              **49,463,307**
              
              
              21,709,224Retained
                  earnings
              
              
              **6,022,012**
              
              
              4,308,242Accumulated
                  other comprehensive loss - net unrealized losson
                  available for sale securities, net of taxes
              
              
              **(680,962**
              **)**
              
              (1,104,149
              )**Total
                  shareholders' equity**
              
              
              **64,283,345**
              
              
              31,374,615**Total
                  liabilities and shareholders' equity**
              
              **$**
              **645,982,795**
              
              $
              470,641,162See
                  Notes to Consolidated Financial
                  Statements.
 2
 **PATRIOT
                    NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
                    STATEMENTS OF INCOME****Years
                    Ended December 31, 2006, 2005 and 2004****2006**
                
                
                2005
                
                
                2004Interest
                    and Dividend IncomeInterest
                    and fees on loans
                
                **$**
                **34,052,444**
                
                $
                21,561,121
                
                $
                15,631,838Interest
                    on investment securities
                
                
                **2,541,678**
                
                
                2,750,205
                
                
                2,496,065Dividends
                    on investment securities
                
                
                **815,014**
                
                
                510,657
                
                
                358,012Interest
                    on Federal funds sold
                
                
                **582,952**
                
                
                315,942
                
                
                189,485Other
                    interest income
                
                
                **17,438**
                
                
                10,776
                
                
                2,851**Total
                    interest and dividend income**
                
                
                **38,009,526**
                
                
                25,148,701
                
                
                18,678,251Interest
                    ExpenseInterest
                    on deposits (Note 7)
                
                
                **16,151,297**
                
                
                9,366,563
                
                
                6,213,732Interest
                    on Federal Home Loan Bank borrowings
                
                
                **1,240,582**
                
                
                374,315
                
                
                371,699Interest
                    on subordinated debt
                
                
                **672,971**
                
                
                527,435
                
                
                380,194Interest
                    on other borrowings
                
                
                **4,798**
                
                
                1,312
                
                
                42,883**Total
                    interest expense**
                
                
                **18,069,648**
                
                
                10,269,625
                
                
                7,008,508**Net
                    interest income**
                
                
                **19,939,878**
                
                
                14,879,076
                
                
                11,669,743Provision
                    for Loan Losses (Note 4)
                
                
                **1,040,000**
                
                
                1,110,000
                
                
                556,000**Net
                    interest income after provision for loan losses**
                
                
                **18,899,878**
                
                
                13,769,076
                
                
                11,113,743Noninterest
                    IncomeMortgage
                    brokerage referral fees
                
                
                **1,240,545**
                
                
                2,104,065
                
                
                1,717,756Loan
                    application, inspection and processing fees
                
                
                **300,907**
                
                
                402,723
                
                
                408,152Fees
                    and service charges
                
                
                **644,845**
                
                
                561,651
                
                
                465,018Other
                    income
                
                
                **172,852**
                
                
                160,598
                
                
                111,278**Total
                    noninterest income**
                
                
                **2,359,149**
                
                
                3,229,037
                
                
                2,702,204Noninterest
                    ExpensesSalaries
                    and benefits (Notes 9 and 13)
                
                
                **10,436,127**
                
                
                8,997,255
                
                
                7,544,055Occupancy
                    and equipment expense, net
                
                
                **2,797,089**
                
                
                2,082,593
                
                
                1,707,769Data
                    processing and other outside services
                
                
                **1,322,423**
                
                
                1,147,378
                
                
                802,536Advertising
                    and promotional expenses
                
                
                **703,007**
                
                
                420,222
                
                
                369,638Professional
                    services
                
                
                **531,611**
                
                
                419,921
                
                
                386,110Loan
                    administration and processing expenses
                
                
                **163,930**
                
                
                190,139
                
                
                209,283Other
                    real estate operations (Note 6)
                
                
                **(19,715**
                **)**
                
                -
                
                
                -Other
                    operating expenses
                
                
                **1,642,400**
                
                
                1,376,979
                
                
                1,237,159**Total
                    noninterest expenses**
                
                
                **17,576,872**
                
                
                14,634,487
                
                
                12,256,550**Income
                    before income taxes**
                
                
                **3,682,155**
                
                
                2,363,626
                
                
                1,559,397Provision
                    for Income Taxes (Note 10)
                
                
                **1,267,000**
                
                
                957,000
                
                
                633,000**Net
                    income**
                
                **$**
                **2,415,155**
                
                $
                1,406,626
                
                $
                926,397**Basic
                    income per share (Note 12)**
                
                **$**
                **0.67**
                
                $
                0.52
                
                $
                0.38**Diluted
                    income per share (Note 12)**
                
                **$**
                **0.66**
                
                $
                0.51
                
                $
                0.37**Dividends
                    per share**
                
                **$**
                **0.175**
                
                $
                0.155
                
                $
                0.135See
                    Notes to Consolidated Financial
                    Statements.
 3
 **PATRIOT
                    NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
                    STATEMENTS OF SHAREHOLDERS' EQUITY****Years
                    Ended December 31, 2006, 2005 and 2004**AccumulatedAdditional
                
                
                
                OtherNumber
                    of
                
                Common
                
                Paid-in
                
                Retained
                
                ComprehensiveShares
                
                Stock
                
                Capital
                
                Earnings
                
                Loss
                
                TotalBalance
                    at December 31, 2003
                
                
                2,408,607
                
                $
                4,817,214
                
                $
                11,519,037
                
                $
                2,752,541
                
                $
                (308,879
                )
                $
                18,779,913Comprehensive
                    incomeNet
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                926,397
                
                
                -
                
                
                926,397Unrealized
                    holding loss on available forsale
                    securities, net of taxes (Note 17)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (84,360
                )
                
                (84,360
                )**Total
                    comprehensive income**
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                842,037Dividends
                
                
                -
                
                
                -
                
                
                -
                
                
                (332,220
                )
                
                -
                
                
                (332,220
                )Issuance
                    of capital stock
                
                
                77,784
                
                
                155,568
                
                
                311,136
                
                
                -
                
                
                -
                
                
                466,704Balance
                    at December 31, 2004
                
                
                2,486,391
                
                
                4,972,782
                
                
                11,830,173
                
                
                3,346,718
                
                
                (393,239
                )
                
                19,756,434Comprehensive
                    incomeNet
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                1,406,626
                
                
                -
                
                
                1,406,626Unrealized
                    holding loss on available forsale
                    securities, net of taxes (Note 17)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (710,910
                )
                
                (710,910
                )**Total
                    comprehensive income**
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                695,716Dividends
                
                
                -
                
                
                -
                
                
                -
                
                
                (445,102
                )
                
                -
                
                
                (445,102
                )Issuance
                    of capital stock
                
                
                744,258
                
                
                1,488,516
                
                
                9,879,051
                
                
                -
                
                
                -
                
                
                11,367,567Balance
                    at December 31, 2005
                
                
                3,230,649
                
                
                6,461,298
                
                
                21,709,224
                
                
                4,308,242
                
                
                (1,104,149
                )
                
                31,374,615Comprehensive
                    incomeNet
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                2,415,155
                
                
                -
                
                
                2,415,155Unrealized
                    holding gain on available forsale
                    securities, net of taxes (Note 17)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                423,187
                
                
                423,187**Total
                    comprehensive income**
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,838,342Dividends
                
                
                -
                
                
                -
                
                
                -
                
                
                (701,385
                )
                
                -
                
                
                (701,385
                )Issuance
                    of capital stock (Note 12)
                
                
                1,508,845
                
                
                3,017,690
                
                
                27,754,083
                
                
                -
                
                
                -
                
                
                30,771,773**Balance,
                    December 31, 2006**
                
                
                **4,739,494**
                
                **$**
                **9,478,988**
                
                **$**
                **49,463,307**
                
                **$**
                **6,022,012**
                
                **$**
                (680,962
                )
                **$**
                **64,283,345**See
                    Notes to Consolidated Financial
                    Statements.
 4
 **PATRIOT
                          NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
                          STATEMENTS OF CASH FLOWS****Years
                          Ended December 31, 2006, 2005 and 2004****2006**
                      
                      2005
                      
                      2004Cash
                          Flows from Operating ActivitiesNet
                          income
                      
                      **$**
                      **2,415,155**
                      
                      $
                      1,406,626
                      
                      $
                      926,397Adjustments
                          to reconcile net income to net cash provided byoperating
                          activities:Amortization
                          and accretion of investment premiums and discounts, net
                      
                      
                      **231,541**
                      
                      
                      394,827
                      
                      
                      500,847Amortization
                          of core deposit intangible
                      
                      
                      **2,440**
                      
                      
                      -
                      
                      
                      -Provision
                          for loan losses
                      
                      
                      **1,040,000**
                      
                      
                      1,110,000
                      
                      
                      556,000Depreciation
                          and amortization of premises and equipment
                      
                      
                      **644,472**
                      
                      
                      604,399
                      
                      
                      536,029Loss
                          on disposal of bank premises and equipment
                      
                      
                      **5,262**
                      
                      
                      -
                      
                      
                      3,804Deferred
                          income taxes
                      
                      
                      **(498,342**
                      **)**
                      
                      (562,833
                      )
                      
                      (101,212
                      )Change
                          in assets and liabilities:Increase
                          in deferred loan fees
                      
                      
                      **531,050**
                      
                      
                      17,048
                      
                      
                      235,734Increase
                          in accrued interest and dividends receivable
                      
                      
                      **(1,096,756**
                      **)**
                      
                      (687,078
                      )
                      
                      (287,717
                      )(Increase)
                          decrease in other assets
                      
                      
                      **(19,022**
                      **)**
                      
                      (128,667
                      )
                      
                      132,592Increase
                          (decrease) in accrued expenses and other liabilities
                      
                      
                      **972,477**
                      
                      
                      863,861
                      
                      
                      (373,139
                      )**Net
                          cash provided by operating activities**
                      
                      
                      **4,228,277**
                      
                      
                      3,018,183
                      
                      
                      2,129,335Cash
                          Flows from Investing ActivitiesPurchases
                          of available for sale securities
                      
                      
                      **(2,050,000**
                      **)**
                      
                      (28,208,359
                      )
                      
                      (16,020,313
                      )Proceeds
                          from sales of available for sale securities
                      
                      
                      **-**
                      
                      
                      -
                      
                      
                      -Principal
                          repayments on available for sale securities
                      
                      
                      **13,079,953**
                      
                      
                      21,264,308
                      
                      
                      23,676,009Cash
                          received in conjunction with branch acquisition
                      
                      
                      **2,586,471**
                      
                      
                      -
                      
                      
                      -Purchase
                          of Federal Reserve Bank stock
                      
                      
                      **(889,400**
                      **)**
                      
                      (329,700
                      )
                      
                      (1,450
                      )Purchase
                          of Federal Home Loan Bank stock
                      
                      
                      **(1,430,500**
                      **)**
                      
                      -
                      
                      
                      (219,400
                      )Proceeds
                          from repurchase of excess stock by the Federal Home Loan
                          Bank
                      
                      
                      **1,510,000**
                      
                      
                      -
                      
                      
                      -Net
                          increase in loans
                      
                      
                      **(145,045,769**
                      **)**
                      
                      (101,496,005
                      )
                      
                      (50,246,026
                      )Purchases
                          of premises and equipment
                      
                      
                      **(1,866,442**
                      **)**
                      
                      (945,919
                      )
                      
                      (1,251,368
                      )**Net
                          cash used in investing activities**
                      
                      
                      **(133,105,687**
                      **)**
                      
                      (106,715,675
                      )
                      
                      (38,062,548
                      )Cash
                          Flows from Financing ActivitiesNet
                          (decrease) increase in demand, savings and money market
                          deposits
                      
                      
                      **(3,663,822**
                      **)**
                      
                      (11,884,273
                      )
                      
                      17,330,022Net
                          increase in time certificates of deposit
                      
                      
                      **142,893,727**
                      
                      
                      63,954,236
                      
                      
                      59,683,121Decrease
                          in securities sold under repurchase agreements
                      
                      
                      **-**
                      
                      
                      -
                      
                      
                      (5,700,000
                      )Proceeds
                          from FHLB borrowings
                      
                      
                      **93,718,000**
                      
                      
                      46,001,000
                      
                      
                      17,000,000Principal
                          repayments of FHLB borrowings
                      
                      
                      **(94,718,000**
                      **)**
                      
                      (45,001,000
                      )
                      
                      (26,000,000
                      )Decrease
                          in other borrowings
                      
                      
                      **-**
                      
                      
                      -
                      
                      
                      (353,385
                      )Proceeds
                          from issuance of common stock
                      
                      
                      **30,771,773**
                      
                      
                      11,367,567
                      
                      
                      466,704Dividends
                          paid on common stock
                      
                      
                      **(617,334**
                      **)**
                      
                      (402,899
                      )
                      
                      (317,454
                      )**Net
                          cash provided by financing activities**
                      
                      
                      **168,384,344**
                      
                      
                      64,034,631
                      
                      
                      62,109,008**Net
                          increase (decrease) in cash and cash equivalents**
                      
                      
                      **39,506,934**
                      
                      
                      (39,662,861
                      )
                      
                      26,175,795Cash
                          and cash equivalentsBeginning
                      
                      
                      **15,967,605**
                      
                      
                      55,630,466
                      
                      
                      29,454,671Ending
                      
                      **$**
                      **55,474,539**
                      
                      $
                      15,967,605
                      
                      $
                      55,630,466(Continued)
 5
 **PATRIOT
                      NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
                      STATEMENTS OF CASH FLOWS, Continued****Years
                      Ended December 31, 2006, 2005 and 2004****2006**
                  
                  2005
                  
                  2004**Supplemental
                      Disclosures of Cash Flow Information**Cash
                      paid for:Interest
                  
                  **$**
                  **17,932,039**
                  
                  $
                  10,265,152
                  
                  $
                  7,020,278Income
                      taxes
                  
                  **$**
                  **1,914,020**
                  
                  $
                  1,234,761
                  
                  $
                  850,970**Supplemental
                      Disclosure of Noncash Investing and Financing****Activities**Unrealized
                      holding gains (losses) on available for sale securitiesarising
                      during the period
                  
                  **$**
                  **682,562**
                  
                  $
                  (1,146,631
                  )
                  $
                  (136,065
                  )Accrued
                      dividends declared on common stock
                  
                  **$**
                  **213,277**
                  
                  $
                  129,226
                  
                  $
                  87,024Transfer
                      of loan to other real estate owned
                  
                  **$**
                  **834,341**
                  
                  $
                  -
                  
                  $
                  -Details
                      of branch acquisition:Fair
                      value of assets acquired
                  
                  **$**
                  **560,000**
                  
                  
                  **-**
                  
                  
                  **-**Fair
                      value of liabilities assumed
                  
                  
                  **(3,146,471**
                  **)**
                  
                  **-**
                  
                  
                  **-**Net
                      cash received
                  
                  **$**
                  **(2,586,471**
                  **)**
                  **$**
                  **-**
                  
                  **$**
                  **-**See
                      Notes to Consolidated Financial
                      Statements.
 6
 
 PATRIOT
            NATIONAL BANCORP, INC. AND SUBSIDIARY
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 **December
            31, 2006 and 2005**
 **Note
                1.**
              **Nature of Operations and Summary of Significant Accounting
                  Policies**
 
 Patriot
        National Bancorp, Inc. (the "Company"), a Connecticut corporation, is a bank
        holding company that was organized in 1999. On December 1, 1999, all
        the issued and outstanding shares of Patriot National Bank (the "Bank") were
        converted into Company common stock and the Bank became a wholly owned
        subsidiary of the Company. The Bank is a nationally chartered commercial
        bank
        whose deposits are insured under the Bank Insurance Fund, which is administered
        by the Federal Deposit Insurance Corporation. The Bank provides a full range
        of
        banking services to commercial and consumer customers through its main office
        in
        Stamford, Connecticut, twelve branch offices in Fairfield County, Connecticut
        and one branch office in New York City, New York. The Bank's customers are
        concentrated in Fairfield County, Connecticut and Westchester County, New
        York.
        The Bank also conducts mortgage brokerage operations through loan production
        offices in Connecticut and New York.
 
 On
        March
        11, 2003, the Company formed Patriot National Statutory Trust I (the “Trust”)
        for the purpose of issuing trust preferred securities and investing the proceeds
        in subordinated debentures issued by the Company, and on March 26, 2003,
        the
        first series of trust preferred securities were issued. In accordance with
        FASB
        Interpretation No. 46R, “Consolidation of Variable Interest Entities,” (“FIN
        46R”) the Trust is not included in the Company’s consolidated financial
        statements.
 
 The
        following is a summary of the Company’s significant accounting
        policies:
 
 Significant
        group concentrations of credit risk
 
 Most
        of
        the Company’s activities are with customers located within Fairfield County,
        Connecticut and Westchester County, New York. Note 3 discusses the types
        of
        securities in which the Company invests. Note 4 discusses the types of lending
        in which the Company engages. The Company does not have any significant
        concentrations to any one industry or customer; however, its short term
        investment is in a mutual fund of a single issuer.
 
 Principles
        of consolidation and basis of financial statement presentation
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        wholly owned subsidiary, the Bank, and the Bank's wholly owned subsidiary,
        PinPat Acquisition Corporation; and have been prepared in accordance with
        accounting principles generally accepted in the United States of America
        and
        general practices within the banking industry. All significant intercompany
        balances and transactions have been eliminated. In preparing the consolidated
        financial statements, management is required 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 reported
        amounts of revenues and expenses for the reporting period. Actual results
        could
        differ from those estimates. Material estimates that are particularly
        susceptible to significant change in the near term relate to the determination
        of the allowance for loan losses and the evaluation of goodwill and other
        intangible assets for impairment.
 7
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   Cash
        and cash equivalents
 
 Cash
        and
        due from banks, Federal funds sold and short-term investments are recognized
        as
        cash equivalents in the consolidated financial statements. Federal funds
        sold
        generally mature in one day. For purposes of reporting cash flows, the Company
        considers all highly liquid debt instruments purchased with a maturity of
        three
        months or less to be cash equivalents. Cash flows from loans and deposits
        are
        reported net. The Company maintains amounts due from banks and Federal funds
        sold which, at times, may exceed Federally insured limits. The Company has
        not
        experienced any losses from such concentrations. The short-term investment
        represents an investment in a money market mutual fund of a single
        issuer.
 
 Investments
        in debt and marketable equity securities
 
 Management
        determines the appropriate classification of securities at the date individual
        investment securities are acquired, and the appropriateness of such
        classification is reassessed at each balance sheet date.
 
 Debt
        securities, if any, that management has the positive intent and ability to
        hold
        to maturity are classified as “held to maturity” and are recorded at amortized
        cost. “Trading” securities, if any, are carried at fair value with unrealized
        gains and losses recognized in earnings. Securities not classified as held
        to
        maturity or trading, including equity securities with readily determinable
        fair
        values, are classified as “available for sale” and recorded at fair value, with
        unrealized gains and losses excluded from earnings and reported in other
        comprehensive income, net of taxes.
 
 Purchase
        premiums and discounts are recognized in interest income using the interest
        method over the lives of the securities. Declines in the fair value of available
        for sale and held to maturity securities below their cost that are deemed
        to be
        other than temporary are reflected in earnings as realized losses. In estimating
        other-than-temporary impairment losses, management considers (1) the length
        of
        time and the extent to which the fair value has been less than cost, (2)
        the
        financial condition and near-term prospects of the issuer, and (3) the intent
        and ability of the Company to retain its investment in the issuer for a period
        of time sufficient to allow for any anticipated recovery in fair value. Gains
        and losses on the sale of securities are recorded on the trade date and are
        determined using the specific identification method.
 
 The
        sale
        of a held to maturity security within three months of its maturity date or
        after
        collection of at least 85% of the principal outstanding at the time the security
        was acquired is considered a maturity for purposes of classification and
        disclosure.
 
 Loans
        held for sale
 
 Loans
        held for sale are those loans the Company has the intent to sell in the
        foreseeable future, and are carried at the lower of aggregate cost or market
        value. Gains and losses on sales of loans are recognized on the trade dates,
        and
        are determined by the difference between the sales proceeds and the carrying
        value of the loans. Loans are sold with servicing released.
 8
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   Loans
        receivable
 
 Loans
        receivable are stated at their current unpaid principal balances and are
        net of
        the allowance for loan losses, net deferred loan origination fees and purchased
        loan premiums and discounts. The Company has the ability and intent to hold
        its
        loans for the foreseeable future or until maturity or payoff.
 
 Management
        considers all nonaccrual loans and restructured loans to be impaired. In
        most
        cases, loan payments that are past due less than 90 days, based on contractual
        terms, are considered minor collection delays, and the related loans are
        not
        considered to be impaired. The Company considers consumer installment loans
        to
        be pools of smaller balance homogeneous loans, which are collectively evaluated
        for impairment.
 
 A
        loan is
        classified as a restructured loan when certain concessions have been made
        to the
        original contractual terms, such as reductions in interest rates or deferral
        of
        interest or principal payments, due to the borrower's financial
        condition.
 
 Impaired
        loans are measured based on the present value of expected future cash flows
        discounted at the loan's effective interest rate or, as a practical expedient,
        at the loan's observable market price or the fair value of the collateral
        if the
        loan is collateral dependent. The amount of impairment, if any, and any
        subsequent changes are recorded as adjustments to the allowance for loan
        losses.
        A loan is impaired when it is probable the Company will be unable to collect
        all
        contractual principal and interest payments due in accordance with the terms
        of
        the loan agreement.
 
 Allowance
        for loan losses
 
 The
        allowance for loan losses is established as losses are estimated to have
        occurred through a provision for loan losses charged to earnings. Loan losses
        are charged against the allowance when management believes the uncollectibility
        of a loan balance is confirmed. Subsequent recoveries, if any, are credited
        to
        the allowance.
 
 The
        allowance for loan losses is evaluated on a regular basis by management and
        is
        based upon management’s periodic review of the collectibility of the loans in
        light of historical experience, the nature and volume of the loan portfolio,
        adverse situations that may affect the borrower’s ability to repay, estimated
        value of any underlying collateral and prevailing economic conditions. This
        evaluation is inherently subjective as it requires estimates that are
        susceptible to significant revision as more information becomes
        available.
 
 The
        allowance consists of specific, general and unallocated components. The specific
        component relates to loans that are considered impaired. For impaired loans,
        an
        allowance is established when the discounted cash flows (or collateral value
        or
        observable market price) of the impaired loan is lower than the carrying
        value
        of that loan. A risk rating system is utilized to measure the general component
        of the allowance for loan losses. Under this system, each loan is assigned
        a
        risk rating between one and nine, which has a corresponding loan loss factor
        assigned, with a rating of one being the least risk and a rating of
 9
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   nine
        reflecting the most risk or a complete loss. Risk ratings are assigned based
        upon the recommendations of the credit analyst and the originating loan officer
        and confirmed by the loan committee at the initiation of the transactions
        and
        are reviewed and changed, when necessary, during the life of the loan. Loan
        loss
        reserve factors which are based on historical loss experience adjusted for
        qualitative factors are multiplied against the balances in each risk rating
        category to arrive at the appropriate level for the allowance for loan losses.
        Loans assigned a risk rating of six or above are monitored more closely by
        the
        credit administration officers and loan committee.
 
 The
        unallocated portion of the allowance reflects management’s estimate of probable
        but undetected losses inherent in the portfolio; such estimates are influenced
        by uncertainties in economic conditions, delays in obtaining information,
        including unfavorable information about a borrower’s financial condition,
        difficulty in identifying triggering events that correlate perfectly to
        subsequent loss rates, and risk factors that have not yet manifested themselves
        in loss allocation factors.
 
 The
        Company's real estate loans are collateralized by real estate located
        principally in Fairfield County, Connecticut and Westchester County, New
        York,
        and accordingly, the ultimate collectibility of a substantial portion of
        the
        Company's loan portfolio is susceptible to changes in regional real estate
        market conditions.
 
 Interest
        and fees on loans
 
 Interest
        on loans is accrued and included in operating income based on contractual
        rates
        applied to principal amounts outstanding. The accrual of interest income
        is
        discontinued whenever reasonable doubt exists as to its collectibility and
        generally is discontinued when loans are past due 90 days, based on contractual
        terms, as to either principal or interest. When the accrual of interest income
        is discontinued, all previously accrued and uncollected interest is reversed
        against interest income. The accrual of interest on loans past due 90 days
        or
        more, including impaired loans, may be continued if the loan is well secured,
        and it is believed all principal and accrued interest income due on the loan
        will be realized, and the loan is in the process of collection. A nonaccrual
        loan is restored to an accrual status when it is no longer delinquent and
        collectibility of interest and principal is no longer in doubt. Interest
        collected on nonaccrual loans and impaired loans is recognized only to the
        extent cash payments are received, and may be recorded as a reduction to
        principal if the collectibility of all loan principal is unlikely.
 
 Loan
        origination fees and direct loan origination costs are deferred and amortized
        as
        an adjustment to the loan's yield, generally over the contractual life of
        the
        loan, utilizing the interest method.
 
 Loan
        brokerage activities
 
 The
        Company receives loan brokerage fees for soliciting and processing conventional
        loan applications on behalf of permanent investors. Brokerage fee income
        is
        recognized upon closing of loans for permanent investors.
 
 Transfers
        of financial assets
 
 Transfers
        of financial assets are accounted for as sales, when control over the assets
        has
        been surrendered. Control over transferred assets is deemed to be surrendered
        when (1) the assets have been
 10
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
    isolated
        from the Company, (2) the transferee obtains the right to pledge or exchange
        the
        transferred assets and no condition both constrains the transferee from taking
        advantage of that right and provides more than a trivial benefit for the
        transferor, and (3) the transferor does not maintain effective control over
        the
        transferred assets through either (a) an agreement that both entitles and
        obligates the transferor to repurchase or redeem the assets before maturity
        or
        (b) the ability to unilaterally cause the holder to return specific assets,
        other than through a cleanup call.
 
 Other
        real estate owned
 
 Other
        real estate owned consists of properties acquired through, or in lieu of,
        loan
        foreclosure or other proceedings and is initially recorded at fair value
        at the
        date of foreclosure, which establishes a new cost basis. After foreclosure,
        the
        properties are held for sale and are carried at the lower of cost or fair
        value
        less estimated costs of disposal. Any write-down to fair value at the time
        of
        acquisition is charged to the allowance for loan losses. Properties are
        evaluated regularly to ensure the recorded amounts are supported by current
        fair
        values, and valuation allowances are recorded as necessary to reduce the
        carrying amount to fair value less estimated cost of disposal. Revenue and
        expense from the operation of other real estate owned and valuation allowances
        are included in operations. Costs relating to the development and improvement
        of
        the property are capitalized, subject to the limit of fair value of the
        collateral. Gains or losses are included in operations upon
        disposal.
 
 Premises
        and equipment
 
 Premises
        and equipment are stated at cost net of accumulated depreciation and
        amortization. Leasehold improvements are capitalized and amortized over the
        shorter of the terms of the related leases or the estimated economic lives
        of
        the improvements. Depreciation is charged to operations for furniture, equipment
        and software using the straight-line method over the estimated useful lives
        of
        the related assets which range from three to ten years. Gains and losses
        on
        dispositions are recognized upon realization. Maintenance and repairs are
        expensed as incurred and improvements are capitalized.
 
 Impairment
        of assets
 
 Long-lived
        assets, which are held and used by the Company, are reviewed for impairment
        whenever events or changes in circumstances indicate that the carrying amount
        of
        an asset may not be recoverable. If impairment is indicated by that review,
        the
        asset is written down to its estimated fair value through a charge to
        noninterest expense.
 
 Goodwill
        and other intangible assets
 
 Goodwill
        and other identified intangible assets with indefinite lives represent the
        cost
        in excess of net assets of businesses acquired and are not subject to
        amortization. Other identified intangible assets with finite lives consist
        of a
        core deposit intangible recorded in connection with a branch acquisition
        and is
        amortized over its estimated useful life. The Company’s unamortized goodwill and
        other intangible assets are tested for impairment annually, or more frequently
        under prescribed conditions.
 11
 **PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   Income
        taxes
 
 The
        Company recognizes income taxes under the asset and liability method. Under
        this
        method, deferred tax assets and liabilities are recognized for the future
        tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax
        bases, and loss carryforwards. Deferred tax assets and liabilities are measured
        using enacted tax rates expected to apply to taxable income in the years
        in
        which those temporary differences are expected to be recovered or settled.
        The
        effect on deferred tax assets and liabilities of a change in tax rates is
        recognized in income in the period that includes the enactment date. Deferred
        tax assets are reduced by a valuation allowance when, in the opinion of
        management, it is more likely than not that some portion or all of the deferred
        tax assets will not be realized.
 
 Related
        party transactions
 
 Directors
        and officers of the Company and the Bank and their affiliates have been
        customers of and have had transactions with the Bank, and it is expected
        that
        such persons will continue to have such transactions in the future. Management
        believes that all deposit accounts, loans, services and commitments comprising
        such transactions were made in the ordinary course of business, and on
        substantially the same terms, including interest rates and collateral, as
        those
        prevailing at the time for comparable transactions with other customers who
        are
        not directors or officers. In the opinion of management, the transactions
        with
        related parties did not involve more than normal risks of collectibility
        or
        favored treatment or terms, or present other unfavorable features. Note 16
        contains details regarding related party transactions.
 
 Earnings
        per share
 
 Basic
        earnings per share represents income available to common stockholders and
        is
        computed by dividing net income by the weighted-average number of common
        shares
        outstanding. Diluted earnings per share reflects additional common shares
        that
        would have been outstanding if potential dilutive common shares had been
        issued,
        as well as any adjustment to income that would result from the assumed issuance.
        Potential common shares that may be issued by the Company relate to outstanding
        stock options and warrants, and are determined using the treasury stock
        method.
 
 Stock
        compensation plans
 
 Statement
        of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,”
requires companies to account for share-based compensation transactions using
        a
        fair-value method and to recognize the related expense in the consolidated
        statements of income. This statement applies to all awards granted, modified,
        repurchased or cancelled after the required effective date. The Company adopted
        SFAS 123R, effective January 1, 2006, using the modified prospective transition
        method. The adoption of this statement had no impact on the Company’s financial
        statements; however, such adoption may impact the amount of compensation
        expense
        recorded in future financial statements if the Company grants share-based
        compensation to employees or directors in the future.
 12
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
  Comprehensive
        income
 
 Accounting
        principles generally require that recognized revenue, expenses, gains and
        losses
        be included in net income. Although certain changes in assets and liabilities,
        such as unrealized gains and losses on available for sale securities, are
        reported as a separate component of shareholders' equity in the consolidated
        balance sheets, such items, along with net income, are components of
        comprehensive income.
 
 Fair
        values of financial instruments
 
 The
        following methods and assumptions were used by the Company in estimating
        the
        fair value of its financial instruments:
 
 ***Cash
        and due from banks, federal funds sold, short-term investments and accrued
        interest receivable and payable and dividends
        receivable***
 
 The
        carrying amount is a reasonable estimate of fair value.
 
 ***Securities***
 
 Fair
        values, excluding restricted Federal Reserve Bank stock and Federal Home
        Loan
        Bank stock, are based on quoted market prices or dealer quotes, if available.
        If
        a quoted market price is not available, fair value is estimated using quoted
        market prices for similar securities. The carrying values of the Federal
        Reserve
        Bank stock and Federal Home Loan Bank stock approximate fair value based
        on the
        redemption provisions of the related stock.
 
 ***Loans
        receivable***
 
 For
        variable rate loans which reprice frequently, and have no significant changes
        in
        credit risk, fair value is based on the loans’ carrying value. The fair value of
        fixed rate loans is estimated by discounting the future cash flows using
        the
        year end rates at which similar loans would be made to borrowers with similar
        credit ratings and for the same remaining maturities.
 
 ***Deposits***
 
 The
        fair
        value of demand deposits, regular savings and certain money market deposits
        is
        the amount payable on demand at the reporting date. The fair value of
        certificates of deposit and other time deposits is estimated using a discounted
        cash flow calculation that applies interest rates currently being offered
        for
        deposits of similar remaining maturities to a schedule of aggregated expected
        maturities on such deposits.
 13
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   
 ***Borrowings***
 
 For
        variable rate borrowings which reprice frequently, and short-term borrowings,
        fair value is based on carrying value. The fair value of fixed rate borrowings
        is estimated by discounting the future cash flows using current interest
        rates
        for similar available borrowings with the same remaining
        maturities.
 
 ***Off-balance-sheet
        instruments***
 
 Fair
        values for the Company's off-balance-sheet instruments (lending commitments
        and
        standby letters of credit) are based on fees currently charged to enter into
        similar agreements, taking into account the remaining terms of the agreements
        and the counterparties' credit standing.
 
 Recent
        accounting pronouncements
 
 In
        May
        2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
        Financial Accounting Standards No. 154, (“SFAS 154”), “Accounting Changes and
        Error Corrections,” replacing APB Opinion No. 20 and FASB Statement No. 3, which
        changes the treatment and reporting requirements for both accounting errors
        and
        changes of accounting principles, and provides guidance on determining the
        treatment of the retrospective application of a change. This Statement applies
        to all voluntary changes in accounting principles. The adoption of this
        statement by the Company in 2006 had no impact on the Company’s financial
        statements.
 
 In
        February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments,” which permits, but does not require, fair value
        accounting for any hybrid financial instrument that contains an embedded
        derivative that would otherwise require bifurcation in accordance with SFAS
        133,
“Accounting for Derivative Instruments and Hedging Activities.” The statement
        also subjects beneficial interests in securitized financial assets to the
        requirements of SFAS 133. This statement is effective for all financial
        instruments acquired, issued, or subject to re-measurement after December
        31,
        2006. The Company does not expect that the adoption of this statement will
        have
        a material impact on its financial statements.
 
 In
        March
        2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
        Assets, an Amendment of FASB Statement No. 140.” The statement amends SFAS No.
        140 by (1) requiring the separate accounting for servicing assets and servicing
        liabilities, which arise from the sale of financial assets; (2) requiring
        all
        separately recognized servicing assets and servicing liabilities to be initially
        measured at fair value, if practicable; and (3) permitting an entity to choose
        between an amortization method or a fair value method for subsequent measurement
        for each class of separately recognized servicing assets and servicing
        liabilities. This statement is effective for fiscal years beginning after
        September 15, 2006. The Company does not expect that the adoption of this
        Statement will have a material impact on its financial statements.
 
 In
        July
        2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for
        Uncertainty in Income Taxes.” FIN 48 applies to all tax positions related to
        income taxes subject to SFAS No. 109, “Accounting
 14
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   for
        Income Taxes.” This includes tax positions considered to be “routine” as well as
        those with a high degree of uncertainty. FIN 48 utilizes a two-step approach
        for
        evaluating tax positions. Recognition (step one) occurs when an enterprise
        concludes that a tax position, based solely on its technical merits, is
        more-likely-than-not to be sustained upon examination. Measurement (step
        two) is
        only addressed if step one has been satisfied (i.e., the position is
        more-likely-than-not to be sustained). FIN 48 clarifies the accounting for
        income taxes by prescribing the minimum recognition threshold a tax position
        must meet before being recognized in the financial statements. FIN 48 also
        provides guidance on derecognition, measurement, classification, interest
        and
        penalties, accounting in interim periods, disclosure and transition. FIN
        48 is
        effective for fiscal years beginning after December 15, 2006. The Company
        is
        required to adopt FIN 48 in 2007 and management is currently assessing the
        impact of FIN 48 on its financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
        statement defines fair value, establishes a framework for measuring fair
        value,
        and expands disclosures about fair value measurements. It clarifies that
        fair
        value is the price that would be received to sell an asset or paid to transfer
        a
        liability in an orderly transaction between market participants in the market
        in
        which the reporting entity operates. This statement does not require any
        new
        fair value measurements, but rather, it provides enhanced guidance to other
        pronouncements that require or permit assets or liabilities to be measured
        at
        fair value. This statement is effective for fiscal years beginning after
        November 15, 2007, with earlier adoption permitted. The Company does not
        expect
        that the adoption of this statement will have a material impact on its financial
        statements.
 
 In
        September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
        Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements
        No. 87, 88, 106 and 132(R).” This Statement requires recognition of the
        overfunded or underfunded status of defined benefit postretirement plans
        as an
        asset or liability in the statement of financial position and to recognize
        changes in that funded status in comprehensive income in the year in which
        the
        changes occur. SFAS No. 158 requires prospective application, recognition
        and
        disclosure requirements and is effective for fiscal years ending after
        December 31, 2006. Additionally, SFAS No. 158 requires companies to
        measure plan assets and obligations as of the entity’s fiscal year end. This
        requirement is effective for the year ending December 31, 2008. The
        Company does not expect that SFAS 158 will have a material impact on its
        financial statements.
 
 At
        its
        September 2006 meeting, the Emerging Issues Task Force (“EITF”) reached a final
        consensus on Issue 06-04, “Accounting for Deferred Compensation and
        Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
        Arrangements.” The consensus stipulates that an agreement by an employer to
        share a portion of the proceeds of a life insurance policy with an employee
        during the postretirement periods is a postretirement benefit arrangement
        required to be accounted for under SFAS No. 106 or Accounting Principles
        Board
        Opinion (“APB”) No. 12, “Omnibus Opinion - 1967.” The consensus concludes that
        the purchase of a split-dollar life insurance policy does not constitute
        a
        settlement under SFAS No. 106 and, therefore, a liability for the postretirement
        obligation must be recognized under SFAS No. 106 if the benefit is offered
        under
        an arrangement that constitutes a plan, or under APB No. 12 if it is not
        part of
        a plan. Issue 06-04 is effective for annual or interim reporting periods
        beginning after December 15, 2007.
 15
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
    The
        Company does not expect that the adoption of EITF 06-04 will have a material
        impact on its financial statements.
 
 **Note
                2.**
              **Restrictions on Cash and Due From
                  Banks**
 
 The
        Company is required to maintain reserves against its respective transaction
        accounts and non-personal time deposits. At December 31, 2006 and
        2005, the Bank was required to have cash and liquid assets of approximately
        $315,000 and $3,566,000, respectively, to meet these requirements. In addition,
        at December 31, 2006 and 2005, the Company was required to maintain $25,000
        in
        the Federal Reserve Bank for clearing purposes.
 
 **Note
                3.**
              **Available for Sale
                  Securities**
 
 The
        amortized cost, gross unrealized gains, gross unrealized losses and approximate
        fair values of available for sale securities at December 31, 2006 and 2005
        are
        as follows:
 
 **2006**
              **Amortized**
                **Cost**
              **Gross**
                **Unrealized**
                **Gains**
              **Gross**
                **Unrealized**
                **Losses**
              **Fair**
                **Value****U.S.
                  Government sponsored**
                **agency obligations**
              **$**
              **16,999,984**
              **$**
              **-**
              **$**
              **(433,162)**
              **$**
              **16,566,822****Mortgage-backed
                  securities**
              
              **44,141,476**
              
              **32,805**
              
              **(697,968)**
              
              **43,476,313****61,141,460**
              
              **32,805**
              
              **(1,131,130)**
              
              **60,043,135****Money
                  market preferred**
                **equity securities**
              
              **7,050,000**
              
              **-**
              
              **-**
              
              **7,050,000****$**
              **68,191,460**
              **$**
              **32,805**
              **$**
              **(1,131,130)**
              **$**
              **67,093,135**
 
 
 2005
              Amortized
                Cost
              Gross
                Unrealized
                Gains
              Gross
                Unrealized
                Losses
              Fair
                ValueU.S.
                  Government sponsored
                agency obligations
              $
              16,999,341
              $
              -
              $
              (522,657)
              $
              16,476,684Mortgage-backed
                  securities
              
              57,453,614
              
              2,330
              
              (1,260,560)
              
              56,195,38474,452,955
              
              2,330
              
              (1,783,217)
              
              72,672,068Money
                  market preferred
                equity securities
              
              6,000,000
              
              -
              
              -
              
              6,000,000$
              80,452,955
              $
              2,330
              $
              (1,783,217)
              $
              78,672,068
 16
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
    The
        following table presents the Company’s available for sale securities’ gross
        unrealized losses and fair value, aggregated by the length of time the
        individual securities have been in a continuous loss position, at December
        31,
        2006 and 2005:
 
 
 **2006**
              **Less
                  Than 12 Months**
              
              **12
                  Months or More**
              
              **Total****Fair**
                **Value**
              **Unrealized**
                **Loss**
              
              **Fair**
                **Value**
              **Unrealized**
                **Loss**
              
              **Fair**
                **Value**
              **Unrealized**
                **Loss**
  **U.S.
                  Government sponsored****agency
                  obligations**
              **$**
              **-**
              **$**
              **-**
              
              **$**
              **16,566,822**
              **$**
              **(433,162)**
              
              **$**
              **16,566,822**
              **$**
              **(433,162)****Mortgage-backed
                  securities**
              
              **1,117,429**
              
              **(2,423)**
              
              
              **35,262,041**
              
              **(695,545)**
              
              
              **36,379,470**
              
              **(697,968)****Totals**
              **$**
              **1,117,429**
              **$**
              **(2,423)**
              
              **$**
              **51,828,863**
              **$**
              **(1,128,707)**
              
              **$**
              **52,946,292**
              **$**
              **(1,131,130)**
 
 2005
              Less
                  Than 12 Months
              
              12
                  Months or More
              
              TotalFair
                Value
              Unrealized
                Loss
              
              Fair
                Value
              Unrealized
                Loss
              
              Fair
                Value
              Unrealized
                Loss
 
 U.S.
                  Government sponsoredagency
                  obligations
              $
              1,985,625
              $
              (13,716)
              
              $
              14,491,059
              $
              (508,941)
              
              $
              16,476,684
              $
              (522,657)Mortgage-backed
                  securities
              
              27,846,559
              
              (459,646)
              
              
              25,315,920
              
              (800,914)
              
              
              53,162,479
              
              (1,260,560)Totals
              $
              29,832,184
              $
              (473,362)
              
              $
              39,806,979
              $
              (1,309,855)
              
              $
              69,639,163
              $
              (1,783,217)
 
 
 At
        December 31, 2006, thirty-nine securities have unrealized losses with aggregate
        depreciation of 2.1% from the amortized cost. There were no securities with
        unrealized losses greater than 5% of amortized cost.
 
 Management
        believes that none of the unrealized losses on available for sale securities
        are
        other than temporary due to the fact that they relate to debt and
        mortgage-backed securities issued by U.S. Government agencies and
        Government sponsored agencies, which the Company has both the intent and
        ability
        to hold until maturity or until the fair value fully recovers. Additionally,
        management considers the issuers of the securities to be financially sound,
        and
        expects to receive all contractual principal and interest related to these
        investments.
 
 At
        December 31, 2006 and 2005, available for sale securities with a carrying
        value
        of $2,817,000 and $1,486,000, respectively, were pledged to secure obligations
        under municipal deposits.
 17
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
     The
        amortized cost and fair value of available for sale debt securities at
        December 31, 2006 by contractual maturity are presented below. Actual
        maturities of mortgage-backed securities may differ from contractual maturities
        because the mortgages underlying the securities may be called or repaid without
        any penalties. Because mortgage-backed securities are not due at a single
        maturity date, they are not included in the maturity categories in the following
        maturity summary.
 
 
 Amortized
              
              FairCost
              
              ValueMaturity:1-5
                  years
              $
              16,999,984
              $
              16,566,822Mortgage-backed
                  securities
              
              44,141,476
              
              43,476,313Total
              $
              61,141,460
              $
              60,043,135
 
 During
        2006, 2005 and 2004, there were no sales of available for sale
        securities.
 
 **Note
                4.**
              **Loans Receivable and Allowance for Loan
                  Losses**
 
 A
        summary
        of the Company’s loan portfolio at December 31, 2006 and 2005 is as
        follows:
 
 **2006**
              
              2005Real
                  estate:Commercial
              **$**
              **166,799,341**
              $
              129,178,889Residential
              
              **91,077,687**
              
              77,391,833Construction
              
              **203,828,453**
              
              107,232,587Commercial
              
              **23,997,640**
              
              15,591,818Consumer
                  installment
              
              **1,251,300**
              
              1,106,648Consumer
                  home equity
              
              **26,933,277**
              
              39,097,450**Total
                  loans**
              
              **513,887,698**
              
              369,599,225Premiums
                  on purchased loans
              
              **292,543**
              
              367,491Net
                  deferred loan fees
              
              **(1,665,654)**
              
              (1,134,604)Allowance
                  for loan losses
              
              **(5,630,432)**
              
              (4,588,335)**Loans
                  receivable, net**
              **$**
              **506,884,155**
              $
              364,243,777
 18
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   The
        changes in the allowance for loan losses for the years ended
        December 31, 2006, 2005 and 2004 are as follows:
 
 **2006**
              
              2005
              
              2004Balance,
                  beginning of year
              **$**
              **4,588,335**
              $
              3,481,525
              $
              2,934,675Provision
                  for loan losses
              
              **1,040,000**
              
              1,110,000
              
              556,000Recoveries
                  of loanspreviously
                  charged-off
              
              **3,190**
              
              -
              
              -Loans
                  charged-off
              
              **(1,093)**
              
              (3,190)
              
              (9,150)Balance,
                  end of year
              **$**
              **5,630,432**
              $
              4,588,335
              $
              3,481,525
 
 At
        December 31, 2006 and 2005, the unpaid principal balances of loans
        delinquent 90 days or more and still accruing were $1,896,984 and $274,622,
        respectively, and the unpaid principal balances of loans placed on nonaccrual
        status were $2,904,015 and $1,934,614, respectively. If nonaccrual loans
        had
        been performing in accordance with their original terms, the Company would
        have
        recorded approximately $141,237, $6,000 and $18,000, respectively, of additional
        income during the years ended December 31, 2006, 2005 and
        2004.
 
 The
        following information relates to impaired loans as of and for the years ended
        December 31, 2006 and 2005:
 
 **2006**
              
              2005Impaired
                  loans receivable for which there is a related allowance
                for
                  credit losses
              **$**
              **1,422,359**
              $
              -Impaired
                  loans receivable for which there is no related
                allowance
                  for credit losses
              **$**
              **1,481,656**
              $
              1,934,614Allowance
                  for credit losses related to impaired loans
              **$**
              **250,000**
              $
              -Average
                  recorded investment in impaired loans
              **$**
              **4,394,509**
              $
              2,668,531
 
 
 During
        2006, 2005 and 2004, interest income collected and recognized on impaired
        loans
        was $149,313, $223,261 and $184,565, respectively. The Company has no
        commitments to lend additional funds to borrowers whose loans are
        impaired.
 
 The
        Company's lending activities are conducted principally in Fairfield County,
        Connecticut and Westchester County, New York. The Company grants commercial
        real
        estate loans, commercial business loans and a variety of consumer loans.
        In
        addition, the Company grants loans for the construction of residential homes,
        residential developments and for land development projects. All residential
        and
        commercial mortgage loans are collateralized by first or second mortgages
        on
        real estate. The ability and willingness of borrowers to satisfy their loan
        obligations is dependent in large part upon the status of the
 19
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   regional
        economy and regional real estate market. Accordingly, the ultimate
        collectibility of a substantial portion of the loan portfolio and the recovery
        of a substantial portion of any resulting real estate acquired is susceptible
        to
        changes in market conditions.
 
 The
        Company has established credit policies applicable to each type of lending
        activity in which it engages, evaluates the creditworthiness of each customer
        and, in most cases, extends credit of up to 75% of the market value of the
        collateral at the date of the credit extension depending on the Company's
        evaluation of the borrowers' creditworthiness and type of collateral. The
        market
        value of collateral is monitored on an ongoing basis and additional collateral
        is obtained when warranted. Real estate is the primary form of collateral.
        Other
        important forms of collateral are accounts receivable, inventory, other business
        assets, marketable securities and time deposits. While collateral provides
        assurance as a secondary source of repayment, the Company ordinarily requires
        the primary source of repayment to be based on the borrower's ability to
        generate continuing cash flows.
 
 **Note
                5.**
              **Premises and Equipment**
 
 At
        December 31, 2006 and 2005, premises and equipment consisted of the
        following:
 
 **2006**
              
              2005Construction
                  in progress
              **$**
              **803,149**
              $
              -Leasehold
                  improvements
              
              **2,676,805**
              
              2,217,690Furniture,
                  equipment and software
              
              **3,408,419**
              
              2,867,738**6,888,373**
              
              5,085,428Less
                  accumulated depreciation and amortization
              
              **(3,197,512)**
              
              (2,611,275)**$**
              **3,690,861**
              $
              2,474,153
 
 For
        the
        years ended December 31, 2006, 2005 and 2004, depreciation and
        amortization expense related to premises and equipment totaled $644,472,
        $604,399, and $536,029, respectively.
 
 **Note
                6.**
              **Other Real Estate
                  Operations**
 
 Other
        real estate owned of $834,341 is included in other assets and is comprised
        of
        one property obtained through loan foreclosure proceedings completed at the
        end
        of the third quarter of 2006. A summary of other real estate operations for
        the
        year ended December 31, 2006 is as follows:
 
 Rental
                  income from other real estate owned
              $
              20,458Less
                  expenses of holding other real estate owned
              
              743Income
                  from other real estate operations
              $
              19,715
 20
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
 
 **Note
                7.**
              **Deposits**
 
 At
        December 31, 2006 and 2005, deposits consisted of the
        following:
 
 **2006**
              
              2005Noninterest
                  bearing
              **$**
              **56,679,836**
              $
              48,797,389Interest
                  bearing:Time
                  certificates, less than $100,000
              
              **248,414,014**
              
              168,565,756Time
                  certificates, $100,000 or more
              
              **162,546,807**
              
              98,440,248Money
                  market
              
              **40,935,628**
              
              57,798,772Savings
              
              **25,993,452**
              
              20,089,889NOW
              
              **26,881,927**
              
              25,383,234Total
                  interest bearing
              
              **504,771,828**
              
              370,277,899**Total
                  deposits**
              **$**
              **561,451,664**
              $
              419,075,288
 
 Interest
        expense on certificates of deposit in denominations of $100,000 or more was
        $5,693,596, $3,023,519 and $1,883,047 for the years ended
        December 31, 2006, 2005 and 2004, respectively.
 
 Contractual
        maturities of time certificates of deposit as of December 31, 2006 are
        summarized below:
 
 Due
                  within:1
                  year
              $
              327,238,5231-2
                  years
              
              46,660,4352-3
                  years
              
              17,382,8713-4
                  years
              
              16,737,1574-5
                  years
              
              2,941,835$
              410,960,821
 
 **Note
                8.**
              **Borrowings**
 
 Federal
        Home Loan Bank borrowings
 
 The
        Bank
        is a member of the Federal Home Loan Bank of Boston ("FHLB"). At
        December 31, 2006, the Bank has the ability to borrow from the FHLB
        based on a certain percentage of the value of the Bank's qualified collateral,
        as defined in the FHLB Statement of Products Policy, comprised mainly of
        mortgage-backed securities delivered under collateral safekeeping to the
        FHLB,
        and a blanket lien on qualifying mortgage loans, at the time of the borrowing.
        In accordance with an agreement with the FHLB, the qualified collateral must
        be
        free and clear of liens, pledges and encumbrances. In addition, the Company
        has
        a $2,000,000 available line of credit with the FHLB. At December 31, 2006
        and 2005, there were no advances outstanding under this line of credit. At
        December 31, 2006, other outstanding advances from the FHLB aggregated
        $8,000,000 at interest rates ranging from 2.96% to 5.24% and at
 21
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
    December 31, 2005,
        other outstanding advances aggregated $9,000,000 at interest rates ranging
        from
        2.49% to 5.11%.
 
 The
        Bank
        is required to maintain an investment in capital stock of the FHLB in an
        amount
        equal to a percentage of its outstanding mortgage loans and contracts secured
        by
        residential properties, including mortgage-backed securities. No ready market
        exists for FHLB stock and it has no quoted market value. For disclosure
        purposes, such stock is assumed to have a market value which is equal to
        cost
        since the Bank can redeem the stock with the FHLB at cost.
 
 Repurchase
        agreements
 
 At
        December 31, 2006 and 2005, the Company had available borrowings under
        repurchase agreements of $10,000,000 and had no amounts outstanding at those
        dates.
 
 Junior
        subordinated debt owed to unconsolidated trust
 
 During
        2003, the Company formed the Trust of which 100% of the Trust’s common
        securities are owned by the Company. The Trust has no independent assets,
        and
        exists for the sole purpose of issuing trust securities and investing the
        proceeds thereof in an equivalent amount of junior subordinated debentures
        issued by the Company.
 
 The
        Trust
        issued $8,000,000 of trust preferred securities in 2003. Pursuant to FIN
        46R,
        issued in December 2003, the Company deconsolidated the Trust at December
        31,
        2003. The Company’s investment in the Trust of $248,000 is included in other
        assets. The overall effect on the financial position and operating results
        of
        the Company as a result of the deconsolidation was not material.
 
 Trust
        preferred securities currently qualify for up to 25% of the Company’s Tier I
        Capital, with the excess qualifying as Tier 2 Capital. On March 1, 2005,
        the
        Federal Reserve Board of Governors, which is the banking regulator for the
        Holding Company, approved final rules that allow for the continued inclusion
        of
        outstanding and prospective issuances of trust preferred securities in
        regulatory capital, subject to new, more strict limitations. The Company
        has
        until March 31, 2009 to meet the new limitations. Management does not believe
        these final rules will have a significant impact on the Company.
 
 The
        subordinated debentures are unsecured obligations of the Company and are
        subordinate and junior in right of payment to all present and future senior
        indebtedness of the Company. The Company has entered into a guarantee, which
        together with its obligations under the subordinated debentures and the
        declaration of trust governing the Trust, including its obligations to pay
        costs, expenses, debts and liabilities, other than trust securities, provides
        a
        full and unconditional guarantee of amounts on the capital securities. The
        subordinated debentures, which bear interest at the three month LIBOR plus
        3.15%
        (8.516% at December 31, 2006), mature on March 26, 2033 and can be
        redeemed at the Company’s option in 2008.
 22
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   The
        duration of the Trust is 30 years with early redemption at par at the Company’s
        option in 2008, or earlier in the event of certain regulatory or tax changes.
        The trust securities also bear interest at the three month LIBOR plus
        3.15%.
 
 Other
        borrowings
 
 At
        December 31, 2006 and 2005, the Company had available borrowings under federal
        funds or letters of credit from its correspondent bank of $3,000,000 and
        had no
        amounts outstanding at those dates.
 
 Maturity
        of borrowings
 
 The
        contractual maturities of the Company’s borrowings at December 31, 2006, by
        year, are as follows:
  Fixed
                FloatingRate
                Rate
                Total2007
                $8,000,000
                $               
                    -
                $8,000,0002008
                -
                -
                -2009
                -
                -
                -2010
                -
                -
                -2011
                -
                -
                -Thereafter
                -
                8,248,000
                8,248,000Total
                    borrowings
                $8,000,000
                $8,248,000
                $16,248,000
 
 **Note
                9.**
              **Commitments and
                  Contingencies**
 
 Operating
        leases
 
 The
        Company has non-cancelable operating leases for its main office, branch and
        mortgage brokerage offices. Under these lease agreements, the Company is
        required to pay certain executory costs such as insurance and property taxes.
        The Company also leases parking space under a noncancelable operating lease
        agreement and certain equipment under cancelable and noncancelable
        arrangements.
 23
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
     Future
        minimum rental commitments under the terms of these leases, by year and in
        the
        aggregate, are as follows:
 
 Years
                  Ending
                December
                  31,
              
              Amount2007
              
              $  
                     1,884,0722008
              
              1,702,2232009
              
              1,642,4602010
              
              1,641,0272011
              
              1,522,680Thereafter
              
              6,240,279$ 
                    14,632,741
 
 Total
        rental expense charged to operations for cancelable and noncancelable operating
        leases was $1,677,824, $1,194,499 and $876,132 for the years ended
        December 31, 2006, 2005 and 2004, respectively. The Company subleases
        excess space at three locations. Income from subleases included in noninterest
        expense was $57,403, $73,545 and $28,326 for the years ended
        December 31, 2006, 2005 and 2004, respectively.
 
 Employment
        Agreements
 
 *President’s
        Agreement*
 
 Effective
        January 1, 2007, after the expiration of a previous employment agreement
        the
        Company and the Bank entered into a new employment agreement (the “Agreement”)
        with the Bank’s President and Chief Executive Officer that expires on December
        31, 2009. The Agreement provides for, among other things, a stipulated base
        salary for each of the three years covered by the Agreement and a discretionary
        annual bonus to be determined by the Board of Directors.
 
 In
        the
        event of the early termination of the Agreement for cause (as defined in
        the
        agreement) or because of his death or disability, all unvested restricted
        stock
        awards and options will be forfeited. The President was issued stock
        appreciation rights and restricted share rights under an earlier employment
        contract and may participate in future option grants if made by the Company.
        In
        the event the President’s employment terminates for any other reason, including
        termination following a change in control (as defined in the agreement),
        all
        stock rights and options, if any, will vest immediately.
 
 In
        the
        event of the early termination of the Agreement for any reason other than
        cause,
        the Company would be obligated to compensate the President in one lump sum
        payment, an amount equal to the higher of the aggregate salary payments that
        would be made to the President under the remaining term of the Agreement,
        or
        eighteen months of the President’s base salary at the time of
        termination.
 24
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   The
        Company and the Bank have also entered into a change of control agreement
        with
        the President that entitles the President to a lump sum payment of two and
        one
        half times the greater of the President’s base salary at the time or total
        compensation for the most recently completed fiscal year at the time of the
        change in control. This agreement is substantially similar to those described
        below for other executive officers.
 
 The
        provisions of the early termination clause apply only to termination of the
        Agreement prior to a change of control. Termination of the Agreement following
        a
        change of control shall be governed by the change of control
        provisions.
 
 *Other
        Employment Agreements*
 
 In
        November 2003, the Company entered into an employment agreement with its
        Chief
        Financial Officer that expires on December 31, 2007. The agreement provides
        for,
        among other things, a stipulated base salary and annual discretionary bonuses
        as
        determined by the Board of Directors. In addition, the Chief Financial Officer
        has a change of control agreement that entitles the Chief Financial Officer
        to a
        lump sum payment of two and one half times the greater of the Chief Financial
        Officer’s base salary at the time or total compensation for the most recently
        completed fiscal year.
 
 Effective
        January 1, 2007, the Company entered into a one-year employment
        agreement with an officer of the Bank who serves as Executive Vice President
        of
        the Bank, Sales Manager of Retail Brokerage, which replaced a contract that
        expired on December 31, 2006. The agreement provides for, among other things,
        a
        minimum base salary and commission arrangement, as well as additional
        compensation based upon the revenue generated by direct reports, and for
        reimbursement of expenses incurred incidental to duties as an officer. The
        agreement terminates on December 31, 2007.
 
 In
        addition, three other executive officers of the Company have change of control
        agreements that entitle such officers to receive two or two and one half
        times
        the greater of the officer’s base salary at the time or total compensation for
        the most recently completed fiscal year if a change of control occurs while
        such
        officers are full time officers of the Company or within six months following
        termination of employment other than for cause or by reason of death or
        disability.
 
 Legal
        Matters
 
 The
        Company is involved in various legal proceedings which have arisen in the
        normal
        course of business. Management believes that the resolution of these matters
        will not have a material effect on the Company’s financial condition or results
        of operations.
 25


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
        31, 2006 and 2005**






Other
 
 The
        Company has received regulatory approval to open six new branch offices.
        The
        Company entered into non-cancelable leases for four of these
        locations.
 
 **Note
                10.**
              **Income Taxes**
 
 The
        components of the income tax provision for the years ended
        December 31, 2006, 2005 and 2004 are as follows:
 
 **2006**
              
              2005
              
              2004CurrentFederal
              **$**
              **1,408,384**
              $
              1,211,403
              $
              554,723State
              
              **356,958**
              
              308,430
              
              179,489**Total**
              
              **1,765,342**
              
              1,519,833
              
              734,212DeferredFederal
              
              **(402,384)**
              
              (454,457)
              
              (81,723)State
              
              **(95,958)**
              
              (108,376)
              
              (19,489)**Total**
              
              **(498,342)**
              
              (562,833)
              
              (101,212)**Provision
                  for income taxes**
              **$**
              **1,267,000**
              $
              957,000
              $
              633,000
 
 A
        reconciliation of the anticipated income tax provision (computed by applying
        the
        statutory Federal income tax rate of 34% to the income before income taxes)
        to
        the income tax provision as reported in the statements of income for the
        years
        ended December 31, 2006, 2005 and 2004 is as follows:
 
 **2006**
              
              2005
              
              2004Provision
                  for income taxes atstatutory
                  Federal rate
              **$**
              **1,251,900**
              $
              803,600
              $
              530,200State
                  taxes, net of Federal benefit
              
              **200,100**
              
              117,000
              
              96,500Dividends
                  received deduction
              
              **(77,500)**
              
              (68,500)
              
              (52,300)Nondeductible
                  expenses
              
              **56,300**
              
              38,600
              
              16,800(Under)
                  over accrual of income tax provision
              
              **(159,489)**
              
              86,800
              
              900Other
              
              **(4,311)**
              
              (20,500)
              
              40,900**Total
                  provision for income taxes**
              **$**
              **1,267,000**
              $
              957,000
              $
              633,000
 26
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
    At
        December 31, 2006 and 2005, the components of gross deferred tax
        assets and gross deferred tax liabilities are as follows:
 
 **2006**
              
              2005Deferred
                  tax assets:Allowance
                  for loan losses
              **$**
              **2,193,055**
              $
              1,787,157Nonaccrual
                  interest
              
              **55,015**
              
              -Investment
                  securities
              
              **417,363**
              
              676,738Premises
                  and equipment
              
              **302,847**
              
              272,370Accrued
                  expenses
              
              **28,382**
              
              17,138Other
              
              **-**
              
              6,989Gross
                  deferred tax assets
              
              **2,996,662**
              
              2,760,392Deferred
                  tax liabilities:Tax
                  bad debt recapture
              
              **63,746**
              
              70,827Other
              
              **18,354**
              
              13,970Gross
                  deferred tax liabilities
              
              **82,100**
              
              84,797**Deferred
                  tax asset, net**
              **$**
              **2,914,562**
              $
              2,675,595
 
 The
        allocation of the deferred tax provision (benefit) involving items charged
        to
        current year income and items charged directly to equity for the years ended
        December 31, 2006, 2005 and 2004 are as follows:
 
 **2006**
              
              2005
              
              2004Deferred
                  tax provision (benefit) allocated to equity
              **$**
              **259,375**
              $
              (435,721)
              $
              (51,705)Deferred
                  tax provision (benefit) allocated to operations
              
              **(498,342)**
              
              (562,833)
              
              (101,212)**Total
                  deferred tax benefit**
              **$**
              **(238,967)**
              $
              (998,554)
              $
              (152,917)
 27
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
  
 **Note
            11.** **Goodwill and other intangible assets**
 ****
 On
        November 17, 2006, the Company acquired the assets and assumed deposit
        liabilities of a branch office from bcpbank, N.A. In consideration for the
        assumption of approximately $3,146,000 in deposit liabilities, the Company
        received approximately $2,586,000 in cash and other assets. The Company
        accounted for this branch acquisition as a business combination and recorded
        the
        acquired tangible and identifiable intangible assets and liabilities at fair
        value with the remainder recorded as goodwill. In connection with this purchase,
        the Company has recorded $435,400 in goodwill and a core deposit intangible
        of
        $124,600. The core deposit intangible is being amortized over the estimated
        life
        of the related deposits of eight years using the straight line method. The
        net
        book value of the Company’s goodwill and core deposit intangibles at December
        31, 2006 and 2005 is as follows:
 
 **2006**
              
              2005Goodwill
              **$**
              **1,365,491**
              $
              930,091Core
                  deposit intangible
              
              **124,600**Less
                  accumulated amortization
              
              **2,440****122,160**
              
              -**Total
                  goodwill and other intangible assets**
              **$**
              **1,487,651**
              $
              930,091
 
 Amortization
        expense for the year ended December 31, 2006 was $2,440. Expected future
        amortization expenses is as follows:
 
 Years
                  Ending
                December
                  31,
              
              Amount2007
              
              $  
                      18,5742008
              
              17,6842009
              
              16,7932010
              
              15,9032011
              
              15,012Thereafter
              
              38,194$    
                  122,160
 
 Based
        on
        the Company’s annual impairment tests goodwill and the core deposit intangible
        were not impaired for the years ended December 31, 2006, 2005 and
        2004.
 28
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   
 **Note   12.**
              **Shareholders’ Equity**
 
 Common
        stock
 
 On
        September 26, 2006, the Company commenced an offering of up to 1,320,000
        shares
        of its common stock, at $22.00 per share through an underwritten public
        offering. In addition, the Company granted the underwriter an option to purchase
        up to 180,000 additional shares of common stock at the public offering price,
        less the underwriting discount, to cover over-allotments. The common stock
        offering was completed on September 29, 2006 with the issuance of 1,500,000
        shares of common stock resulting in an increase in common stock and additional
        paid in capital of $30,665,966 after deducting total stock issuance costs
        of
        $2,334,034 which were charged to additional paid-in capital.
 
 In
        addition, during 2006, 8,000 options were exercised resulting in proceeds
        to the
        Company of $80,880 and 845 shares were issued to directors in payment of
        directors’ fees of $24,927.
 
 On
        August
        4, 2005, the Company commenced an offering of up to 705,883 shares of its
        common
        stock, at $17.00 per share, to existing shareholders, whereby each shareholder
        was granted the right to purchase one share of stock for every six shares
        owned
        as of August 1, 2005. In addition, each shareholder was granted an
        oversubscription privilege to purchase up to two additional shares for each
        share owned from stock not subscribed by existing shareholders under the
        initial
        rights described above. The Company also entered into standby purchase
        agreements pursuant to which the standby purchasers agreed to acquire up
        to
        529,412 shares at $17.00 per share. The common stock offering was completed
        on
        September 21, 2005 resulting in an increase in common stock and additional
        paid
        in capital of $10,965,881 after deducting total stock issuance costs of
        $1,034,130 which were charged to additional paid-in capital. The Company
        received subscriptions for a total of 705,883 shares; existing shareholders
        purchased $6.3 million or 368,687 shares; standby investors purchased $5.7
        million or 337,196 shares.
 
 In
        addition, during 2005, 37,000 options were exercised resulting in proceeds
        to
        the Company of $375,436 and 1,375 shares were issued to directors in payment
        of
        directors’ fees of $26,250.
 
 During
        2004, 77,784 warrants issued to certain of the Bank’s original organizers and
        certain other individuals were exercised resulting in proceeds to the Company
        of
        $466,704.
 29
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
    Income
        Per Share
 
 The
        following tables present information about the computation of basic and diluted
        income per share for the years ended December 31, 2006, 2005 and
        2004.
 
 **2006****Net**
                **Income**
              **Shares**
              **Per
                  Share**
                **Amount****Basic
                  Income Per Share****Income
                  available to common shareholders**
              **$**
              **2,415,155**
              **3,621,250**
              **$**
              **0.67****Effect
                  of Dilutive Securities****Stock
                  options outstanding**
              
              **-**
              **41,897**
              
              **(0.01)****Diluted
                  Income Per Share****Income
                  available to common shareholders****plus
                  assumed conversions**
              **$**
              **2,415,155**
              **3,663,147**
              **$**
              **0.66**
 
 2005Net
                Income
              Shares
              Per
                  Share
                AmountBasic
                  Income Per ShareIncome
                  available to common shareholders
              $
              1,406,626
              2,696,676
              $
              0.52Effect
                  of Dilutive SecuritiesStock
                  options outstanding
              
              -
              42,042
              
              (0.01)Diluted
                  Income Per ShareIncome
                  available to common shareholdersplus
                  assumed conversions
              $
              1,406,626
              2,738,718
              $
              0.51
 30
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
  
 2004Net
                Income
              Shares
              Per
                  Share
                AmountBasic
                  Income Per ShareIncome
                  available to common shareholders
              $
              926,397
              2,449,679
              $
              0.38Effect
                  of Dilutive SecuritiesWarrants
                  and stock options outstanding
              
              -
              53,012
              
              (0.01)Diluted
                  Income Per ShareIncome
                  available to common shareholdersplus
                  assumed conversions
              $
              926,397
              2,502,691
              $
              0.37
 
 Stock
        warrants
 
 The
        Bank
        issued warrants to certain of the Bank’s original organizing group and certain
        other individuals to purchase up to 95,000 shares of the Bank’s common stock at
        the original public offering price of $6 per share. The obligations related
        to
        all warrants issued by the Bank were assumed by the Company. During 2004,
        all
        unexercised warrants expired.
 
 A
        summary
        of the status of the warrants at December 31, 2004, and changes during the
        year ended on that date, is as follows:
  **2004****Number
                  of**
                **Shares**
              
              **Weighted-Average**
                **Exercise
                  Price**Outstanding
                  at beginning of year
              
              **83,484**
              **$**
              **6.00**Expired
              
              **5,700**
              
              **6.00**Exercised
              
              **77,784**
              
              **6.00**Outstanding
                  at end of year
              
              **-**Exercisable
                  at end of year
              
              **-**
 
 Stock
        options
 
 On
        August
        17, 1999, the Bank adopted a stock option plan (the “Plan”) for employees and
        directors, under which both incentive and non-qualified stock options were
        granted, and subsequently the Company assumed all obligations related to
        such
        options. The Plan provided for the grant of 110,000 non-qualified and incentive
        stock options in 1999 to certain directors of the Company, with an exercise
        price equal to the market value of the Company’s stock on the date of grant.
        Such options were immediately exercisable and expire if unexercised ten years
        after the date of grant. The Company has reserved 65,000 shares of common
        stock
        for issuance under the Plan. No additional options may be granted under the
        Plan.
 31
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   A
        summary
        of the status of the stock options at December 31, 2006, 2005 and 2004
        is as follows:
 
 
 **2006**
              
              2005
              
              2004
 
 **Number
                  of Shares**
              
              **Weighted-Average
                  Exercise**
                **Price**
              
              Number
                of
                Shares
              
              Weighted-Average
                  Exercise Price
              
              Number
                of
                Shares
              
              Weighted-Average
                  Exercise
                Price
 
 Outstanding
                  at beginningof
                  year
              **73,000**
              $
              **10.13**
              
              110,000
              $
              10.13
              
              110,000
              $
              10.13Exercised
              **8,000**
              
              **10.11**
              
              37,000
              
              10.15
              
              -Outstanding
                  at end of year
              **65,000**
              
              **10.13**
              
              73,000
              
              10.13
              
              110,000
              
              10.13Exercisable
                  at end of year
              **65,000**
              
              **10.13**
              
              73,000
              
              10.13
              
              110,000
              
              10.13
 
 
 The
        intrinsic value of options outstanding and exercisable at December 31, 2006
        and
        2005 was $977,795 and $733,577, respectively. The intrinsic value of options
        exercised during the twelve months ended December 31, 2006 and 2005
        were $149,275 and $313,037, respectively. There are no pro forma disclosures
        required for the twelve months ended December 31, 2006 and 2005, because
        there
        was no compensation expense attributed to these periods as no awards were
        granted or vested under this Plan during these periods.
 
 The
        weighted-average remaining contractual life for the options outstanding at
        December 31, 2006 is 2.7 years.
 
 The
        provisions in SFAS 123R have had no impact on existing plans under the
        employment agreements discussed below:
 
 President’s
        Agreement
 
 Included
        under the terms of an employment agreement, which expired on
        October 23, 2003 (the “Agreement”) between the Company and the
        President, was a provision for the Company to grant shares of the Company’s
        common stock, if available, or its cash equivalent, if not, to the President
        on
        December 31, 2000, and annually thereafter through
        December 31, 2003. The number of shares to be granted was based on 30%
        of the President’s base salary for the preceding annual employment period.
        Compensation cost for grants through 2002 were recognized over the period
        ending
        with the expiration date of the Agreement and compensation cost for the 2003
        grant was recognized over the term of the most recently expired contract.
        This
        stock grant has been settled in cash each year from 2001 through 2006 and
        the
        remaining 1,135 shares are anticipated to settle in cash when fully
        distributed at the end of 2007. The expense charged to operations related
        to
        this component of the Agreement for the twelve months ended
        December 31, 2006, 2005 and 2004 was $51,951, $46,247 and $77,085,
        respectively.
 32
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
     The
        Agreement also provided for the grant of options to purchase a minimum of
        10,000
        shares of the Company’s common stock on December 31, 2000, and
        annually thereafter through December 2002, and on December 31, 2003,
        if the President remained employed by the Bank. In the event that the Company
        did not have stock options available to grant at any of the stipulated dates,
        which was the case at December 31, 2000, 2001, 2002 and 2003, the
        President was able to elect, on a future determination date, to be chosen
        by the
        President, to receive cash compensation equal to the difference between the
        value of the Company’s stock at the time the options would have been granted,
        and the value of the Company’s stock on the determination date. The President
        has the equivalent of 15,000 options remaining under this section of the
        Agreement. The expense charged to operations related to the option component
        of
        the Agreement for the twelve months ended December 31, 2006, 2005 and
        2004 was $114,998, $114,338 and $198,665, respectively.
 
 Stock
        Appreciation Rights Plan
 
 During
        2001, the Company adopted the Patriot National Bancorp, Inc. 2001 Stock
        Appreciation Rights Plan (the “SAR Plan”), providing for the grant by the
        Company of stock appreciation rights to officers of the Company. Stock
        appreciation rights entitle the officers to receive, in cash or Company common
        stock, the appreciation in the value of the Company’s common stock from the date
        of grant. Each award vested at the rate of 20% per year from the date of
        grant.
        Any unexercised rights will expire ten years from the date of grant. During
        2001, the Company granted a total of 18,000 stock appreciation rights to
        three
        Company executive officers, and $89,880, $67,932 and $99,216, respectively,
        was
        charged to operations under the SAR Plan for the years ended
        December 31, 2006, 2005 and 2004. At December 31, 2006 there are
        12,000 unexercised rights under this plan.
 
 Rights
        Agreement
 
 On
        April
        15, 2004, the Board of Directors of the Company declared, effective as of
        April
        19, 2004, a dividend distribution of one Right for each outstanding share
        of
        common stock of the Company. The dividend was payable on April 29, 2004 to
        the
        stockholders of record as of the close of business on that date. Each Right
        entitles the registered holder to purchase from the Company 8.152 shares
        of the
        Company’s common stock, at a price of $60.00, or $7.36 per share subject to
        adjustment. The description and terms of the Rights are set forth in a Rights
        Agreement, dated as of April 19, 2004 between the Company and Registrar and
        Transfer Company.
 
 The
        Rights are not exercisable until the earliest of (i) the tenth business day
        after a public announcement that a person or group of affiliated or associated
        persons acquired, or obtained the right to acquire, beneficial ownership
        of 15%
        or more of the outstanding shares of the Company’s common stock (an Acquiring
        Person); (ii) the tenth business day (or such later day as may be determined
        by
        action of the Board of Directors of the Company prior to such time as any
        person
        becomes an Acquiring Person) after the date of the commencement of a tender
        or
        exchange offer by any person (other than the Company) if, upon consummation
        such
        person would be an Acquiring Person; and (iii) the tenth business day (or
        such
        later day as may be determined by action of the Board of Directors of the
        Company prior to such time as
 33
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
    any
        person becomes an Acquiring Person) after the filing by any Person (other
        than
        the Company) of a registration statement under the Securities Act of 1933,
        as
        amended, with respect to a contemplated exchange offer to acquire (when added
        to
        any shares as to which such person is the beneficial owner immediately prior
        to
        such filing) beneficial ownership of 15% or more of the issued and outstanding
        shares of the Company’s common stock.
 
 The
        Rights will expire on April 19, 2014, unless earlier redeemed or exchanged
        by
        the Company.
 
 **Note 13.**
              **401(k) Savings Plan**
 
 The
        Company offers employees participation in the Patriot National Bank 401(k)
        Savings Plan (the "401(k) Plan") under Section 401(k) of the Internal Revenue
        Code. The 401(k) Plan covers substantially all employees who have completed
        six
        months of service, are 21 years of age and who elect to participate. Under
        the
        terms of the 401(k) Plan, participants can contribute up to the maximum amount
        allowed, subject to Federal limitations. The Company may make discretionary
        matching contributions to the 401(k) Plan. Participants are immediately vested
        in their contributions and fully vested in Company contributions after two
        years. The Company contributed approximately $147,000, $140,000 and $127,000
        to
        the 401(k) Plan in 2006, 2005 and 2004, respectively.
 
 **Note 14.**
              **Financial Instruments With Off-Balance-Sheet
                  Risk**
 
 In
        the
        normal course of business, the Company is a party to financial instruments
        with
        off-balance-sheet risk to meet the financing needs of its customers. These
        financial instruments include commitments to extend credit and standby letters
        of credit and involve, to varying degrees, elements of credit and interest
        rate
        risk in excess of the amounts recognized in the balance sheets. The contractual
        amounts of these instruments reflect the extent of involvement the Company
        has
        in particular classes of financial instruments.
 
 The
        contractual amounts of commitments to extend credit and standby letters of
        credit represent the amounts of potential accounting loss should: the contract
        be fully drawn upon; the customer default; and the value of any existing
        collateral become worthless. The Company uses the same credit policies in
        making
        commitments and conditional obligations as it does for on-balance-sheet
        instruments and evaluates each customer's creditworthiness on a case-by-case
        basis. Management believes that the Company controls the credit risk of these
        financial instruments through credit approvals, credit limits, monitoring
        procedures and the receipt of collateral as deemed necessary.
 34
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
    Financial
        instruments whose contract amounts represent credit risk are as follows at
        December 31, 2006 and 2005:
 
 **2006**
              
              2005Commitments
                  to extend credit:Future
                  loan commitments
              **$**
              **54,134,247**
              $
              55,364,491Unused
                  lines of credit
              
              **43,900,007**
              
              37,819,135Undisbursed
                  construction loans
              
              **97,977,899**
              
              40,398,941Financial
                  standby letters of credit
              
              **264,483**
              
              216,000**$**
              **196,276,636**
              $
              133,798,567
 
 Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Commitments to extend
        credit generally have fixed expiration dates or other termination clauses
        and
        may require payment of a fee by the borrower. Since these commitments could
        expire without being drawn upon, the total commitment amounts do not necessarily
        represent future cash requirements. The amount of collateral obtained, if
        deemed
        necessary by the Company upon extension of credit, is based on management's
        credit evaluation of the counterparty. Collateral held varies, but may include
        residential and commercial property, deposits and securities.
 
 Standby
        letters of credit are written commitments issued by the Company to guarantee
        the
        performance of a customer to a third party. The credit risk involved in issuing
        letters of credit is essentially the same as that involved in extending loan
        facilities to customers. As of January 1, 2003, newly issued or modified
        guarantees that are not derivative contracts have been recorded on the Company’s
        consolidated balance sheet at their fair value at inception. No liability
        related to guarantees was required to be recorded at December 31, 2006 and
        2005.
 
 **Note 15.**
              **Regulatory Matters**
 
 The
        Company and the Bank are subject to various regulatory capital requirements
        administered by the federal banking agencies. Failure to meet minimum capital
        requirements can initiate certain mandatory - and possibly additional
        discretionary - actions by regulators that, if undertaken, could have a direct
        material effect on the Company's financial statements. Under capital adequacy
        guidelines and the regulatory framework for prompt corrective action, the
        Company and the Bank must meet specific capital guidelines that involve
        quantitative measures of the Company's and the Bank's assets, liabilities,
        and
        certain off-balance-sheet items as calculated under regulatory accounting
        practices. The Company's and the Bank's capital amounts and classification
        are
        also subject to qualitative judgments by the regulators about components,
        risk
        weightings, and other factors.
 
 Quantitative
        measures established by regulation to ensure capital adequacy require the
        Company and the Bank to maintain minimum amounts and ratios (set forth in
        the
        table below) of total and Tier I capital (as defined in the regulations)
        to
        risk-weighted assets (as defined), and of Tier I capital (as defined) to
        average
 35
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
    assets
        (as defined). Management believes, as of December 31, 2006, that the
        Company and the Bank meet all capital adequacy requirements to which they
        are
        subject.
 
 The
        most
        recent notification from the Office of the Comptroller of the Currency
        categorized the Bank as well capitalized under the regulatory framework for
        prompt corrective action. To be categorized as well capitalized, the Bank
        must
        maintain minimum total risk-based, Tier I risk-based, and Tier-I leverage
        ratios
        as set forth in the table. There are no conditions or events since then that
        management believes have changed the Bank’s category.
 
 The
        Company’s and the Bank’s actual capital amounts and ratios at
        December 31, 2006 and 2005 were (dollars in thousands):
 **Actual**
              **For
                  Capital**
                **Adequacy
                  Purposes**
              **To
                  Be Well**
                **Capitalized
                  Under**
                **Prompt
                  Corrective**
                **Action
                  Provisions**
 
 **2006**
              
              **Amount**
              **Ratio**
              
              **Amount**
              **Ratio**
              
              **Amount**
              **Ratio****The
                  Company:****Total
                  Capital (to Risk Weighted Assets)**
              **$**
              **77,107**
              **15.34%**
              **$**
              **40,212**
              **8.00%**
              **$**
              **N/A**
              **N/A****Tier
                  I Capital (to Risk Weighted Assets)**
              
              **71,477**
              **14.22%**
              
              **20,106**
              **4.00%**
              
              **N/A**
              **N/A****Tier
                  I Capital (Average Assets)**
              
              **71,477**
              **11.63%**
              
              **24,584**
              **4.00%**
              
              **N/A**
              **N/A**
 
 **The
                  Bank:****Total
                  Capital (to Risk Weighted Assets)**
              **$**
              **75,499**
              **15.02%**
              **$**
              **40,213**
              **8.00%**
              **$**
              **50,266**
              **10.00%****Tier
                  I Capital (to Risk Weighted Assets)**
              
              **69,869**
              **13.90%**
              
              **20,106**
              **4.00%**
              
              **30,159**
              **6.00%****Tier
                  I Capital (to Average Assets)**
              
              **69,869**
              **11.37%**
              
              **24,580**
              **4.00%**
              
              **30,725**
              **5.00%**
 
 Actual
              For
                  Capital
                Adequacy
                  Purposes
              To
                  Be Well
                Capitalized
                  Under
                Prompt
                  Corrective
                Action
                  Provisions
 
 2005
              
              Amount
              Ratio
              
              Amount
              Ratio
              
              Amount
              RatioThe
                  Company:Total
                  Capital (to Risk Weighted Assets)
              $
              43,870
              12.70%
              $
              27,635
              8.00%
              $
              N/A
              N/ATier
                  I Capital (to Risk Weighted Assets)
              
              39,549
              11.45%
              
              13,816
              4.00%
              
              N/A
              N/ATier
                  I Capital (Average Assets)
              
              39,549
              8.56%
              
              18,481
              4.00%
              
              N/A
              N/A
 
 The
                  Bank:Total
                  Capital (to Risk Weighted Assets)
              $
              43,180
              12.52%
              $
              27,591
              8.00%
              $
              34,489
              10.00%Tier
                  I Capital (to Risk Weighted Assets)
              
              38,865
              11.27%
              
              13,794
              4.00%
              
              20,691
              6.00%Tier
                  I Capital (to Average Assets)
              
              38,865
              8.42%
              
              18,463
              4.00%
              
              23,079
              5.00%
 36
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
     Restrictions
        on dividends, loans and advances
 
 The
        Company’s ability to pay dividends is dependent on the Bank’s ability to pay
        dividends to the Company. However, certain restrictions exist regarding the
        ability of the Bank to transfer funds to the Company in the form of cash
        dividends, loans or advances. The approval of the Comptroller of the Currency
        is
        required to pay dividends in excess of the Bank’s earnings retained in the
        current year plus retained net earnings for the preceding two years. As of
        December 31, 2006, the Bank had retained earnings of approximately
        $7,634,000, of which $4,157,000 is available for distribution to the
        Company as dividends without prior regulatory approval. The Bank is also
        prohibited from paying dividends that would reduce its capital ratios below
        minimum regulatory requirements, and the Federal Reserve Bank may impose
        further
        dividend restrictions on the Company.
 
 Loans
        or
        advances to the Company by the Bank are limited to 10% of the Bank's capital
        stock and surplus on a secured basis.
 
 **Note 16.**
              **Related Party Transactions**
 
 In
        the
        normal course of business, the Company grants loans to executive officers,
        directors and members of their immediate families, as defined, and to entities
        in which these individuals have more than a 10% equity ownership. Such loans
        are
        transacted at terms, including interest rates, similar to those available
        to
        unrelated customers.
 
 Changes
        in loans outstanding to such related parties during 2006 and 2005 are as
        follows:
 
 **2006**
              
              2005Balance,
                  beginning of year
              **$**
              **153,394**
              $
              198,586Additional
                  loans
              
              **4,612**
              
              341,394Repayments
              
              **(106,825)**
              
              (386,586)Balance,
                  end of year
              **$**
              **51,181**
              $
              153,394
 
 Related
        party deposits aggregated approximately $7,300,000 and $5,700,000 as of
        December 31, 2006 and 2005, respectively.
 
 The
        Company leases office space to a director of the Company under two leases.
        Rental income under these leases was approximately $28,300 for the years
        ended
        December 31, 2006, 2005 and 2004, respectively.
 
 During
        2006, 2005 and 2004, the Company paid legal fees of approximately $6,200,
        $18,600 and $20,900, respectively, to an attorney who is a director of the
        Company.
 37
 
 **PATRIOT
            NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
            31, 2006 and 2005**
 **Note 17.**
              **Other Comprehensive Income**
 
 Other
        comprehensive income, which is comprised solely of the change in unrealized
        gains and losses on available for sale securities, is as follows:
 
 **2006**
 
 **Before-Tax**
                **Amount**
              **Tax
                  Effect**
              **Net-of-Tax**
                **Amount**
 
 **Unrealized
                  holding gains arising during period**
              **$**
              **682,562**
              **$**
              **(259,375)**
              **$**
              **423,187****Add
                  reclassification adjustment for gains****recognized
                  in net income**
              
              **-**
              
              **-**
              
              **-****Unrealized
                  holding gain on available for sale****securities,
                  net of taxes**
              **$**
              **682,562**
              **$**
              **(259,375)**
              **$**
              **423,187**
  2005
 
 Before-Tax
                Amount
              Tax
                  Effect
              Net-of-Tax
                Amount
 
 Unrealized
                  holding losses arising during period
              $
              (1,146,631)
              $
              435,721
              $
              (710,910)Add
                  reclassification adjustment for gainsrecognized
                  in net income
              
              -
              
              -
              
              -Unrealized
                  holding loss on available for salesecurities,
                  net of taxes
              $
              (1,146,631)
              $
              435,721
              $
              (710,910)
 
 2004
 
 Before-Tax
                Amount
              Tax
                  Effect
              Net-of-Tax
                Amount
 
 Unrealized
                  holding losses arising during period
              $
              (136,065)
              $
              51,705
              $
              (84,360)Add
                  reclassification adjustment for gainsrecognized
                  in net income
              
              -
              
              -
              
              -Unrealized
                  holding loss on available for salesecurities,
                  net of taxes
              $
              (136,065)
              $
              51,705
              $
              (84,360)
 38
 **PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
 
  **Note 18.**
              **Fair Value of Financial Instruments and Interest Rate
                  Risk**
 
 SFAS
        No.
        107, "Disclosures About Fair Value of Financial Instruments" ("Statement
        No.
        107"), requires disclosure of fair value information about financial
        instruments, whether or not recognized in the balance sheet, for which it
        is
        practicable to estimate that value. 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 rates and estimates of future cash
        flows. In that regard, the derived fair value estimates cannot be substantiated
        by comparisons to independent markets and, in many cases, could not be realized
        in immediate settlement of the instrument. Statement No. 107 excludes certain
        financial instruments from its disclosure requirements. Accordingly, the
        aggregate fair value amounts presented do not represent the underlying value
        of
        the Company.
 
 Management
        uses its best judgment in estimating the fair value of the Company's financial
        instruments; however, there are inherent weaknesses in any estimation technique.
        Therefore, for substantially all financial instruments, the fair value estimates
        presented herein are not necessarily indicative of the amounts the Company
        could
        have realized in a sales transaction at December 31, 2006 and 2005.
        The estimated fair value amounts for 2006 and 2005 have been measured as
        of
        their respective year-ends, and have not been reevaluated or updated for
        purposes of these consolidated financial statements subsequent to those
        respective dates. As such, the fair values of these financial instruments
        subsequent to the respective reporting dates may be different from the amounts
        reported at each year-end.
 
 The
        information presented should not be interpreted as an estimate of the fair
        value
        of the entire Company since a fair value calculation is only required for
        a
        limited portion of the Company's assets and liabilities. Due to the wide
        range
        of valuation techniques and the degree of subjectivity used in making the
        estimate, comparisons between the Company's disclosures and those of other
        bank
        holding companies may not be meaningful.
 
 
 39
 **PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
   As
        of
        December 31, 2006 and 2005, the recorded book balances and estimated
        fair values of the Company’s financial instruments were (in
        thousands):
   **2006**
                
                2005**Recorded**
                
                
                
                Recorded**Book**
                
                
                
                Book**Balance**
                
                **Fair
                    Value**
                
                Balance
                
                Fair
                    Value**Financial
                    Assets:**Cash
                    and noninterest bearing deposits due from banks
                
                **$**
                **3,865**
                
                **$**
                **3,865**
                
                $
                7,181
                
                $
                7,181Interest
                    bearing deposits due from banks
                
                
                **3**
                
                
                **3**
                
                
                40
                
                
                40Federal
                    funds sold
                
                
                **27,000**
                
                
                **27,000**
                
                
                6,500
                
                
                6,500Short-term
                    investments
                
                
                **24,606**
                
                
                **24,606**
                
                
                2,247
                
                
                2,247Available
                    for sale securities
                
                
                **67,093**
                
                
                **67,093**
                
                
                78,672
                
                
                78,672Federal
                    Reserve Bank stock
                
                
                **1,912**
                
                
                **1,912**
                
                
                1,022
                
                
                1,022Federal
                    Home Loan Bank stock
                
                
                **1,217**
                
                
                **1,217**
                
                
                1,297
                
                
                1,297Loans
                    receivable, net
                
                
                **506,884**
                
                
                **474,079**
                
                
                364,244
                
                
                353,231Accrued
                    interest receivable
                
                
                **3,542**
                
                
                **3,542**
                
                
                2,445
                
                
                2,445**Financial
                    Liabilities:**Demand
                    deposits
                
                **$**
                **56,680**
                
                **$**
                **56,680**
                
                $
                48,797
                
                $
                48,797Savings
                    deposits
                
                
                **25,993**
                
                
                **25,993**
                
                
                20,090
                
                
                20,090Money
                    market deposits
                
                
                **40,936**
                
                
                **40,936**
                
                
                57,799
                
                
                57,799NOW
                    accounts
                
                
                **26,882**
                
                
                **26,882**
                
                
                25,383
                
                
                25,383Time
                    deposits
                
                
                **410,961**
                
                
                **413,951**
                
                
                267,006
                
                
                268,643FHLB
                    borrowings
                
                
                **8,000**
                
                
                **7,981**
                
                
                9,000
                
                
                8,967Subordinated
                    debt
                
                
                **8,248**
                
                
                **8,248**
                
                
                8,248
                
                
                8,248Accrued
                    interest payable
                
                
                **182**
                
                
                **182**
                
                
                45
                
                
                45
  Unrecognized
        financial instruments
 
 Loan
        commitments on which the committed interest rate is less than the current
        market
        rate were insignificant at December 31, 2006 and 2005. The estimated
        fair value of fee income on letters of credit at December 31, 2006 and
        2005 was insignificant.
 
 The
        Company assumes interest rate risk (the risk that general interest rate levels
        will change) as a result of its normal operations. As a result, the fair
        values
        of the Company’s financial instruments will change when interest rate levels
        change and that change may be either favorable or unfavorable to the Company.
        Management attempts to match maturities of assets and liabilities to the
        extent
        believed necessary to minimize interest rate risk. However, borrowers with
        fixed
        rate obligations are less likely to prepay in a rising rate environment and
        more
        likely to prepay in a falling rate environment. Conversely, depositors who
        are
        receiving fixed rates are more likely to withdraw funds before maturity in
        a
        rising rate environment and less likely to do so in a falling rate environment.
        Management monitors rates and maturities of assets and liabilities and attempts
        to minimize interest rate risk by adjusting terms of new loans and deposits
        and
        by investing in securities with terms that mitigate the Company’s overall
        interest rate risk.
 40
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**
 **December
          31, 2006 and 2005**
    
 **Note 19.**
              **Segment Reporting**
 
 The
        Company provides its commercial customers with products such as commercial
        mortgage and construction loans, working capital loans, equipment loans and
        other business financing arrangements, and provides its consumer customers
        with
        residential mortgage loans, home equity loans and other consumer installment
        loans. The Company also attracts deposits from both consumer and commercial
        customers, and invests such deposits in loans, investments and working capital.
        Revenues are generated primarily from net interest income from lending,
        investment and deposit activities. Additional revenues are derived from loan
        brokerage and application processing fees through the solicitation and
        processing of conventional mortgage loans, deposit account transaction based
        fees and service charges and other loan origination and processing
        fees.
 
 The
        Company’s loan and deposit customers are primarily residents and businesses
        located in the Connecticut communities in which the Company has branches,
        as
        well as in bordering communities. Its lending customers extend beyond these
        areas and also include other nonadjacent towns in Fairfield County, Connecticut
        and towns in Westchester County, New York. The Company also makes loans from
        its
        Melville (Long Island), New York loan production office.
 
 The
        Company’s customer base is diversified. There is not a concentration of either
        loans or deposits from a single person or groups of individuals or within
        a
        single industry or groups of industries. The Company is not dependent on
        one or
        a few significant customers for either its loan or deposit activities, the
        loss
        of any one of which would have a material adverse impact on its
        business.
 
 Prior
        to
        April 1, 2006, the Company had two reportable segments: commercial banking
        and
        mortgage brokerage activities. The operations of the mortgage broker have
        been
        fully integrated into the operations of the commercial bank. The activities
        of
        the former mortgage broker segment have expanded to include the products
        and
        services of the former commercial banking segment and developed such that
        they
        are indistinguishable from the lending activities of the commercial bank.
        Any
        such separate financial disclosures would be consistent with those presented
        in
        the financial statements.
 
 41