U.
      S.
      SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549


**FORM
      10 - KSB**





[
      X
      ] ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      Fiscal Year Ended December 31, 2005





[
      ] TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      transition period from ____________________ to ____________________





Commission
      file number 000-29599





PATRIOT
      NATIONAL BANCORP, INC.


(Name
      of
      small business issuer in its charter)





Connecticut
            06-1559137(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification Number)900
                Bedford StreetStamford,
                Connecticut
            06901(Address
                of principal executive offices)
            (Zip
                Code)Issuer’s
                telephone number
            (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


Check
      whether the issuer (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 X  No





Check
      if
      disclosure of delinquent filers in response to Item 405 of Regulation S-B 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-KSB or any amendment
      to
      this Form 10-KSB. [ ]





State
      issuer’s revenue for its most recent fiscal year: $
      28,377,738





Aggregate
      market value of the voting stock held by nonaffiliates of the registrant as
      of
      February 28, 2006 based on the last sale price as reported on the
      NASDAQ Small Cap Market: $ 51,106,227 .





Number
      of
      shares of the registrant’s Common Stock, par value $2.00 per share, outstanding
      as of February 28, 2006: 3,230,649.





Documents
      Incorporated by Reference





Proxy
                Statement for 2006 Annual
            Incorporated
                into Part III of thisMeeting
                of Shareholders. (A definitive
            Form
                10-KSBproxy
                statement will be filed with theSecurities
                and Exchange Commissionwithin
                120 days after the close of thefiscal
                year covered by this Form 10-KSB.)





Transitional
      Small Business Disclosure Format (check one):





Yes
            NoX













**Table
      of Contents**





PagePart
                IItem
                1.
            Description
                of Business
            1Item
                2.
            Description
                of Properties
            8Item
                3.
            Legal
                Proceedings
            8Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            8Part
                IIItem
                5.
            Market
                for Common Equity, Related Shareholder Mattersand
                Small Business Issuer Purchases of Equity Securities
            8Item
                6.
            Management’s
                Discussion and Analysis orPlan
                of Operation
            11Item
                7.
            Financial
                Statements
            27Item
                8.
            Changes
                in and Disagreements with Accountantson
                Accounting and Financial Disclosure
            27Item
                8A.
            Controls
                and Procedures
            27Item
                8B.
            Other
                Information
            28Part
                IIIItem
                9.
            Directors
                and Executive Officers of the Registrant
            28Item
                10.
            Executive
                Compensation
            28Item
                11.
            Security
                Ownership of Certain Beneficial Ownersand
                Management and Related Stockholder Matters
            28Item
                12.
            Certain
                Relationships and Related Transactions
            28Item
                13.
            Exhibits,
                Lists and Reports on Form 8-K
            29Item
                14.
            Principal
                Accountant Fees and Services
            31





**PART
      I**





Item
                1.
            Description
                of Business





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 and a branch office
      in Southport, Connecticut. The Bank recently received regulatory approval to
      open three branch offices, two in Fairfield, Connecticut and one in Milford,
      Connecticut.





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 Patriot
      National Bank Residential Lending Group ( *“Residential
      Lending Group”* ),
      a
      division of the Bank. PinPat Acquisition Corporation is presently an inactive
      subsidiary of the Bank.




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.




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.




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 and





3695 Post
      Road in Southport, Connecticut. The Bank also operates loan origination offices
      at: 1177 Summer Street, Stamford, Connecticut, 200 Broad Hollow Road, Melville,
      New York and 450 7 th Avenue,
      New York, 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 and IRA’s
      (Individual Retirement Accounts). 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
      offers residential mortgages through its Residential Lending Group. The
      Residential Lending Group solicits and processes mortgage loan applications
      from
      consumers on behalf of permanent investors and originates loans for
      sale.





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 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 and Southport,
      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 Bridgeport to the east, and the Long Island
      Sound to the south.


2


The
      Bank’s loan customers extend beyond Stamford, Greenwich, Norwalk, Wilton, Darien
      and Southport 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.





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,
      and
      Southport are presently served by approximately 182 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 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 and Southport, posing significant competition to the Bank for
      deposits and loans. Many of such 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. This increase in competition has caused banks
      and
      other financial service institutions to diversify their services and become
      more
      cost effective as a result of competition with one another and with new types
      of
      financial service companies, including non-bank competitors. The impact on
      Bancorp of federal legislation authorizing increased services by financial
      holding companies and interstate branching of banks has 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.





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*


3


*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 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 the Federal Reserve Board’s
      view that a bank holding company should pay cash dividends only to the extent
      that 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 the bank holding company’s 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


4


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.





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 nature
      and amount of collateral for certain


5


loans
      a
      bank makes, 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.





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.





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. For example, 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 and Southport, 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.


6


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 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. Due to the burdens on smaller companies in designing
      and implementing compliance with this section, the SEC Advisory Committee on
      Smaller Public companies is considering recommendations for companies with
      market capitalization of less that $75 million that may exempt these companies
      from certain requirements of Section 404.





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. The Bank has, however,
      registered the trademark “Patriot” and the corresponding logo with the State of
      Connecticut Trademark Office. Compliance by Bancorp and the Bank with federal,
      state and local provisions which have been enacted or adopted regulating or
      otherwise relating to the discharge of material into the environment is not
      expected to have a material effect upon the capital expenditures, earnings
      or
      competitive position of Bancorp.


7


As
      of
      December 31, 2005, Bancorp had 97 full-time employees and seven
      part-time employees. None of the employees of Bancorp is covered by a collective
      bargaining agreement.




Item
                2.
            Description
                of 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 nine other branch banking offices, three approved branch
      locations scheduled to open in 2006, one of which is currently under renovation,
      and three loan origination offices. The Bank also leases space at its main
      office for additional parking. Lease commencement dates for office locations
      range from July 1, 2002 to January 1, 2006 and lease expiration dates
      fall between June 30, 2007 and December 31, 2015. Subsequent to December
      31, 2005 the Bank entered into two leases for new branch locations with lease
      expiration dates during 2016 and 2021; definitive expiration dates are dependent
      upon the determination of lease commencement dates. 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.”





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 2005, no matter was submitted to a vote of
      shareholders.








**PART
      II**





Item
                5.
            Market
                for Common Equity, Related Shareholder Matters and Small Business
                Issuer
                Purchases of Equity Securities





Market
      Information





Bancorp
      Common Stock is traded on the NASDAQ Small Cap Market under the Symbol “PNBK.”
On December 31, 2005, the last sale price for Bancorp Common Stock on
      NASDAQ Small Cap Market was $20.75.


8


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.





2005
            
            2004Cash
            
            
            
            
            
            CashSales
                Price
            
            Dividends
            
            Sales
                Price
            
            DividendsQuarter
                Ended
            
            
            High
            
            Low
            
            Declared
            
            High
            
            Low
            
            DeclaredMarch
                31
            
            
            $
            18.38
            
            $
            17.95
            
            $
            0.035
            
            $
            16.25
            
            $
            12.49
            
            $
            0.030June
                30
            
            
            
            19.96
            
            
            18.07
            
            
            0.040
            
            
            15.25
            
            
            14.03
            
            
            0.035September
                30
            
            
            
            19.37
            
            
            18.49
            
            
            0.040
            
            
            14.99
            
            
            13.51
            
            
            0.035December
                31
            
            
            
            21.25
            
            
            19.06
            
            
            0.040
            
            
            18.60
            
            
            14.01
            
            
            0.035





Holders





There
      were approximately 708 shareholders of record of Bancorp Common Stock as of
      December 31, 2005.





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, by the Bank
      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, including management’s estimates of future earnings and
      Bancorp’s need for capital.





Recent
      Sales of Unregistered Securities





On
      October 26, 2005, the Company issued 1,375 shares of its common stock to its
      six
      outside directors. Pursuant to a new policy adopted by the Board in February
      2005, outside directors serving on the board receive an annual award of the
      Company’s common stock valued at $5,000; the award is prorated for directors who
      have served less than a full year. Normally these shares would be issued and
      priced at the time of the annual meeting of shareholders; however, in 2005,
      the
      Company was actively involved in its rights offering preparation at the time
      of
      the annual meeting, and deferred issuance of the director stock until after
      that
      offering had been priced and completed. The shares have not been registered
      under the Securities Act of 1933 and therefore were issued in a private
      placement transaction exempt from registration under Section 4(2) of the
      Securities Act. For purposes of this transaction, the Company shares were valued
      at approximately $19.118 per share, or a total value of
      $26,250.


9


Purchases
      of Equity Securities by the Small Business Issuer and Affiliated
      Purchasers





During
      the fourth quarter of 2005 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, 2005 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
            73,000
            $10.13
            -Equity
                compensation plans not approved by security holders
            -
            -
            -Total
            73,000
            $10.13
            -







10





Item
                6.
            Management’s
                Discussion and Analysis or Plan of
                Operation





Patriot
      National Bancorp, Inc


Financial
      Highlights




**2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****Operating
                Data**Interest
                and dividend income
            
            $
            25,148,701
            
            $
            18,678,251
            
            $
            15,214,702
            
            $
            12,604,718
            
            $
            13,722,943Interest
                expense
            
            
            10,269,625
            
            
            7,008,508
            
            
            5,588,255
            
            
            4,764,693
            
            
            6,866,960Net
                interest income
            
            
            14,879,076
            
            
            11,669,743
            
            
            9,626,447
            
            
            7,840,025
            
            
            6,855,983Provision
                for loan losses
            
            
            1,110,000
            
            
            556,000
            
            
            563,000
            
            
            468,000
            
            
            250,000Noninterest
                income
            
            
            3,229,037
            
            
            2,702,204
            
            
            4,813,740
            
            
            4,113,820
            
            
            3,509,955Noninterest
                expense
            
            
            14,634,487
            
            
            12,256,550
            
            
            11,659,467
            
            
            9,812,838
            
            
            8,675,551Net
                income
            
            
            1,406,626
            
            
            926,397
            
            
            1,340,720
            
            
            1,052,007
            
            
            876,387Basic
                income per share
            
            
            0.52
            
            
            0.38
            
            
            0.56
            
            
            0.44
            
            
            0.37Diluted
                income per share
            
            
            0.51
            
            
            0.37
            
            
            0.55
            
            
            0.43
            
            
            0.36Dividends
                per share
            
            
            0.155
            
            
            0.135
            
            
            0.115
            
            
            0.095
            
            
            0.060**Balance
                Sheet Data**Cash
                and due from banks
            
            
            7,220,557
            
            
            6,670,409
            
            
            4,023,732
            
            
            5,385,757
            
            
            7,544,242Federal
                funds sold
            
            
            6,500,000
            
            
            37,500,000
            
            
            15,000,000
            
            
            3,000,000
            
            
            12,700,000Short
                term investments
            
            
            2,247,028
            
            
            11,460,057
            
            
            10,430,939
            
            
            3,348,968
            
            
            6,788,569Investment
                securities
            
            
            80,991,068
            
            
            78,258,775
            
            
            92,330,533
            
            
            61,720,716
            
            
            35,816,880Loans,
                net
            
            
            364,243,777
            
            
            263,874,820
            
            
            214,420,528
            
            
            170,794,939
            
            
            135,680,036Total
                assets
            
            
            470,641,162
            
            
            405,046,955
            
            
            342,469,049
            
            
            248,496,753
            
            
            202,569,457Total
                deposits
            
            
            419,075,288
            
            
            367,005,325
            
            
            289,992,182
            
            
            217,911,260
            
            
            183,263,939Total
                borrowings
            
            
            17,248,000
            
            
            16,248,000
            
            
            31,301,385
            
            
            10,292,675
            
            
            839,280Total
                shareholders’ equity
            
            
            31,374,615
            
            
            19,756,434
            
            
            18,779,913
            
            
            18,544,955
            
            
            17,406,016





(a)
            *Plan
                of Operation*





Not
      applicable since Bancorp has had revenues from operations in each of the last
      two fiscal years.


11


(b)
            *Management’s
                Discussion and Analysis of*
              *Financial
                Condition and Results of
                Operations*





**Summary**





Bancorp’s
      subsidiary, Patriot National Bank established its tenth branch banking office
      in
      June of 2005. In addition, Bancorp successfully completed a shareholder rights
      offering during September 2005 resulting in an increase in common stock of
      $12.0 million, $11.0 million, net of offering fees and expenses. Eligible
      shareholders purchased $6.3 million or 368,687 shares; standby investors
      purchased $5.7 million or 337,196 shares.





Bancorp
      reported earnings of $1,407,000 ($0.52 basic income per share and
      $0.51 diluted income per share) for 2005 compared to $926,000 ($0.38 basic
      income per share and $0.37 diluted income per share) for 2004. Total assets
      ended the year at a new record high of $470.6 million, an increase of $65.6
      million from December 31, 2004.




Net
      interest income for the year ended December 31, 2005 increased $3.2 million
      or 28% to $14.9 million as compared to $11.7 million for the year
      ended December 31, 2004.





Total
      assets increased by 16% during the year as total loans increased from $263.9
      million at December 31, 2004 to $364.2 million at
      December 31, 2005. The available for sale securities portfolio
      increased $2.4 million or 3% to $78.7 million from $76.3 million at
      December 31, 2004. Loan growth was funded through deposit growth and a
      reduction in federal funds sold and short term investments. Deposits increased
      $52.1 million to $419.1 million at December 31, 2005;
      interest bearing deposits increased $45.9 million, or 14%, and non-interest
      bearing deposits increased $6.2 million or 15%. Shareholders’ equity increased
      $11.6 million; this increase is the result of the stock offering, the
      exercise of certain stock options and the increase in retained earnings from
      net
      income, net of dividend payments. The increase in shareholder’s equity is
      partially offset by the increase in accumulated other comprehensive loss due
      to
      unrealized losses on the available for sale securities portfolio.








**FINANCIAL
      CONDITION**





***Assets***





Bancorp’s
      total assets increased $65.6 million or 16% from $405.0 million at
      December 31, 2004 to $470.6 million at
      December 31, 2005. The growth in total assets was funded primarily by
      deposit growth of $52.1 million and $11.0 million in capital raised through
      the rights offering. Federal funds sold and short term investments decreased
      $31.0 million and $9.2 million, respectively; these decreases were used to
      fund loan growth.


12


***Investments***





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





2005
            
            2004
            
            2003U.
                S. Government Agency andSponsored
                Agency Obligations
            
            $
            16,476,684
            
            $
            14,823,295
            
            $
            11,865,618Mortgage-backed
                securities
            
            
            56,195,384
            
            
            52,446,180
            
            
            66,696,465Marketable
                equity securities
            
            
            6,000,000
            
            
            9,000,000
            
            
            12,000,000Federal
                Reserve Bank stock
            
            
            1,022,300
            
            
            692,600
            
            
            691,150Federal
                Home Loan Bank stock
            
            
            1,296,700
            
            
            1,296,700
            
            
            1,077,300Total
                Investments
            
            $
            80,991,068
            
            $
            78,258,775
            
            $
            92,330,533





Total
      investments increased $2.7 million to $81.0 million; purchases of U.S.
      Government Agency and Sponsored Agency obligations and mortgage-backed
      securities were partially offset by principal payments on mortgage-backed
      securities and redeemed money market preferred equity instruments.





The
      following table presents the maturity distribution of available for sale
      investment securities at December 31, 2005 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 Agency andSponsored
                Agency obligations
            
            $
            -
            
            $
            16,999,341
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            16,999,341
            
            
            3.59
            %Mortgage-backed
                securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            57,453,614
            
            
            57,453,614
            
            
            4.33
            %Money
                market preferredequity
                securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6,000,000
            
            
            6,000,000
            
            
            3.44
            %Total
            
            $
            -
            
            $
            16,999,341
            
            $
            -
            
            $
            -
            
            $
            63,453,614
            
            $
            80,452,955
            
            
            4.11
            %Weighted
                average yield
            
            
            -
            %
            
            3.59
            %
            
            -
            %
            
            -
            %
            
            4.25
            %
            
            4.11
            %




The
      following table presents a summary of investments for any issuer that exceeds
      10% of shareholders’ equity at December 31, 2005:


Amortized
            
            FairCost
            
            ValueAvailable
                for sale securities:U.S.
                Government Agency and SponsoredAgency
                Obligations
            
            $
            16,999,341
            
            $
            16,476,684U.S.
                Government Agency mortgage-backed securities
            
            
            57,453,614
            
            
            56,195,384






13


***Loans***





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





2005
            
            2004
            
            2003Real
                EstateCommercial
            
            $
            129,178,889
            
            $
            106,771,441
            
            $
            96,339,220Residential
            
            
            77,391,833
            
            
            36,965,661
            
            
            21,772,759Construction
            
            
            107,232,587
            
            
            74,598,919
            
            
            57,122,445Commercial
            
            
            15,591,818
            
            
            17,562,523
            
            
            15,532,902Consumer
                installment
            
            
            1,106,648
            
            
            1,386,709
            
            
            1,861,924Consumer
                home equity
            
            
            39,097,450
            
            
            30,874,894
            
            
            25,607,775Total
                Loans
            
            
            369,599,225
            
            
            268,160,147
            
            
            218,237,025Premiums
            
            
            367,491
            
            
            313,754
            
            
            -Net
                deferred fees
            
            
            (1,134,604
            )
            
            (1,117,556
            )
            
            (881,822
            )Allowance
                for loan losses
            
            
            (4,588,335
            )
            
            (3,481,525
            )
            
            (2,934,675
            )Loans,
                net
            
            $
            364,243,777
            
            $
            263,874,820
            
            $
            214,420,528





Bancorp’s
      net loan portfolio increased $100.3 million or 38% to $364.2 million
      at December 31, 2005 from $263.9 million at
      December 31, 2004. Loan growth was funded through an increase in total
      deposits as well as by reductions in federal funds sold and short term
      investments. At December 31, 2005, the net loan to deposit ratio was
      87% and the net loan to asset ratio was 77%. At December 31, 2004, the
      net loan to deposit ratio was 72%, and the net loan to asset ratio was 65%.





Despite
      a
      period of rising short term rates, the yield curve was relatively flat and
      longer term rates have remained lower; therefore, loan activity continued to
      remain strong and the volume of new loans far exceeded principal reductions
      and
      payoffs.


14


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, 2005, 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
            
            $
            20,823
            
            $
            42,705
            
            $
            65,651
            
            $
            129,179Residential
                real estate
            
            
            3,055
            
            
            4,034
            
            
            70,303
            
            
            77,392Construction
                loans
            
            
            68,074
            
            
            35,866
            
            
            3,293
            
            
            107,233Commercial
                loans
            
            
            8,289
            
            
            6,154
            
            
            1,149
            
            
            15,592Consumer
                installment
            
            
            1,016
            
            
            90
            
            
            -
            
            
            1,106Consumer
                home equity
            
            
            35
            
            
            6,048
            
            
            33,014
            
            
            39,097Total
            
            $
            101,292
            
            $
            94,897
            
            $
            173,410
            
            $
            369,599Fixed
                rate loans
            
            $
            5,503
            
            $
            20,955
            
            $
            3,405
            
            $
            29,863Variable
                rate loans
            
            
            95,789
            
            
            73,942
            
            
            170,005
            
            
            339,736Total
            
            $
            101,292
            
            $
            94,897
            
            $
            173,410
            
            $
            369,599





The
      following table presents loan concentrations at
      December 31, 2005:





DollarsCategory
            Percentage
            Outstanding(thousands
                of dollars)Construction
            29%
            $107,233Commercial
                Retail
            7%
            25,351Commercial
                Residential Rental
            5%
            17,797








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.


15


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. 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 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 and 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
      $4.6
      million, at December 31, 2005, which represents 1.25% of gross loans
      outstanding, is adequate, under prevailing economic conditions, to absorb losses
      on existing loans. At December 31, 2004, the allowance for loan losses
      was $3.5 million or 1.31% 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.


16


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 an accrual status
      when it is no longer delinquent and collectibility of interest and principal
      is
      no longer in doubt.





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





2005
            
            2004
            
            2003
            
            2002
            
            2001(thousands
                of dollars)Balance
                at beginning of period
            
            $
            3,481
            
            $
            2,934
            
            $
            2,372
            
            $
            1,894
            
            $
            1,645Charge-offs
            
            
            (3
            )
            
            (9
            )
            
            (1
            )
            
            -
            
            
            (2
            )Recoveries
            
            
            -
            
            
            -
            
            
            -
            
            
            10
            
            
            1Net
                (charge-offs) recoveries
            
            
            (3
            )
            
            (9
            )
            
            (1
            )
            
            10
            
            
            (1
            )Additions
                charged to operations
            
            
            1,110
            
            
            556
            
            
            563
            
            
            468
            
            
            250Balance
                at end of period
            
            $
            4,588
            
            $
            3,481
            
            $
            2,934
            
            $
            2,372
            
            $
            1,894Ratio
                of net (charge-offs) recoveriesduring
                the period to average loansoutstanding
                during the period
            
            
            (0.00
            %)
            
            (0.01
            %)
            
            (0.00
            %)
            
            0.01
            %
            
            (0.00
            %)





Allocation
      of the Allowance for Loan Losses





Balance
                at end of each
            
            Amounts
                (thousands of dollars)
            
            
            
            Percent
                of loans in each
              category
                to total loansperiod
                applicable to
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001Real
                Estate:Commercial
            
            $
            1,607
            
            $
            1,319
            
            $
            1,183
            
            $
            893
            
            $
            833
            
            
            34.95
            %
            
            39.82
            %
            
            44.15
            %
            
            37.97
            %
            
            43.88
            %Residential
            
            
            511
            
            
            304
            
            
            230
            
            
            276
            
            
            153
            
            
            20.94
            %
            
            13.78
            %
            
            9.98
            %
            
            15.54
            %
            
            5.44
            %Construction
            
            
            1,963
            
            
            1,358
            
            
            972
            
            
            726
            
            
            348
            
            
            29.01
            %
            
            27.82
            %
            
            26.17
            %
            
            22.56
            %
            
            19.02
            %Commercial
            
            
            164
            
            
            185
            
            
            155
            
            
            129
            
            
            142
            
            
            4.22
            %
            
            6.55
            %
            
            7.12
            %
            
            7.49
            %
            
            10.63
            %Consumer
                installment
            
            
            10
            
            
            11
            
            
            12
            
            
            11
            
            
            14
            
            
            0.30
            %
            
            0.52
            %
            
            0.85
            %
            
            1.01
            %
            
            0.89
            %Consumer
                home equity
            
            
            260
            
            
            233
            
            
            285
            
            
            283
            
            
            296
            
            
            10.58
            %
            
            11.51
            %
            
            11.73
            %
            
            15.43
            %
            
            20.14
            %Unallocated
            
            
            73
            
            
            71
            
            
            97
            
            
            54
            
            
            108
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/ATotal
            
            $
            4,588
            
            $
            3,481
            
            $
            2,934
            
            $
            2,372
            
            $
            1,894
            
            
            100.00
            %
            
            100.00
            %
            
            100.00
            %
            
            100.00
            %
            
            100.00
            %


17


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.





2005
            
            2004
            
            2003
            
            2002
            
            2001(thousands
                of dollars)Loans
                delinquent over 90days
                still accruing
            
            $
            275
            
            $
            373
            
            $
            165
            
            $
            1,172
            
            $
            1,300Non-accruing
                loans
            
            
            1,935
            
            
            3,669
            
            
            150
            
            
            201
            
            
            1,654$
            2,210
            
            $
            4,042
            
            $
            315
            
            $
            1,373
            
            $
            2,954%
                of Total Loans
            
            
            0.60
            %
            
            1.51
            %
            
            0.14
            %
            
            0.79
            %
            
            2.14%%
                of Total Assets
            
            
            0.47
            %
            
            1.00
            %
            
            0.09
            %
            
            0.56
            %
            
            1.46%Additional
                income on non-accrualloans
                if recognized on an accrualbasis
            
            $
            6
            
            $
            18
            
            $
            18
            
            $
            67
            
            $
            159





There
      were no loans in either 2005 or 2004 considered as “troubled debt
      restructurings.”





Potential
      Problem Loans





The
      $1.9 million of non-accruing loans at December 31, 2005 is comprised of two
      loans, both of which are well collateralized and in the process of collection;
      both loans are current as to principal and interest payments.





At
      December 31, 2005, 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.


18


***Deposits***





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





2005
            
            2004
            
            2003Non-interest
                bearing
            
            $
            48,797,389
            
            $
            42,584,120
            
            $
            30,477,295Interest
                bearingTime
                certificates, less than $100,000
            
            
            168,565,756
            
            
            131,764,662
            
            
            92,574,784Time
                certificates, $100,000 or more
            
            
            98,440,248
            
            
            71,287,106
            
            
            50,793,863Money
                market
            
            
            57,798,772
            
            
            72,450,663
            
            
            69,503,859Savings
            
            
            20,089,889
            
            
            22,104,121
            
            
            23,792,811NOW
            
            
            25,383,234
            
            
            26,814,653
            
            
            22,849,570Total
                interest bearing
            
            
            370,277,899
            
            
            324,421,205
            
            
            259,514,887Total
                deposits
            
            $
            419,075,288
            
            $
            367,005,325
            
            $
            289,992,182





Total
      deposits increased $52.1 million or 14% to $419.1 million at December 31,
      2005. Non-interest bearing deposits increased $6.2 million or 15% to
      $48.8 million at December 31, 2005; interest bearing deposits
      increased $45.9 million or 14% to $370.3 million at
      December 31, 2005. Based upon the Bank’s continued expansion and the
      increased penetration into the areas served by the Bank, commercial demand
      accounts increased $2.6 million, a 10% increase as compared to last year,
      and personal demand accounts increased $1.6 million, an increase of 13%
      when compared to last year. During 2005, the Bank established its tenth branch
      banking office; this new office contributed significantly to the annual growth
      in deposits. The promotional campaign run in conjunction with the opening of
      the
      new branch was also a contributing factor to the growth of deposits in
      established branches. Certificates of deposit increased $64.0 million which
      represents an increase of 32% 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 to the transfer of funds
      from
      lower rate products, which decreased as compared to last year. The increase
      in
      certificates of deposit greater than $100 thousand of $27.2 million is the
      result of successful sales efforts and branch expansion; these balances do
      not
      include brokered deposits. Money market fund and savings accounts decreased
      $14.7 million and $2.0 million, respectively; a portion of these decreases
      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 in
      the
      very competitive Fairfield County marketplace in order to attract additional
      deposits to fund loan growth.





19


As
      of
      December 31, 2005, the Bank’s maturities of time deposits were:





$100,000
                or
            
            Less
                thangreater
            
            $100,000
            
            Totals(thousands
                of dollars)Three
                months or less
            
            $
            13,340
            
            $
            27,240
            
            $
            40,580Three
                to six months
            
            
            16,671
            
            
            27,017
            
            
            43,688Six
                months to one year
            
            
            27,952
            
            
            53,228
            
            
            81,180Over
                one year
            
            
            40,477
            
            
            61,081
            
            
            101,558Total
            
            $
            98,440
            
            $
            168,566
            
            $
            267,006





***Borrowings***





Borrowings
      increased $1.0 million to $17.2 million at December 31, 2005.





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





The
      following table sets forth short term borrowing amounts along with the
      respective interest rates and maturities:





Federal
      Home Loan Bank advances:


AverageAmount
            Maturity
            Rate
            amount
                outstanding$
                5,000,000
            03/13/2006
            4.490%
            $
                273,9731,000,000
            05/01/2006
            2.490%
            1,000,000$
                6,000,000
            
            4.156%
            $
                1,273,973





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





***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.





The
      increase in accrued interest receivable is due primarily to higher outstanding
      balances in loans at December 31, 2005 as compared to those in effect
      at December 31, 2004.





The
      increase in accrued expenses and other liabilities is due primarily to increases
      in accruals for income taxes, salaries and commissions, and higher balances
      in
      accrual estimates for other unpaid expenses.


20





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 Shareholders’ Equity**


**Interest
      Rates and Interest Differential and Rate Volume Variance
      Analysis**


**(thousands
      of dollars)** **** **(1)**





2005
            
            2004
            
            2003
            
            2005
                vs. 2004 FluctuationsInterest
            
            
            
            Interest
            
            
            
            Interest
            
            
            Interest
                Income/Expense (3)Average
            Income/
            Average
            
            Average
            Income/
            Average
            
            Average
            Income/
            Average
            
            Due
                to change in:Balance
            Expense
            Rate
            
            Balance
            Expense
            Rate
            
            Balance
            Expense
            Rate
            
            Volume
            Rate
            TotalInterest
                earning assets:Loans
                (2)
            316,058
            21,561
            6.82%
            
            $
                239,239
            $
                15,632
            6.53%
            
            $
                193,990
            $
                12,782
            6.59%
            
            $
                4,824
            $
                1,105
            $
                5,929Short
                term investments
            6,466
            178
            2.75%
            
            8,356
            105
            1.26%
            
            7,124
            79
            1.11%
            
            (19)
            92
            73Investments
                (4)
            87,164
            3,094
            3.55%
            
            87,631
            2,752
            3.14%
            
            72,250
            2,256
            3.12%
            
            (15)
            357
            342Federal
                funds sold
            10,311
            316
            3.06%
            
            12,733
            189
            1.48%
            
            9,147
            97
            1.06%
            
            (30)
            157
            127Total
                interest earning assets
            419,999
            25,149
            5.99%
            
            347,959
            18,678
            5.37%
            
            282,511
            15,214
            5.39%
            
            4,760
            1,711
            6,471Cash
                and due from banks
            5,117
            
            
            
            4,159
            
            
            
            4,001Allowance
                for loan losses
            (3,897)
            
            
            
            (3,190)
            
            
            
            (2,652)Other
            8,446
            
            
            
            8,017
            
            
            
            6,881Total
                Assets
            $
                429,665
            
            
            
            $
                356,945
            
            
            
            $
                290,741Interest
                bearing liabilities:Time
                certificates
            $
                224,526
            $
                8,040
            3.58%
            
            $
                156,623
            $
                4,901
            3.13%
            
            $
                110,129
            $
                3,512
            3.19%
            
            $
                1,895
            $
                1,244
            $
                3,139Savings
                accounts
            21,792
            277
            1.27%
            
            23,666
            294
            1.24%
            
            24,824
            337
            1.36%
            
            (22)
            5
            (17)Money
                market accounts
            67,943
            862
            1.27%
            
            70,264
            867
            1.23%
            
            62,217
            863
            1.39%
            
            (29)
            24
            (5)NOW
                accounts
            26,072
            188
            0.72%
            
            23,107
            152
            0.66%
            
            22,627
            149
            0.66%
            
            19
            17
            36FHLB
                advances
            10,422
            374
            3.59%
            
            14,197
            372
            2.62%
            
            11,671
            327
            2.80%
            
            (84)
            86
            2Subordinated
                debt
            8,248
            528
            6.40%
            
            8,248
            380
            4.61%
            
            6,159
            271
            4.40%
            
            -
            148
            148Other
                borrowings
            34
            1
            2.94%
            
            2,469
            42
            1.70%
            
            6,171
            129
            2.09%
            
            (23)
            (18)
            (41)Total
                interest bearing liabilities
            359,037
            10,270
            2.86%
            
            298,574
            7,008
            2.35%
            
            243,798
            5,588
            2.29%
            
            1,756
            1,506
            3,262Demand
                deposits
            43,813
            
            
            
            36,456
            
            
            
            25,892Accrued
                expenses and other liabilities
            3,380
            
            
            
            2,362
            
            
            
            2,140Shareholders’
                equity
            23,435
            
            
            
            19,553
            
            
            
            18,911Total
                liabilities and equity
            $
                429,665
            
            
            
            $
                356,945
            
            
            
            $
                290,741Net
                interest income
            
            $
                14,879
            
            
            
            $
                11,670
            
            
            
            $
                9,626
            
            
            $
                3,004
            $
                205
            $
                3,209Interest
                margin
            
            
            3.54%
            
            
            
            3.35%
            
            
            
            3.41%Interest
                Spread
            
            
            3.13%
            
            
            
            3.02%
            
            
            
            3.10%





(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 gain
      or
      loss on available for sale securities.


21


**RESULTS
      OF OPERATIONS**





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). Net income for the commercial banking segment increased
      $462,000 or 44% to $1.5 million for the year ended December 31, 2005 from
      $1.1 million for the year ended December 31, 2004; the net loss for
      the Residential Lending Segment decreased 14% or $18,000 from a loss of $128,000
      for the year ended December 31, 2004 to a loss of $110,000 for the year ended
      December 31, 2005.





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 is due primarily to the growth in the loan portfolio combined with
      a
      general increase in interest rates.





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 is 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. Noninterest expenses for 2005 totaled $14.6 million
      which represents an increase of $2.3 million or 19% over the prior year.
      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.





The
      following are measurements relating to Bancorp’s earnings.





2005
            2004
            2003Return
                on average assets
            .33%
            .26%
            .46%Return
                on average equity
            6.00%
            4.74%
            7.09%Dividend
                payout ratio
            29.81%
            35.26%
            20.54%Average
                equity to average assets
            5.46%
            5.48%
            6.50%Basic
                income per share
            $
                0.52
            $
                0.38
            $
                0.56Diluted
                income per share
            $
                0.51
            $
                0.37
            $
                0.55





***Interest
      income and expense***





Bancorp’s
      net interest income derived from the operations of the commercial banking
      segment 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 reflects the continuing strength of the local real estate
      market. The increase in the yields on investments partially offset by a decrease
      in the volume of investments resulted in an increase in interest and dividends
      on investments of $342,000. Higher yields on federal funds sold and short


22


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 represents an increase of $554,000 when compared to
      the provision of $556,000 for the year ended December 31, 2004. This increase
      is
      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.”





***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 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
      income for the Residential Lending Group segment increased $752,000 or 37%
      from
      $2.0 million for the year ended December 31, 2004 to $2.8 million
      for the year ended December 31, 2005; this increase is due to increases in
      the
      loan origination staff, the volume of transactions and the per transaction
      loan
      size, as well as to fees earned for commercial real estate and construction
      transactions referred to the commercial banking segment. Noninterest income
      for
      the commercial banking segment decreased $225,000 or 33% from $682,000 for
      the
      year ended December 31, 2004 to $457,000 for the year ended December 31,
      2005; increases in fees and service charges and other noninterest income of
      $97,000 and $50,000 respectively were more than offset by a decrease in fee
      income of $350,000 due to intersegment transactions for referrals of loans
      from
      the Residential Lending Group segment that were booked into the portfolio of
      the
      commercial banking segment.


23


***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 the residential lending group. 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 is 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 22% to
      $2.1 million from $1.7 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. Noninterest expenses for the residential
      lending group segment of $3.0 million represent an increase of $731,000 or
      33% as compared to $2.2 million for the year ended December 31, 2004; much
      of this increase is related to increases in commission and production related
      compensation which relates to the increase in noninterest income for the year.
      Noninterest expenses for the commercial banking segment of $11.7 million
      represent an increase of $1.6 million or 16% as compared to $10.0 million
      for the year ended December 31, 2004; these increases are due primarily to
      branch expansion, data processing and other outside services as described
      earlier.


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.





Management
      regularly reviews loan and deposit rates and attempts to price Bancorp’s
      products competitively. With the assistance of its investment advisors, 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.





***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 20% and 33% at December 31, 2005 and 2004, 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


24


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 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.





**CAPITAL**





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





December
                31,2005
            2004
            2003Total
                Risk-Based Capital
            12.70%
            10.70%
            11.87%Tier
                1 Risk-Based Capital
            11.45%
            9.04%
            10.00%Leverage
                Capital
            8.56%
            6.79%
            7.51%





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





December
                31,2005
            2004
            2003Total
                Risk-Based Capital
            12.52%
            10.50%
            11.67%Tier
                1 Risk-Based Capital
            11.27%
            9.29%
            10.47%Leverage
                Capital
            8.42%
            6.98%
            7.85%





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 2005 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 plans include the opening of
      additional branches in 2006.





**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.


25


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. Customers
      may withdraw funds from their accounts at any time and deposit balances may
      therefore 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, or more frequently, if needed. 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.





The
      Board
      Asset and Liability Committee *(“ALCO”)* meets
      quarterly. ALCO monitors the interest rate risk analyses, reviews investment
      transactions during the period and determines compliance with Bank
      policies.





**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.





**“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 this “Management’s Discussion and Analysis or Plan 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


26


traditionally
      provided by banks and the impact of federal legislation, (6) the ability of
      competitors which 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, and (8) the effect of any decision by Bancorp to engage in any
      business not historically operated by it. 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.





Item
                7.
            Financial
                Statements





The
      consolidated balance sheets of Bancorp as of December 31, 2005 and
      December 31, 2004 and the related consolidated statements of income,
      shareholders’ equity and cash flows for the years ended
      December 31, 2005 and December 31, 2004, together with the
      report thereon of McGladrey & Pullen, LLP dated March 8, 2006, are
      included as part of this Form 10-KSB in the “Financial Report” following page 33
      hereof.





Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting
              and
                Financial DisclosureNot
              applicable.




Item
                8A.
            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


27


Bancorp’s
      fiscal year ended December 31, 2005 that has materially affected, or
      is reasonably likely to materially affect, Bancorp’s internal control over
      financial reporting.





Item
                8B.
            Other
                InformationNot
                applicable





**PART
      III**





Item
                9.
            Directors
                and Executive Officers of the
                Registrant





The
      information required by Items 401 and 405 of Regulation S-B is incorporated
      into
      this Form 10-KSB by reference to Bancorp’s definitive proxy statement (the
“ *Definitive
      Proxy Statement”* )
      for its
      2006 Annual Meeting of Shareholders, to be filed within 120 days following
      December 31, 2005.





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-KSB.
      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
                10.
            Executive
                Compensation





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





Item
                11.
            Security
                Ownership of Certain Beneficial Owners and
                Management





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





Item
                12.
            Certain
                Relationships and Related
                Transactions





The
      information required by Item 404 of Regulation S-B is incorporated into this
      Form 10-KSB by reference to the Definitive Proxy Statement.


28





Item
                13.
            Exhibits
                and Reports on Form 8-K







(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(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)).10(a)(4)
            Change
                of Control Agreement, dated as of May 1, 2001 between Martin G. Noble
                and
                Patriot National Bank (incorporated by reference to Exhibit 10(a)(4)
                to
                Bancorp’s Annual Report on Form 10-KSB for the year ended December 31,
                2004 (Commission File No. 000-29599))
                .


29




Exhibit
                No.
            Description10(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 November 3, 2003 between
                Robert F. O’Connell and Patriot National Bank (incorporated by
                reference to Exhibit 10(a)(6) to Bancorp’s Annual Report on Form 10-KSB
                for the year ended December 31, 2003 (Commission File No.
                000-29599)).10(a)(8)
            Employment
                Agreement dated as of January 1, 2006 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 October 23, 2003 among the Bank, Bancorp and
                Charles
                F. Howell (incorporated by reference to Exhibit 10(a)(10) to Bancorp’s
                Annual Report on Form 10-KSB for the year ended
                December 31, 2003 (Commission File No.
                000-29599)).10(a)(11)
            Amendment
                No. 1 to the Amended and Restated Change of Control Agreement, dated
                March
                30, 2006, between Robert F. O’Connell and Patriot National
                Bank.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)).21
            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


30


(b)
            Reports
                on Form 8-K





During
      the quarter ended December 31, 2005, Bancorp filed two current Reports
      of Form 8-K; the first was dated November 10, 2005 (filed November
      10, 2005) responding to Item 2 and relating to a press release announcing
      certain information concerning Bancorp’s results of operations for the quarter
      and nine months ended September 30, 2005 and its financial condition
      at September 30, 2005; the second report was dated December 15, 2005
      (filed December 15, 2005) responding to Item 8 and related to a press
      release announcing Bancorp’s quarterly dividend.





14.
            Principal
                Accountant Fees and Services





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




31


**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 27, 2006





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
                27, 2006Angelo
                De Caro, Chairman, Chief Executive
            DateOfficer
                and Director/s/
                Robert F. O’Connell
            March
                27, 2006Robert
                F. O’Connell
            DateSenior
                Executive Vice President,Chief
                Financial Officer and Director/s/
                Michael A. Capodanno _
            March
                27, 2006Michael
                A. Capodanno
            DateSenior
                Vice President & Controller/s/
                John J. Ferguson_ __
            March
                27, 2006John
                J. Ferguson
            DateDirector/s/
                Brian A. Fitzgerald_ __
            March
                27, 2006Brian
                A. Fitzgerald
            DateDirector








32





**Form
      10 KSB - Signatures continued**











/s/
                John A. Geoghegan
            March
                29, 2006John
                A. Geoghegan
            DateDirector/s/
                L. Morris Glucksman
            March
                27, 2006L.
                Morris Glucksman
            DateDirector/s/
                Charles F. Howell_
            March
                27, 2006Charles
                F. Howell
            DateDirector/s/
                Michael F. Intrieri
            March
                27, 2006Michael
                F. Intrieri
            DateDirector/s/
                Philip Wolford
            March
                27, 2006Philip
                Wolford
            DateDirector





33


McGladrey
      & Pullen
















**PATRIOT
                NATIONAL BANCORP, INC. AND SUBSIDIARY**
              
              **FINANCIAL
                REPORT**
              **December
                31, 2005 and 2004**








































McGladrey
        & Pullen, LLP is a member firm of RSM International,
 an
        affiliation of separate and independent legal entities.





**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
            7-38

































McGladrey
&
Pullen








**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, 2005 and
      2004, and the related consolidated statements of income, shareholders' equity
      and cash flows for the years then ended. 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, 2005 and 2004, and the results of
      their operations and their cash flows for the years then ended, in conformity
      with accounting principles generally accepted in the United States of
      America.







/s/
      McGladrey & Pullen





New
      Haven, Connecticut


March
      8,
      2006



















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, 2005 and 2004****2005**
              
              2004**ASSETS**Cash
                  and due from banks (Note 2)
              
              **$**
              **7,220,577**
              
              $
              6,670,409Federal
                  funds sold
              
              
              **6,500,000**
              
              
              37,500,000Short-term
                  investments
              
              
              **2,247,028**
              
              
              11,460,057**Cash
                  and cash equivalents**
              
              
              **15,967,605**
              
              
              55,630,466Available
                  for sale securities (at fair value) (Note 3)
              
              
              **78,672,068**
              
              
              76,269,475Federal
                  Reserve Bank stock
              
              
              **1,022,300**
              
              
              692,600Federal
                  Home Loan Bank stock (Note 7)
              
              
              **1,296,700**
              
              
              1,296,700Loans
                  receivable (net of allowance for loan losses: 2005
                  $4,588,335;2004
                  $3,481,525) (Note 4)
              
              
              **364,243,777**
              
              
              263,874,820Accrued
                  interest and dividends receivable
              
              
              **2,445,417**
              
              
              1,758,339Premises
                  and equipment, net (Notes 5 and 8)
              
              
              **2,474,153**
              
              
              2,132,633Deferred
                  tax asset (Note 9)
              
              
              **2,675,595**
              
              
              1,677,042Goodwill
                  (Note 10)
              
              
              **930,091**
              
              
              930,091Other
                  assets (Note 7)
              
              
              **913,456**
              
              
              784,789**Total
                  assets**
              
              **$**
              **470,641,162**
              
              $
              405,046,955**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**LiabilitiesDeposits
                  (Note 6):Noninterest
                  bearing deposits
              
              **$**
              **48,797,389**
              
              $
              42,584,120Interest
                  bearing deposits
              
              
              **370,277,899**
              
              
              324,421,205**Total
                  deposits**
              
              
              **419,075,288**
              
              
              367,005,325Federal
                  Home Loan Bank borrowings (Note 7)
              
              
              **9,000,000**
              
              
              8,000,000Junior
                  subordinated debt owed to unconsolidated trust (Note 7)
              
              
              **8,248,000**
              
              
              8,248,000Accrued
                  expenses and other liabilities
              
              
              **2,943,259**
              
              
              2,037,196**Total
                  liabilities**
              
              
              **439,266,547**
              
              
              385,290,521Commitments
                  and Contingencies (Notes 7, 8, 11 and 13)Shareholders'
                  equity (Notes 11 and 14)Preferred
                  stock, no par value; 1,000,000 shares authorized,no
                  shares issued
              
              
              **-**
              
              
              -Common
                  stock, $2 par value: 30,000,000 shares authorized; sharesissued
                  and outstanding: 2005 3,230,649; 2004 2,486,391
              
              
              **6,461,298**
              
              
              4,972,782Additional
                  paid-in capital
              
              
              **21,709,224**
              
              
              11,830,173Retained
                  earnings
              
              
              **4,308,242**
              
              
              3,346,718Accumulated
                  other comprehensive loss - net unrealized losson
                  available for sale securities, net of taxes
              
              
              **(1,104,149**
              **)**
              
              (393,239
              )**Total
                  shareholders' equity**
              
              
              **31,374,615**
              
              
              19,756,434**Total
                  liabilities and shareholders' equity**
              
              **$**
              **470,641,162**
              
              $
              405,046,955See
                  Notes to Consolidated Financial Statements.


2


**PATRIOT
                  NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
                  STATEMENTS OF INCOME****Years
                  Ended December 31, 2005 and 2004****2005**
              
              2004Interest
                  and Dividend IncomeInterest
                  and fees on loans
              
              **$**
              **21,561,121**
              
              $
              15,631,838Interest
                  and dividends on investment securities
              
              
              **3,271,638**
              
              
              2,856,928Interest
                  on Federal funds sold
              
              
              **315,942**
              
              
              189,485**Total
                  interest and dividend income**
              
              
              **25,148,701**
              
              
              18,678,251Interest
                  ExpenseInterest
                  on deposits (Note 6)
              
              
              **9,366,563**
              
              
              6,213,732Interest
                  on Federal Home Loan Bank borrowings
              
              
              **374,315**
              
              
              371,699Interest
                  on subordinated debt
              
              
              **527,435**
              
              
              380,194Interest
                  on other borrowings
              
              
              **1,312**
              
              
              42,883**Total
                  interest expense**
              
              
              **10,269,625**
              
              
              7,008,508**Net
                  interest income**
              
              
              **14,879,076**
              
              
              11,669,743Provision
                  for Loan Losses (Note 4)
              
              
              **1,110,000**
              
              
              556,000**Net
                  interest income after provision for loan losses**
              
              
              **13,769,076**
              
              
              11,113,743Noninterest
                  IncomeMortgage
                  brokerage referral fees
              
              
              **2,104,065**
              
              
              1,717,756Loan
                  origination and processing fees
              
              
              **402,723**
              
              
              408,152Fees
                  and service charges
              
              
              **561,651**
              
              
              465,018Other
                  income
              
              
              **160,598**
              
              
              111,278**Total
                  noninterest income**
              
              
              **3,229,037**
              
              
              2,702,204Noninterest
                  ExpensesSalaries
                  and benefits (Notes 8 and 12)
              
              
              **8,997,255**
              
              
              7,544,055Occupancy
                  and equipment expense, net
              
              
              **2,082,593**
              
              
              1,707,769Data
                  processing and other outside services
              
              
              **1,147,378**
              
              
              802,536Advertising
                  and promotional expenses
              
              
              **420,222**
              
              
              369,638Professional
                  services
              
              
              **419,921**
              
              
              386,110Loan
                  administration and processing expenses
              
              
              **190,139**
              
              
              209,283Other
                  operating expenses
              
              
              **1,376,979**
              
              
              1,237,159**Total
                  noninterest expenses**
              
              
              **14,634,487**
              
              
              12,256,550**Income
                  before income taxes**
              
              
              **2,363,626**
              
              
              1,559,397Provision
                  for Income Taxes (Note 9)
              
              
              **957,000**
              
              
              633,000**Net
                  income**
              
              **$**
              **1,406,626**
              
              $
              926,397**Basic
                  income per share (Note 11)**
              
              **$**
              **0.52**
              
              $
              0.38**Diluted
                  income per share (Note 11)**
              
              **$**
              **0.51**
              
              $
              0.37**Dividends
                  per share**
              
              **$**
              **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, 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 16)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (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 16)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (710,910
              )
              
              (710,910
              )**Total
                  comprehensive income**
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              695,716Dividends
              
              
              -
              
              
              -
              
              
              -
              
              
              (445,102
              )
              
              -
              
              
              (445,102
              )Issuance
                  of capital stock (Note 11)
              
              
              744,258
              
              
              1,488,516
              
              
              9,879,051
              
              
              -
              
              
              -
              
              
              11,367,567**Balance,
                  December 31, 2005**
              
              
              **3,230,649**
              
              **$**
              **6,461,298**
              
              **$**
              **21,709,224**
              
              **$**
              **4,308,242**
              
              **$**
              **(1,104,149**
              **)**
              **$**
              **31,374,615**See
                  Notes to Consolidated Financial Statements.


4


**PATRIOT
                  NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****Years
                  Ended December 31, 2005 and 2004****2005**
              
              2004Cash
                  Flows from Operating ActivitiesNet
                  income
              
              **$**
              **1,406,626**
              
              $
              926,397Adjustments
                  to reconcile net income to net cash provided byoperating
                  activities:Amortization
                  and accretion of investment premiums and discounts, net
              
              
              **394,827**
              
              
              500,847Provision
                  for loan losses
              
              
              **1,110,000**
              
              
              556,000Depreciation
                  and amortization of premises and equipment
              
              
              **604,399**
              
              
              536,029Loss
                  on disposal of bank premises and equipment
              
              
              **-**
              
              
              3,804Deferred
                  income taxes
              
              
              **(562,833**
              **)**
              
              (101,212
              )Change
                  in assets and liabilities:Increase
                  in deferred loan fees
              
              
              **17,048**
              
              
              235,734Increase
                  in accrued interest and dividends receivable
              
              
              **(687,078**
              **)**
              
              (287,717
              )(Increase)
                  decrease in other assets
              
              
              **(128,667**
              **)**
              
              132,592Increase
                  (decrease) in accrued expenses and other liabilities
              
              
              **863,861**
              
              
              (373,139
              )**Net
                  cash provided by operating activities**
              
              
              **3,018,183**
              
              
              2,129,335Cash
                  Flows from Investing ActivitiesPurchases
                  of available for sale securities
              
              
              **(28,208,359**
              **)**
              
              (16,020,313
              )Proceeds
                  from maturities of available for sale securities
              
              
              **3,000,000**
              
              
              6,000,000Principal
                  repayments on available for sale securities
              
              
              **21,264,308**
              
              
              23,676,009Purchase
                  of Federal Reserve Bank stock
              
              
              **(329,700**
              **)**
              
              (1,450
              )Purchase
                  of Federal Home Loan Bank stock
              
              
              **-**
              
              
              (219,400
              )Net
                  increase in loans
              
              
              **(101,496,005**
              **)**
              
              (50,246,026
              )Purchases
                  of premises and equipment
              
              
              **(945,919**
              **)**
              
              (1,251,368
              )**Net
                  cash used in investing activities**
              
              
              **(106,715,675**
              **)**
              
              (38,062,548
              )Cash
                  Flows from Financing ActivitiesNet
                  (decrease) increase in demand, savings and money market
                  deposits
              
              
              **(11,884,273**
              **)**
              
              17,330,022Net
                  increase in time certificates of deposit
              
              
              **63,954,236**
              
              
              59,683,121Decrease
                  in securities sold under repurchase agreements
              
              
              **-**
              
              
              (5,700,000
              )Proceeds
                  from FHLB borrowings
              
              
              **46,001,000**
              
              
              17,000,000Principal
                  repayments of FHLB borrowings
              
              
              **(45,001,000**
              **)**
              
              (26,000,000
              )Decrease
                  in other borrowings
              
              
              **-**
              
              
              (353,385
              )Proceeds
                  from issuance of common stock
              
              
              **11,367,567**
              
              
              466,704Dividends
                  paid on common stock
              
              
              **(402,899**
              **)**
              
              (317,454
              )**Net
                  cash provided by financing activities**
              
              
              **64,034,631**
              
              
              62,109,008**Net
                  (decrease) increase in cash and cash equivalents**
              
              
              **(39,662,861**
              **)**
              
              26,175,795Cash
                  and cash equivalentsBeginning
              
              
              **55,630,466**
              
              
              29,454,671Ending
              
              **$**
              **15,967,605**
              
              $
              55,630,466(Continued)


5




**PATRIOT
                  NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS, Continued****Years
                  Ended December 31, 2005 and 2004****2005**
              
              2004**Supplemental
                  Disclosures of Cash Flow Information**Cash
                  paid for:Interest
              
              **$**
              **10,265,152**
              
              $
              7,020,278Income
                  taxes
              
              **$**
              **1,234,761**
              
              $
              850,970**Supplemental
                  Disclosure of Noncash Investing and Financing****Activities**Unrealized
                  holding losses on available for sale securitiesarising
                  during the period
              
              **$**
              **(1,146,631**
              **)**
              $
              (136,065
              )Accrued
                  dividends declared on common stock
              
              **$**
              **129,226**
              
              $
              87,024See
                  Notes to Consolidated Financial Statements.


6


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**




NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS


December
      31, 2005 and
      2004









**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, and nine branch offices in Fairfield County, Connecticut.
      The Bank's customers are concentrated in Fairfield County, Connecticut and
      Westchester County, New York. The Bank also conducts mortgage brokerage
      operations through offices in Connecticut and New York through its Residential
      Lending Group.





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
      statement.





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.





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 (currently inactive); 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
      for impairment.


7


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004







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 at 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, 2005 and
        2004







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


9


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004




of
“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 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 isolated from the Company, (2) the transferee
      obtains the right to pledge or exchange the transferred


10


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004




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, if any, 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 for purchased assets, and at the lower of
      fair
      value or the net present value of the minimum lease payments required over
      the
      term of the lease for assets under capital leases, 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 using
      the straight-line method over the estimated useful lives of the related assets
      which range from three to ten years. Amortization of premises under capital
      leases is charged to operations using the straight-line method over the life
      of
      the lease. 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





Goodwill
      represents the cost in excess of net assets of businesses acquired and is 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, 2005 and
        2004







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 15
      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. 123, “Accounting for Stock-Based
      Compensation,” encourages all entities to adopt a fair value based method of
      accounting for employee stock compensation plans, whereby compensation cost
      is
      measured at the grant date based on the value of the award and is recognized
      over the service period, which is usually the vesting period. However, it also
      allows an entity to continue to measure compensation cost for those plans using
      the intrinsic value based method of accounting prescribed by Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,”
whereby compensation cost is the excess, if any, of the quoted market price
      of
      the stock at the grant date (or other measurement date) over the amount an
      employee must pay to acquire the stock. Stock options issued under the Company’s
      stock option plan, and stock warrants issued, have no intrinsic value at the
      grant date, and under Opinion No. 25 no compensation cost is recognized for


12


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004






them.
      The
      Company has elected to continue with the accounting methodology in Opinion
      No.
      25 and, as a result, provides pro forma disclosures of net income and earnings
      per share and other disclosures, as if the fair value based method of accounting
      had been applied. There is no proforma disclosure required for 2005 and 2004,
      because no compensation cost related to stock options and warrants was
      attributed to those periods. See “Recent Accounting Pronouncements” below for
      developments regarding accounting for stock compensation plans.





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 the shareholders' equity section of 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 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, 2005 and
        2004**







***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
      December 2003, the Accounting Standards Executive Committee of the AICPA issued
      Statement of Position No. 03-3 (“SOP 03-3”), “Accounting for Certain Loans or
      Debt Securities Acquired in a Transfer.” SOP 03-3 addresses the accounting for
      differences between contractual cash flows and the cash flows expected to be
      collected from purchased loans or debt securities if those differences are
      attributable, in part, to credit quality. SOP 03-3 requires purchased loans
      and
      debt securities to be recorded initially at fair value based on the present
      value of the cash flows expected to be collected with no carryover of any
      valuation allowance previously recognized by the seller. Interest income should
      be recognized based on the effective yield from the cash flows expected to
      be
      collected. To the extent that the purchased loans or debt securities experience
      subsequent deterioration in credit quality, a valuation allowance would be
      established for any additional cash flows that are not expected to be received.
      However, if subsequently more cash flows are expected to be received than
      originally estimated, the effective yield would be adjusted on a prospective
      basis. SOP 03-3 was effective for loans and debt securities acquired after
      December 31, 2004. This Statement had no impact on the Company’s
      financial statements.





On
      September 30, 2004, the Financial Accounting Standards Board (“FASB”) issued
      FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 03-1-1
      delaying the effective date of paragraphs 10-20 of EITF 03-1, “The Meaning of
      Other-Than-Temporary Impairment and its Application to Certain Investments,”
which provides guidance for determining the meaning of “other-than-temporarily
      impaired” and its application to certain debt and equity securities within the
      scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
      Securities,” and investments accounted for under the cost method. The guidance
      requires that investments which have declined in value due to credit concerns
      or
      solely due to changes in interest rates must be recorded as
      other-than-temporarily impaired unless the Company can assert and demonstrate
      its intention to hold the security for a period of time sufficient to allow
      for
      a recovery of fair value up to or beyond the cost of the investment which might
      mean maturity. The delay of the effective date of EITF 03-1 was superseded
      by
      the issuance on November 3, 2005 of FSP 115-1, “The Meaning of
      Other-Than-Temporarily Impaired and Its Application to Certain Investments.”
This FSP nullified paragraphs 10-18 of EITF 03-1, carried forward certain
      requirements of EITF 03-1 relating to cost method investments, carried forward
      certain disclosure requirements of EITF 03-1 and references existing


14


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004




other-than-temporary
      impairment guidance. The requirements of this FSP had no effect on the Company’s
      financial statements.





In
      December 2004, the FASB published FASB Statement No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) requires that the
      compensation cost relating to share-based payment transactions, including grants
      of employee stock options, be recognized in financial statements. That cost
      will
      be measured based on the fair value of the equity or liability instruments
      issued. SFAS 123(R) covers a wide range of share-based compensation arrangements
      including stock options, restricted share plans, performance-based awards,
      share
      appreciation rights, and employee share purchase plans. SFAS 123(R) is a
      replacement of FASB Statement No. 123, “Accounting for Stock-Based
      Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued
      to Employees,” and its related interpretive guidance (APB 25).





The
      effect of SFAS 123(R) will be to require entities to measure the cost of
      employee services received in exchange for shared-based payments using the
      grant-date fair value of the award, and to recognize the cost over the period
      the employee is required to provide services for the award. SFAS 123(R) permits
      entities to use any option-pricing model that meets the fair value objective
      in
      the Statement.





The
      Company will be required to apply SFAS 123(R) as of the beginning of its first
      interim period that begins after December 15, 2005, which will be the quarter
      ending March 31, 2006.





SFAS
      123(R) allows two methods for determining the effects of the transition: the
      modified prospective transition method and the modified retrospective method
      of
      transition. Under the modified prospective transition method, an entity would
      use the fair value based accounting method for all employee awards granted,
      modified, or settled after the effective date. As of the effective date,
      compensation cost related to the non-vested portion of awards outstanding as
      of
      that date would be based on the grant-date fair value of those awards as
      calculated under the original provisions of Statement No. 123; that is, an
      entity would not remeasure the grant-date fair value estimate of the unvested
      portion of awards granted prior to the effective date. An entity will have
      the
      further option to either apply SFAS 123(R) to all quarters in the fiscal year
      of
      adoption. Under the modified retrospective method of transition, an entity
      would
      revise its previously issued financial statements to recognize employee
      compensation cost for prior periods presented in accordance with the original
      provisions of Statement No. 123. The Company will adopt the modified transition
      method effective January 1, 2006. The adoption of this Statement will have
      no
      effect on the Company’s financial statements as there are no unvested
      share-based awards at January 1, 2006.





In
      May
      2005, the 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. At this time, management believes this Statement will have no impact
      on the Company’s financial statements.


15


**PATRIOT
      NATIONAL BANCORP, INC. AND SUBSIDIARY**




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS,
      Continued


December
      31, 2005 and
      2004





**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, 2005 and
      2004, the Bank was required to have cash and liquid assets of approximately
      $3,566,000 and $2,820,000, respectively, to meet these requirements. In
      addition, at December 31, 2005 and 2004, 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, 2005 and 2004
      are
      as follows:




**2005**
              
              **Amortized**
                **Cost**
              
              **Gross**
                **Unrealized**
                **Gains**
              
              **Gross**
                **Unrealized**
                **Losses**
              
              **Fair**
                **Value****U.S.
                Government agency****and
                  sponsored agency****obligations**
              
              **$**
              **16,999,341**
              
              **$**
              **-**
              
              **$**
              **(522,657**
              **)**
              **$**
              **16,476,684****Mortgage-backed
                  securities**
              
              
              **57,453,614**
              
              
              **2,330**
              
              
              **(1,260,560**
              **)**
              
              **56,195,384****Money
                market
                preferred****equity
                    securities**
              
              
              **6,000,000**
              
              
              **-**
              
              
              **-**
              
              
              **6,000,000****$**
              **80,452,955**
              
              **$**
              **2,330**
              
              **$**
              **(1,783,217**
              **)**
              **$**
              **78,672,068**





2004
              
              Amortized
                Cost
              
              Gross
                Unrealized
                Gains
              
              Gross
                Unrealized
                Losses
              
              Fair
                ValueU.S.
                Government
                agency andsponsored
                  agencyobligations
              
              $
              15,000,000
              
              $
              937
              
              $
              (177,642
              )
              $
              14,823,295Mortgage-backed
                  securities
              
              
              52,903,731
              
              
              69,719
              
              
              (527,270
              )
              
              52,446,180Money
                market
                preferredequity
                  securities
              
              
              9,000,000
              
              
              -
              
              
              -
              
              
              9,000,000$
              76,903,731
              
              $
              70,656
              
              $
              (704,912
              )
              $
              76,269,475




16


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004


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,
      2005 and 2004:





**2005**
            
            **Less
                Than 12 Months**
            
            **12
                Months or More**
            
            **Total****Fair**
              **Value**
            
            
            **Unrealized**
              **Loss**
            
            
            **Fair**
              **Value**
            
            
            **Unrealized**
              **Loss**
            
            
            **Fair**
              **Value**
            
            
            **Unrealized**
              **Loss**


**U.S.
                Government agency and****sponsored
                agency****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**)****








2004
            
            Less
                Than 12 Months
            
            12
                Months or More
            
            TotalFair
              Value
            
            
            Unrealized
              Loss
            
            
            Fair
              Value
            
            
            Unrealized
              Loss
            
            
            Fair
              Value
            
            
            Unrealized
              Loss


U.S.
                Government agency andsponsored
                agencyobligations
            
            $
            7,921,108
            
            $
            (78,892)
            
            $
            3,901,250
            
            $
            (98,750)
            
            $
            11,822,358
            
            $
            (177,642)Mortgage-backed
                securities
            
            
            17,632,613
            
            
            (134,422)
            
            
            20,361,275
            
            
            (392,848)
            
            
            37,993,888
            
            
            (527,270)Totals
            
            $
            25,553,721
            
            $
            (213,314)
            
            $
            24,262,525
            
            $
            (491,598)
            
            $
            49,816,246
            
            $
            (704,912)





At
      December 31, 2005, forty-three securities have unrealized losses with aggregate
      depreciation of 2.5% from the Company’s 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, 2005 and 2004, available for sale securities with a carrying value
      of $1,486,000 and $1,280,000, respectively, were pledged to secure obligations
      under municipal deposits.





The
      amortized cost and fair value of available for sale debt securities at
      December 31, 2005 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.


17


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004


Amortized
            
            FairCost
            
            ValueMaturity:1-5
                years
            
            $
            16,999,341
            
            $
            16,476,684Mortgage-backed
                securities
            
            
            57,453,614
            
            
            56,195,384Total
            
            $
            74,452,955
            
            $
            72,672,068





During
      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, 2005 and 2004 is as
      follows:





**2005**
            
            2004Real
                estate:Commercial
            
            $
            **129,178,889**
            
            $
            106,771,441Residential
            
            
            **77,391,833**
            
            
            36,965,661Construction
            
            
            **107,232,587**
            
            
            74,598,919Commercial
            
            
            **15,591,818**
            
            
            17,562,523Consumer
                installment
            
            
            **1,106,648**
            
            
            1,386,709Consumer
                home equity
            
            
            **39,097,450**
            
            
            30,874,894**Total
                loans**
            
            
            **369,599,225**
            
            
            268,160,147Premiums
                on purchased loans
            
            
            **367,491**
            
            
            313,754Net
                deferred loan fees
            
            
            **(1,134,604**
            **)**
            
            (1,117,556
            )Allowance
                for loan losses
            
            
            **(4,588,335**
            **)**
            
            (3,481,525
            )**Loans
                receivable, net**
            
            $
            **364,243,777**
            
            $
            263,874,820





The
      changes in the allowance for loan losses for the years ended
      December 31, 2005 and 2004 are as follows:





**2005**
            
            2004Balance,
                beginning of year
            
            $
            **3,481,525**
            
            $
            2,934,675Provision
                for loan losses
            
            
            **1,110,000**
            
            
            556,000Recoveries
                of loans previously charged-off
            
            
            **-**
            
            
            -Loans
                charged-off
            
            
            **(3,190**
            **)**
            
            (9,150
            )Balance,
                end of year
            
            $
            **4,588,335**
            
            $
            3,481,525





At
      December 31, 2005 and 2004, the unpaid principal balances of loans
      delinquent 90 days or more were $274,622 and $522,751, respectively, and the
      unpaid principal balances of loans placed on nonaccrual status were $1,934,614
      and $3,669,148, respectively. If nonaccrual loans had been performing in


18


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004







accordance
      with their original terms, the Company would have recorded approximately $6,000
      and $18,000, respectively, of additional income during the years ended December
      31, 2005 and 2004.





The
      following information relates to impaired loans as of and for the years ended
      December 31, 2005 and 2004:





**2005**
            
            2004Loans
                receivable for which there is a related allowance
                forcredit
                losses
            
            $
            -
            
            $
            150,000Loans
                receivable for which there is no related allowance
                forcredit
                losses
            
            $
            1,934,614
            
            $
            3,519,148Allowance
                for credit losses related to impaired loans
            
            $
            -
            
            $
            22,500Average
                recorded investment in impaired loans
            
            $
            2,668,531
            
            $
            2,990,191





During
      2005 and 2004, interest income collected and recognized on impaired loans was
      $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 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.


19
 
 **PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS,
          Continued
 December
          31, 2005 and
          2004
 
  **Note
                5.**
              **Premises
                  and Equipment**





At
      December 31, 2005 and 2004, premises and equipment consisted of the
      following:





**2005**
            
            2004Leasehold
                improvements
            
            $
            **2,217,690**
            
            $
            1,811,187Furniture,
                equipment and software
            
            
            **2,867,738**
            
            
            2,332,962**5,085,428**
            
            
            4,144,149Less
                accumulated depreciation and amortization
            
            
            **(2,611,275**
            **)**
            
            (2,011,516
            )$
            **2,474,153**
            
            $
            2,132,633





For
      the
      years ended December 31, 2005 and 2004, depreciation and amortization
      expense related to premises and equipment totaled $604,399 and $536,029,
      respectively.




**Note
              6.**
            **Deposits**


****


At
      December 31, 2005 and 2004, deposits consisted of the
      following:





**2005**
            
            2004Noninterest
                bearing
            
            $
            **48,797,389**
            
            $
            42,584,120Interest
                bearing:Time
                certificates, less than $100,000
            
            
            **168,565,756**
            
            
            131,764,662Time
                certificates, $100,000 or more
            
            
            **98,440,248**
            
            
            71,287,106Money
                market
            
            
            **57,798,772**
            
            
            72,450,663Savings
            
            
            **20,089,889**
            
            
            22,104,121NOW
            
            
            **25,383,234**
            
            
            26,814,653Total
                interest bearing
            
            
            **370,277,899**
            
            
            324,421,205**Total
                deposits**
            
            $
            **419,075,288**
            
            $
            367,005,325





Interest
      expense on certificates of deposit in denominations of $100,000 or more was
      $3,023,519 and $1,883,047 for the years ended December 31, 2005 and
      2004, respectively.


20


**PATRIOT
          NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS,
          Continued
 December
          31, 2005 and
          2004




Contractual
      maturities of time certificates of deposit as of December 31, 2005 are
      summarized below:





Due
                within:1
                year
            
            
            
            $
            165,447,7601-2
                years
            
            
            
            
            34,648,0402-3
                years
            
            
            
            
            28,391,0733-4
                years
            
            
            
            
            18,546,1084-5
                years
            
            
            
            
            19,973,023$
            267,006,004




**Note
              7.**
            **Borrowings**


****


Federal
      Home Loan Bank borrowings





The
      Bank
      is a member of the Federal Home Loan Bank of Boston ("FHLB"). At
      December 31, 2005, 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, 2005
      and 2004, there were no advances outstanding under this line of credit. At
      December 31, 2005, other outstanding advances from the FHLB aggregated
      $9,000,000 at interest rates ranging from 2.49% to 5.11% and at
      December 31, 2004, other outstanding advances aggregated $8,000,000 at
      interest rates ranging from 1.93% 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, 2005 and 2004, the Company has available borrowings under
      repurchase agreements of $10,000,000, and no amounts outstanding at December
      31,
      2005 or 2004.





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.


21


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004




The
      Trust
      issued $8,000,000 of trust preferred securities in 2003. Pursuant to FIN46R,
      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 three month LIBOR plus 3.15%
      (7.669% at December 31, 2005), mature on March 26, 2033 and can be
      redeemed at the Company’s option in 2008.





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 three month LIBOR plus
      3.15%.





Other
      borrowings





At
      December 31, 2005, the Bank also has the ability to borrow up to $3,000,000
      in
      federal funds or letters of credit from its correspondent bank.


22


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004






Maturity
      of borrowings





The
      contractual maturities of the Company’s borrowings at December 31, 2005, by
      year, are as follows:




Fixed
              
              FloatingRate
              
              Rate
              
              Total2006
              
              $
              6,000,000
              
              $
              -
              
              $
              6,000,0002007
              
              
              3,000,000
              
              
              -
              
              
              3,000,0002008
              
              
              -
              
              
              -
              
              
              -2009
              
              
              -
              
              
              -
              
              
              -2010
              
              
              -
              
              
              -
              
              
              -Thereafter
              
              
              -
              
              
              8,248,000
              
              
              8,248,000Total
                  borrowings
              
              $
              9,000,000
              
              $
              8,248,000
              
              $
              17,248,000




**Note
              8.**
            **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.





Future
      minimum rental commitments under the terms of these leases, by year and in
      the
      aggregate, are as follows:





Years
                Ending
              December
                31,
            
            
            Amount2006
            
            
            $
            1,436,2862007
            
            
            
            1,391,6992008
            
            
            
            1,208,4922009
            
            
            
            1,162,6322010
            
            
            
            1,151,592Thereafter
            
            
            
            5,478,775$
            11,829,476





Total
      rental expense charged to operations for cancelable and noncancelable operating
      leases was $1,194,499 and $876,132 for the years ended
      December 31, 2005 and 2004, respectively.


23


**PATRIOT
      NATIONAL BANCORP, INC. AND SUBSIDIARY**




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS,
      Continued


December
      31, 2005 and
      2004











Employment
      Agreements





*President’s
      Agreement*





In
      October 2003, the Company and the Bank entered into an employment agreement
      (the
“Agreement”) with the Bank’s President and Chief Executive Officer that expires
      on December 31, 2006. The Agreement provides for, among other things, a
      stipulated base salary for the first year of the Agreement, annual increases
      at
      each anniversary and a discretionary annual bonus to be determined by the Board
      of Directors.





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 stipulated base salary at the time of
      termination.





The
      Agreement also includes change of control provisions that entitles the President
      to a lump sum payment of two times the greater of the President’s stipulated
      base salary at the time of the change in control; total cash compensation,
      as
      defined, for the year preceding the change in control; or the average total
      cash
      compensation, as defined, for the two years preceding the change in
      control.





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.





Under
      the
      terms of a prior employment agreement (the “Prior Agreement”), the Prior
      Agreement provided that the Company granted shares of the Company’s common stock
      to the President on December 31, 2000, and annually thereafter through
      December 31, 2003. The number of shares granted was based on 30% of
      the President’s stipulated base salary for the preceding annual employment
      period, as defined, and such shares granted would vest and be distributed to
      the
      President in four annual installments (with any balance distributed upon
      termination other than for cause). Compensation cost for grants through 2002
      was
      being recognized over four years under the terms of the Prior Agreement and
      compensation cost for the 2003 grant is being recognized over the term of the
      existing contract. Under certain circumstances defined in the Prior Agreement,
      this stock grant may be settled in cash. The Prior 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 may then elect,
      on a future determination date, as defined, to be chosen by the President,
      to
      receive cash compensation in the future 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. For the years
      ended December 31, 2005 and 2004,


24


**PATRIOT
      NATIONAL BANCORP, INC. AND SUBSIDIARY**  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004






approximately
      $161,000 and $276,000, respectively, was charged to expense related to the
      stock
      and option compensation components of the Prior Agreement.





*Other
      Employment Agreements*





Effective
      January 1, 2006, the Company entered into a one-year employment
      agreement with an officer of the Residential Lending Group division, which
      replaced a contract that expired on December 31, 2005. 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, 2006.





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
      receive two years’ compensation (as defined in the agreement) if a change of
      control (as defined in the agreement) occurs while the Chief Financial Officer
      is a full-time officer of the Bank or within six months following termination
      of
      employment other than for cause (as defined in the agreement) or by reason
      of
      death or disability.





In
      addition, certain officers of the Company have change of control agreements
      that
      entitle such officers to receive one year’s compensation (as defined in the
      agreements) if a change of control (as defined in the agreements) occurs while
      such officers are full time officers of the Company or within six months
      following termination of employment other than for cause (as defined in the
      agreements) or by reason of death or disability.





Stock
      Appreciation Rights Plan





During
      2001, the Company adopted the Patriot National Bancorp, Inc. 2001 Stock
      Appreciation Rights Plan (the “SAR Plan”). Under the terms of the SAR Plan, the
      Company may grant stock appreciation rights to officers of the Company that
      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 vests 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
      officers, and $67,932 and $99,216, respectively, was charged to operations
      under
      the SAR Plan for the years ended December 31, 2005 and
      2004.





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, 2005 and
      2004











Other





The
      Company has received regulatory approval to open three new branch offices in
      2006. The Company entered into a non-cancelable lease for one of these
      locations. Subsequent to December 31, 2005, the Company entered into two
      non-cancelable leases at the other two locations.




**Note
              9.**
            **Income
                Taxes**


****


The
      components of the income tax provision for the years ended
      December 31, 2005 and 2004 are as follows:





**2005**
            
            2004CurrentFederal
            
            $
            **1,211,403**
            
            $
            554,723State
            
            
            **308,430**
            
            
            179,489**Total**
            
            
            **1,519,833**
            
            
            734,212DeferredFederal
            
            
            **(454,457**
            **)**
            
            (81,723
            )State
            
            
            **(108,376**
            **)**
            
            (19,489
            )**Total**
            
            
            **(562,833**
            **)**
            
            (101,212
            )**Provision
                for income taxes**
            
            $
            **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, 2005 and 2004 is as follows:





**2005**
            
            2004Provision
                for income taxes at statutory Federal rate
            
            $
            **803,600**
            
            $
            530,200State
                taxes, net of Federal benefit
            
            
            **117,000**
            
            
            96,500Dividends
                received deduction
            
            
            **(68,500**
            **)**
            
            (52,300
            )Nondeductible
                expenses
            
            
            **38,600**
            
            
            16,800Other
            
            
            **66,300**
            
            
            41,800**Total
                provision for income taxes**
            
            $
            **957,000**
            
            $
            633,000


26


**PATRIOT
      NATIONAL BANCORP, INC. AND SUBSIDIARY**




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS,
      Continued


December
      31, 2005 and
      2004









At
      December 31, 2005 and 2004, the components of gross deferred tax
      assets and gross deferred tax liabilities are as follows:





**2005**
            
            2004Deferred
                tax assets:Allowance
                for loan losses
            
            $
            **1,787,157**
            
            $
            1,356,056Investment
                securities
            
            
            **676,738**
            
            
            241,017Premises
                and equipment
            
            
            **272,370**
            
            
            138,986Accrued
                expenses
            
            
            **17,138**
            
            
            14,022Other
            
            
            **6,989**
            
            
            -Gross
                deferred tax assets
            
            
            **2,760,392**
            
            
            1,750,081Deferred
                tax liabilities:Tax
                bad debt reserve
            
            
            **70,827**
            
            
            69,347Other
            
            
            **13,970**
            
            
            3,692Gross
                deferred tax liabilities
            
            
            **84,797**
            
            
            73,039**Deferred
                tax asset, net**
            
            $
            **2,675,595**
            
            $
            1,677,042





The
      allocation of deferred tax benefit involving items charged to current year
      income and items charged directly to equity for the years ended December 31,
      2005 and 2004 are as follows:





**2005**
            
            2004Deferred
                tax benefit allocated to equity
            
            $
            **(435,721**
            **)**
            $
            (51,705
            )Deferred
                tax benefit allocated to operations
            
            
            **(562,833**
            **)**
            
            (101,212
            )**Total
                deferred tax benefit**
            
            $
            **(998,554**
            **)**
            $
            (152,917
            )






**Note
              10.**
            **Goodwill**


****


Based
      on
      the Company’s annual goodwill impairment tests performed in October 2005 and
      2004, goodwill was not impaired for the years ended December 31, 2005
      and 2004. In addition, no goodwill was acquired during 2005 and
      2004.


27


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004









**Note
              11.**
            **Shareholders’
                Equity**





Common
      stock





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.





Income
      Per Share





The
      following is information about the computation of income per share for the
      years
      ended December 31, 2005 and 2004.





**2005****Net**
              **Income**
            
            **Shares**
            
            **Per
                Share**
              **Amount****Basic
                Income Per Share****Income
                available to common shareholders**
            
            
            
            
            $
            1,406,626
            
            
            **2,696,676**
            
            
            
            
            $
            0.52**Effect
                of Dilutive Securities****Warrants
                and stock options outstanding**
            
            
            
            
            
            **-**
            
            
            **42,042**
            
            
            
            
            
            **(0.01**)******Diluted
                Income Per Share****Income
                available to common shareholders****plus
                assumed conversions**
            
            
            
            
            $
            1,406,626
            
            
            **2,738,718**
            
            
            
            
            $
            0.51


28


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004








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:





2004Number
              of
              Shares
            
            Weighted-
              Average
              Exercise
              PriceOutstanding
                at beginning of year
            
            
            83,484
            
            $
            6.00Expired
            
            
            5,700
            
            
            6.00Exercised
            
            
            77,784
            
            
            6.00Outstanding
                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


29


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004






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 110,000 shares of common stock for issuance under the
      Plan.
      No additional options may be granted under the Plan.





A
      summary
      of the status of the stock options at December 31, 2005 and 2004 is as
      follows:





**2005**
            
            2004**Number**
              **of**
              **Shares**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            Number
              of
              Shares
            
            Weighted-
              Average
              Exercise
              PriceOutstanding
                at beginning of year
            
            
            **110,000**
            
            $
            **10.13**
            
            
            110,000
            
            $
            10.13Exercised
            
            
            **37,000**
            
            
            **10.15**
            
            
            -Outstanding
                at end of year
            
            
            **73,000**
            
            
            **10.13**
            
            
            110,000
            
            
            10.13Exercisable
                at end of year
            
            
            **73,000**
            
            
            **10.13**
            
            
            110,000
            
            
            10.13





The
      weighted-average remaining contractual life for the options outstanding at
      December 31, 2005 is 3.7 years.





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 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.


30


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004




The
      Rights will expire on April 19, 2014, unless earlier redeemed or exchanged
      by
      the Company.




**Note
              12.**
            **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 $140,000 and $127,000 to the 401(k)
      Plan in 2005 and 2004, respectively.




**Note
              13.**
            **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.





Financial
      instruments whose contract amounts represent credit risk are as follows at
      December 31, 2005 and 2004:





**2005**
            
            2004Commitments
                to extend credit:Future
                loan commitments
            
            $
            **55,364,491**
            
            $
            23,484,674Unused
                lines of credit
            
            
            **37,819,135**
            
            
            36,018,661Undisbursed
                construction loans
            
            
            **40,398,941**
            
            
            37,224,376Financial
                standby letters of credit
            
            
            **216,000**
            
            
            197,000$
            **133,798,567**
            
            $
            96,924,711





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


31


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004




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, 2005 and
      2004.




**Note
              14.**
            **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
      assets (as defined). Management believes, as of December 31, 2005,
      that the Company and the Bank meet all capital adequacy requirements to which
      it
      is 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.


32


**PATRIOT
        NATIONAL BANCORP, INC. AND SUBSIDIARY**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004






The
      Company’s and the Bank’s actual capital amounts and ratios at
      December 31, 2005 and 2004 were (dollars in thousands):


**Actual**
            
            **For
                Capital**
              **Adequacy
                Purposes**
            
            **To
                Be Well**
              **Capitalized
                Under**
              **Prompt
                Corrective**
              **Action
                Provisions****2005**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio****The
                Company:****Total
                Capital (to Risk Weighted Assets)**
            
            **$**
            **43,870**
            
            
            **12.70**%****
            
            **$**
            **27,635**
            
            
            **8.00**%****
            
            **$**
            **N/A**
            
            
            **N/A****Tier
                I Capital (to Risk Weighted Assets)**
            
            
            **39,549**
            
            
            **11.45**%****
            
            
            **13,816**
            
            
            **4.00**%****
            
            
            **N/A**
            
            
            **N/A****Tier
                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**%****




Actual
            
            For
                Capital
              Adequacy
                Purposes
            To
                Be Well
              Capitalized
                Under
              Prompt
                Corrective
              Action
                Provisions2004
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            RatioThe
                Company:Total
                Capital (to Risk Weighted Assets)
            
            
            $30,701
            
            
            10.70%
            
            
            22,954
            
            
            8.00%
            
            $
            N/A
            
            
            N/ATier
                I Capital (to Risk Weighted Assets)
            
            
            25,936
            
            
            9.04%
            
            
            11,476
            
            
            4.00%
            
            
            N/A
            
            
            N/ATier
                I Capital (Average Assets)
            
            
            25,936
            
            
            6.79%
            
            
            15,279
            
            
            4.00%
            
            
            N/A
            
            
            N/AThe
                Bank:Total
                Capital (to Risk Weighted Assets)
            
            
            $
                  30,124
            
            
            10.50%
            
            
            22,952
            
            
            8.00%
            
            $
            28,690
            
            
            10.00%Tier
                I Capital (to Risk Weighted Assets)
            
            
            26,642
            
            
            9.29%
            
            
            11,471
            
            
            4.00%
            
            
            17,207
            
            
            6.00%Tier
                I Capital (to Average Assets)
            
            
            26,642
            
            
            6.98%
            
            
            15,268
            
            
            4.00%
            
            
            19,085
            
            
            5.00%




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, 2005, the Bank had retained


33


**PATRIOT
      NATIONAL BANCORP, INC. AND SUBSIDIARY**  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004




earnings
      of approximately $5,698,000, all of which 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
              15.**
            **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 2005 and 2004 are as
      follows:





**2005**
            
            2004Balance,
                beginning of year
            
            $
            **198,586**
            
            $
            1,410,440Additional
                loans
            
            
            **341,394**
            
            
            183,386Repayments
            
            
            **(386,586**
            **)**
            
            (22,998
            )Adjustment
                for former related parties
            
            
            **-**
            
            
            (1,372,242
            )Balance,
                end of year
            
            $
            **153,394**
            
            $
            198,586





Related
      party deposits aggregated approximately $5,700,000 and $3,444,000 as of
      December 31, 2005 and 2004, 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, 2005 and 2004.





During
      2005 and 2004, the Company paid legal fees of approximately $18,600 and $20,900,
      respectively, to an attorney who is a director of the Company.


34


**PATRIOT NATIONAL BANCORP, INC. AND
      SUBSIDIARY**  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004






**Note
              16.**
            **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:





**2005****Before-Tax**
              **Amount**
            
            **Tax
                Effect**
            
            **Net-of-Tax**
              **Amount****Unrealized
                holding losses arising during period**
            
            **$**
            **(1,146,631**
            **)**
            **$**
            **435,721**
            
            **$**
            **(710,910**
            **)****Less
                reclassification adjustment for gains****recognized
                in net income**
            
            
            **-**
            
            
            **-**
            
            
            **-****Unrealized
                holding loss on available for sale****securities,
                net of taxes**
            
            **$**
            **(1,146,631**
            **)**
            **$**
            **435,721**
            
            **$**
            **(710,910**
            **)**




2004Before-Tax
              Amount
            
            Tax
                Effect
            
            Net-of-Tax
              AmountUnrealized
                holding losses arising during period
            
            $
            (136,065
            )
            $
            51,705
            
            $
            (84,360
            )Less
                reclassification adjustment for gainsrecognized
                in net income
            
            
            -
            
            
            -
            
            
            -Unrealized
                holding loss on available for salesecurities,
                net of taxes
            
            $
            (136,065
            )
            $
            51,705
            
            $
            (84,360
            )




**Note
              17.**
            **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


35


**PATRIOT
      NATIONAL BANCORP, INC. AND SUBSIDIARY**  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004




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, 2005 and 2004. The estimated fair value amounts for
      2005 and 2004 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.





As
      of
      December 31, 2005 and 2004, the recorded book balances and estimated
      fair values of the Company’s financial instruments were (in
      thousands):




**2005**
              
              2004**Recorded**
              
              
              
              Recorded**Book**
              
              
              
              Book**Balance**
              
              **Fair
                  Value**
              
              Balance
              
              Fair
                  Value**Financial
                  Assets:**Cash
                  and due from banks
              
              **$**
              **7,221**
              
              **$**
              **7,221**
              
              $
              6,670
              
              $
              6,670Federal
                  funds sold
              
              
              **6,500**
              
              
              **6,500**
              
              
              37,500
              
              
              37,500Short-term
                  investments
              
              
              **2,247**
              
              
              **2,247**
              
              
              11,460
              
              
              11,460Available
                  for sale securities
              
              
              **78,672**
              
              
              **78,672**
              
              
              76,269
              
              
              76,269Federal
                  Reserve Bank stock
              
              
              **1,022**
              
              
              **1,022**
              
              
              693
              
              
              693Federal
                  Home Loan Bank stock
              
              
              **1,297**
              
              
              **1,297**
              
              
              1,297
              
              
              1,297Loans
                  receivable, net
              
              
              **364,244**
              
              
              **353,231**
              
              
              263,875
              
              
              265,206Accrued
                  interest receivable
              
              
              **2,445**
              
              
              **2,445**
              
              
              1,758
              
              
              1,758**Financial
                  Liabilities:**Demand
                  deposits
              
              **$**
              **48,797**
              
              **$**
              **48,797**
              
              $
              42,584
              
              $
              42,584Savings
                  deposits
              
              
              **20,090**
              
              
              **20,090**
              
              
              22,104
              
              
              22,104Money
                  market deposits
              
              
              **57,799**
              
              
              **57,799**
              
              
              72,451
              
              
              72,451NOW
                  accounts
              
              
              **25,383**
              
              
              **25,383**
              
              
              26,815
              
              
              26,815Time
                  deposits
              
              
              **267,006**
              
              
              **268,643**
              
              
              203,052
              
              
              206,539FHLB
                  borrowings
              
              
              **9,000**
              
              
              **8,967**
              
              
              8,000
              
              
              8,082Subordinated
                  debt
              
              
              **8,248**
              
              
              **8,248**
              
              
              8,248
              
              
              8,248
  Unrecognized
      financial instruments





Loan
      commitments on which the committed interest rate is less than the current market
      rate were insignificant at December 31, 2005 and 2004. The estimated
      fair value of fee income on letters of credit at December 31, 2005 and
      2004 was insignificant.


36


**PATRIOT
      NATIONAL BANCORP, INC. AND SUBSIDIARY**  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004




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.




**Note
              18.**
            **Segment
                Reporting**


****


The
      Company has two reportable segments, the commercial bank and the mortgage
      broker. The commercial bank segment 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 commercial bank segment also attracts
      deposits from both consumer and commercial customers and invests such deposits
      in loans, investments and working capital. The commercial bank’s revenues are
      generated primarily from net interest income from its lending, investment and
      deposit activities.





The
      mortgage broker solicits and processes conventional mortgage loan applications
      from consumers on behalf of permanent investors and originates loans for sale.
      Revenues are generated from loan brokerage and application processing fees
      received from the permanent investors, and gains and origination fees from
      loans
      sold.





Information
      about reportable segments, and a reconciliation of such information to the
      consolidated financial statements as of and for the years ended
      December 31, 2005 and 2004 is as follows (in thousands):




**2005**
            
            **Commercial**
              **Bank**
            
            **Mortgage**
              **Broker**
            
            **Consolidated**
              **Totals****Net
                interest income**
            
            **$**
            **14,879**
            
            **$**
            **-**
            
            **$**
            **14,879****Noninterest
                income**
            
            
            **457**
            
            
            **2,772**
            
            
            **3,229****Noninterest
                expenses**
            
            
            **11,671**
            
            
            **2,963**
            
            
            **14,634****Provision
                for loan losses**
            
            
            **1,110**
            
            
            **-**
            
            
            **1,110****Income
                (loss) before taxes**
            
            
            **2,555**
            
            
            **(191**
            **)**
            
            **2,364****Assets**
            
            
            **469,572**
            
            
            **1,069**
            
            
            **470,641**


37


**PATRIOT NATIONAL BANCORP, INC. AND
      SUBSIDIARY**  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS,
        Continued
 December
        31, 2005 and
        2004


2004
            
            Commercial
              Bank
            
            Mortgage
              Broker
            
            Consolidated
              TotalsNet
                interest income
            
            $
            11,670
            
            $
            -
            
            $
            11,670Noninterest
                income
            
            
            682
            
            
            2,020
            
            
            2,702Noninterest
                expenses
            
            
            10,025
            
            
            2,232
            
            
            12,257Provision
                for loan losses
            
            
            556
            
            
            -
            
            
            556Income
                (loss) before taxes
            
            
            1,771
            
            
            (212
            )
            
            1,559Assets
            
            
            403,959
            
            
            1,088
            
            
            405,047





The
      accounting policies of the segments are the same as those described in the
      summary of significant accounting policies. Intersegment revenues are negotiated
      and agreed upon by the commercial bank and mortgage broker segments at the
      time
      of the transactions. Management allocates certain overhead expenses of the
      commercial bank to the mortgage broker segment. These allocations are based
      on a
      pre-determined monthly charge agreed to between the commercial bank and the
      mortgage broker segment. Management evaluates the performance of each segment
      based on profit or loss from operations before income taxes.





The
      Company's reportable segments are strategic business units that offer different
      products and services. They are managed separately because each segment appeals
      to different markets and, accordingly, requires different technology and
      marketing strategies.





The
      Company does not have operating segments other than those reported, the Company
      does not have a single external customer from which it derives 10% or more
      of
      its revenues and the Company operates in one geographical area.





38