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, 2004
 
 [    
] 
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
      (State
      or other jurisdiction of incorporation or organization)
    06-1559137
      (IRS
      Employer Identification Number)900
      Bedford Street
      Stamford,
      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: $
21,380,455
 
 Aggregate
market value of the voting stock held by nonaffiliates of the registrant as of
February 28, 2005 based on the last sale price as reported on the
NASDAQ Small Cap Market: $ 28,887,830 .
 
 Number of
shares of the registrant’s Common Stock, par value $2.00 per share, outstanding
as of February 28, 2005: 2,486,391.
  
  
 Documents
Incorporated by Reference
 
 Proxy
      Statement for 2005 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 ofSecurity Holders
    8Part
      IIItem
      5.  Market for Common Equity, RelatedShareholder  Matters
      and 
      SmallBusiness
      Issuer Purchases of EquitySecurities
    8Item
      6.  Management’s Discussion andAnalysis
      or Plan of Operation
    11Item
      7.  Financial Statements
    27Item
      8.  Changes in and Disagreements withAccountants
      on Accounting
      andFinancial
      Disclosure
    28Item
      8A. Controls and Procedures
    28Item
      8B. Other Information
    28Part
      IIIItem
      9.   Directors and Executive Officers ofthe
      Registrant
    28Item
      10. Executive Compensation
    29Item
      11. Security Ownership of CertainBeneficial
      Owners and
      Managementand
      Related Matters
    29Item
      12. Certain Relationships and RelatedTransactions
    29Item
      13. Exhibits, Lists and Reports on Form8-K
    29Item
      14. Principal Accountant Fees andServices
    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 commenced operations as a
national bank on August 31, 1994. Since then, the Bank has opened
branch offices in Greenwich and Old Greenwich, Connecticut in 1997 and 1999,
respectively, two branch offices in Norwalk, Connecticut, one in 2001 and a
second in 2003, a second Stamford location in 2003, two branch offices in
Wilton, Connecticut, one in 2003 and a second in 2004, and a branch office in
Darien, Connecticut in 2004. The Bank recently received regulatory approval to
open two branch offices, one in Southport, Connecticut and one in Greenwich,
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 and 800 Post Road in Darien,
Connecticut. The Bank also operates mortgage origination offices at 1177 Summer
Street, Stamford, Connecticut and 20 Broad Hollow Road, Melville, New
York.
  The Bank
offers a broad range of consumer and commercial banking services with an
emphasis on serving the needs of individuals, small and medium-sized businesses
and professionals. The Bank offers consumer and commercial deposit accounts that
include: checking accounts, interest-bearing “NOW” accounts, insured money
market accounts, time certificates of deposit, savings accounts 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 does not currently accept brokered
deposits.
 
 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 and Darien, 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 Westport to the east, and the Long Island Sound to the
south.
 
 2
 
 The
Bank’s loan customers extend beyond Stamford, Greenwich, Norwalk, Wilton and
Darien 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 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
processing services, credit card processing and armored carrier
service.
 
 The
cities of Stamford and Norwalk and the towns of Greenwich, Wilton and Darien are
presently served by approximately 151 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 and Darien, 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 financial institutions of these market dynamics and
legislative and regulatory changes has been increased customer awareness of
product and service differences 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.
 
 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 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
 
 5
 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 and Darien, which are characterized by a very diverse
ethnic, economic and racial cross-section of the population. As the Bank expands
further, the market areas served by the Bank will continue to evolve. Bancorp
and the Bank have not and will not adopt any policies or practices, which
discourage credit applications from, or unlawfully discriminate against,
individuals or segments of the communities served by the Bank.
 
 On
October 26, 2001, the United and Strengthening America by Providing Tools
Required to Intercept and Obstruct Terrorism Act of 2001, or the *USA
Patriot Act,* was
enacted to further strengthen domestic security following the September 11, 2001
attacks. This Act amends various federal banking laws, particularly the Bank
Secrecy Act with the intent to curtail money
 
 6
 
 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.
 
 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 March 2, 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 16, 2006.
Due to the burdens on smaller companies in designing and implementing compliance
with this section, this one year extension will provide smaller companies, such
as Bancorp, with the necessary opportunity to more thoroughly evaluate their
systems of internal controls.
 
 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.
 
 As of
December 31, 2004, Bancorp had 102 full-time employees and 8 part-time
employees. None of the employees of Bancorp is covered by a collective
bargaining agreement.
 
 7
 
 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 eight other branch banking offices and two mortgage
origination offices; the Bank also leases space at its main office for
additional parking. Lease commencement dates for office locations range from
January 1, 2001 to September 1, 2004 and lease expiration dates
fall between March 31, 2005 and October 15, 2014. Subsequent to
December 31, 2004 the Bank entered into a lease for a new branch location with a
lease expiration date of March 22, 2015. In addition, the Bank is in the process
of negotiating a lease for a New York mortgage origination office to replace the
lease expiring March 31, 2005. 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 two of its locations to an attorney. 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 2004, 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, 2004, the last sale price for Bancorp Common Stock on
NASDAQ Small Cap Market was $18.40.
 
 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.
 
 2004
    
    
    
    2003Sales
      Price
    
    Cash
      DividendsDeclared
    
    
    
    Sales
      Price
    
    Cash
      DividendsDeclaredQuarter
      Ended
    
    High
    Low
    
    
    
    High
    LowMarch
      31
    
    $
    16.25
    
    $
    12.49
    
    $
    0.030
    
    
    
    
    $
    10.56
    
    $
    9.50
    
    $
    0.025June
      30
    
    
    15.25
    
    
    14.03
    
    
    0.035
    
    
    
    
    
    10.80
    
    
    9.10
    
    
    0.030September
      30
    
    
    14.99
    
    
    13.51
    
    
    0.035
    
    
    
    
    
    11.45
    
    
    9.65
    
    
    0.030December
      31
    
    
    18.60
    
    
    14.01
    
    
    0.035
    
    
    
    
    
    12.50
    
    
    10.76
    
    
    0.030
 
 Holders
 
 There
were approximately 761 shareholders of record of Bancorp Common Stock as of
December 31, 2004.
 
 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
 
 During
the fourth quarter of 2004 Bancorp did not have any sales of unregistered
securities.
 
 Purchases
of Equity Securities by the Small Business Issuer and Affiliated
Purchasers
 
 During
the fourth quarter of 2004 there were no such purchases of Bancorp Common
Stock.
 
 9
 
 Securities
Authorized for Issuance under Equity Compensation Plans
  
  The
following table presents information as of December 31, 2004 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
    110,000
    $10.13
    -Equity
      compensation plans not approved by security holders
    -
    -
    -Total
    110,000
    $10.13
    -
  10
  Item 6. Management’s
Discussion and Analysis or Plan of Operation
 
 Patriot
National Bancorp, Inc
 Financial
Highlights
 **2004**
    ****
    **2003**
    ****
    **2002**
    ****
    **2001**
    ****
    **2000****Operating
      Data**Interest
      and dividend income
    
    $
    18,678,251
    
    $
    15,214,702
    
    $
    12,604,718
    
    $
    13,722,943
    
    $
    14,694,135Interest
      expense
    
    
    7,008,508
    
    
    5,588,255
    
    
    4,764,693
    
    
    6,866,960
    
    
    8,017,615Net
      interest income
    
    
    11,669,743
    
    
    9,626,447
    
    
    7,840,025
    
    
    6,855,983
    
    
    6,676,520Provision
      for loan losses
    
    
    556,000
    
    
    563,000
    
    
    468,000
    
    
    250,000
    
    
    325,900Noninterest
      income
    
    
    2,702,204
    
    
    4,813,740
    
    
    4,113,820
    
    
    3,509,955
    
    
    2,685,296Noninterest
      expense
    
    
    12,256,550
    
    
    11,659,467
    
    
    9,812,838
    
    
    8,675,551
    
    
    7,693,345Net
      income
    
    
    926,397
    
    
    1,340,720
    
    
    1,052,007
    
    
    876,387
    
    
    767,171Basic
      income per share
    
    
    0.38
    
    
    0.56
    
    
    0.44
    
    
    0.37
    
    
    0.34Diluted
      income per share
    
    
    0.37
    
    
    0.55
    
    
    0.43
    
    
    0.36
    
    
    0.33Dividends
      per share
    
    
    0.135
    
    
    0.115
    
    
    0.095
    
    
    0.060
    
    
    -**Balance
      Sheet Data**Cash
      and due from banks
    
    
    6,670,409
    
    
    4,023,732
    
    
    5,385,757
    
    
    7,544,242
    
    
    3,656,071Federal
      funds sold
    
    
    37,500,000
    
    
    15,000,000
    
    
    3,000,000
    
    
    12,700,000
    
    
    29,500,000Short
      term investments
    
    
    11,460,057
    
    
    10,430,939
    
    
    3,348,968
    
    
    6,788,569
    
    
    -Investment
      securities
    
    
    78,258,775
    
    
    92,330,533
    
    
    61,720,716
    
    
    35,816,880
    
    
    34,073,832Loans,
      net
    
    
    263,874,820
    
    
    214,420,528
    
    
    170,794,939
    
    
    135,680,036
    
    
    126,411,265Total
      assets
    
    
    405,046,955
    
    
    342,469,049
    
    
    248,496,753
    
    
    202,569,457
    
    
    197,628,127Total
      deposits
    
    
    367,005,325
    
    
    289,992,182
    
    
    217,911,260
    
    
    183,263,939
    
    
    179,666,098Total
      borrowings
    
    
    16,248,000
    
    
    31,301,385
    
    
    10,292,675
    
    
    839,280
    
    
    945,270Total
      shareholders’ equity
    
    
    19,756,434
    
    
    18,779,913
    
    
    18,544,955
    
    
    17,406,016
    
    
    16,427,436
 
 (a)
    Plan
      of Operation
 
 Not
applicable since Bancorp has had revenues from operations in each of the last
two fiscal years.
 
 (b)
    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 
 11
 
 **Summary**
 
 Bancorp’s
subsidiary, Patriot National Bank, celebrated its ten year anniversary on
August 31, 2004. In addition, the Bank established two new branch
banking offices during 2004; the first located in Darien, Connecticut opened in
July 2004 and the second located in Wilton, Connecticut opened in November
2004.
 
 Bancorp
reported earnings of $926,000 ($0.38 basic income per share and
$0.37 diluted income per share) for 2004 compared to $1,341,000 ($0.56
basic income per share and $0.55 diluted income per share) for 2003. Total
assets ended the year at a new record high of $405.0 million, an increase of
$62.5 million from December 31, 2003.
 
 Net
interest income for the year ended December 31, 2004 increased $2.1 million
or 21.2% to $11.7 million as compared to $9.6 million for the year
ended December 31, 2003.
 
 Total
assets increased by 18.3% during the year as total loans increased from $214.4
million at December 31, 2003 to $263.9 million at
December 31, 2004. The available for sale securities portfolio
decreased $14.3 million or 15.8% to $76.3 million from $90.6 million at
December 31, 2003. Loan growth was funded primarily through deposit
growth. Deposits increased $77.0 million to $367.0 million at
December 31, 2004; interest bearing deposits increased $64.9 million,
or 25.0%, and non-interest bearing deposits increased $12.1 million or 39.7%.
Borrowings decreased $15.1 million due mainly to the payoff of certain FHLB
advances and a repurchase agreement. The exercise of stock warrants combined
with the increase in retained earnings from net income, net of dividend
payments, partially offset by the increase in other comprehensive loss from
unrealized losses on the available for sale securities portfolio, resulted in an
increase of $977 thousand in shareholders’ equity.
 
 **FINANCIAL
CONDITION**
 
 ***Assets***
 
 Bancorp’s
total assets increased $62.5 million or 18.3% from $342.5 million at
December 31, 2003 to $405.0 million at
December 31, 2004. The growth in total assets was funded primarily by
deposit growth of $77.0 million partially offset by decreases in borrowings
of $15.1 million. Federal funds sold increased $22.5 million; cash and due from
banks and short term investments increased $2.6 million and $1.0 million,
respectively.
 
 12
 
 ***Investments***
 
 The
following table is a summary of Bancorp’s investment portfolio at December 31
for the years shown.
 
 2004
    
    2003
    
    2002U.
      S. Government Agency andSponsored
      Agency Obligations
    
    $
    14,823,295
    
    $
    11,865,618
    
    $
    9,129,414Mortgage-backed
      securities
    
    
    52,446,180
    
    
    66,696,465
    
    
    38,461,159Corporate
      bonds
    
    
    -
    
    
    -
    
    
    383,797Marketable
      equity securities
    
    
    9,000,000
    
    
    12,000,000
    
    
    12,643,996Federal
      Reserve Bank stock
    
    
    692,600
    
    
    691,150
    
    
    481,050Federal
      Home Loan Bank stock
    
    
    1,296,700
    
    
    1,077,300
    
    
    621,300Total
      Investments
    
    $
    78,258,775
    
    $
    92,330,533
    
    $
    61,720,716
 
 Total
investments decreased $14.1 million to $78.3 million due primarily to
principal payments on mortgage-backed securities and redeemed money market
preferred equity instruments exceeding new investment purchases. During the
fourth quarter of 2004, the Bank redeployed excess liquidity into the purchase
of adjustable rate residential mortgage loans in place of additional investment
purchases. The Bank is a member of the Federal Home Loan Bank of Boston which
provides an additional source of liquidity.
 
 The
following table presents the maturity distribution of available for sale
investment securities at December 31, 2004 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.
 
 One
      year
      or
      less
    
    Over
      one  through
      five
      years
    
    Over
      five through
      ten
      years
    
    Over
      ten
      years
    
    No
      maturity
    
    Total
    
    Weighted
      Average YieldU.S.
      Government Agency and
      Sponsored Agency obligations
    
    $
    -
    
    $
    14,000,000
    
    $
    1,000,000
    
    $
    -
    
    $
    -
    
    $
    15,000,000
    
    
    3.47%Mortgage-backed
      securities
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    52,903,731
    
    
    52,903,731
    
    
    4.09%Money
      market preferred
      equity securities
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    9,000,000
    
    
    9,000,000
    
    
    2.34%Total
    
    $
    -
    
    $
    14,000,000
    
    $
    1,000,000
    
    $
    -
    
    $
    61,903,731
    
    $
    76,903,731
    
    
    3.76%Weighted
      average yield
    
    
    -%
    
    
    3.40%
    
    
    4.38%
    
    
    -%
    
    
    3.83%
    
    
    3.76%
 
 13
 
 The
following table presents a summary of investments for any issuer that exceeds
10% of shareholders’ equity at December 31, 2004.
 
 Amortized
    
    FairCost
    
    ValueAvailable
      for sale securities:U.S.
      Government Agency and SponsoredAgency
      Obligations
    
    $
    15,000,000
    
    $
    14,823,295U.S.
      Government Agency mortgage-backed securities
    
    
    52,903,731
    
    
    52,446,180Short
      term investments:Merrill
      Lynch Premier Institutional Fund
    
    
    11,460,057
    
    
    11,460,057
 ******
 ***Loans***
 
 The
following table is a summary of Bancorp’s loan portfolio at December 31 for the
years shown.
 2004
    
    2003
    
    2002Real
      EstateCommercial
    
    $
    106,771,441
    
    $
    96,339,220
    
    $
    65,967,205Residential
    
    
    36,965,661
    
    
    21,772,759
    
    
    27,012,024Construction
    
    
    74,598,919
    
    
    57,122,445
    
    
    39,208,651Commercial
    
    
    17,562,523
    
    
    15,532,902
    
    
    13,021,909Consumer
      installment
    
    
    1,386,709
    
    
    1,861,924
    
    
    1,757,321Consumer
      home equity
    
    
    30,874,894
    
    
    25,607,775
    
    
    26,812,092Total
      Loans
    
    
    268,160,147
    
    
    218,237,025
    
    
    173,779,202Premiums
    
    
    313,754
    
    
    -
    
    
    -Net
      deferred fees
    
    
    (1,117,556
    )
    
    (881,822
    )
    
    (611,809
    )Allowance
      for loan losses
    
    
    (3,481,525
    )
    
    (2,934,675
    )
    
    (2,372,454
    )Loans,
      net
    
    $
    263,874,820
    
    $
    214,420,528
    
    $
    170,794,939
 
 Bancorp’s
net loan portfolio increased $49.5 million or 23.1% from
$214.4 million at December 31, 2003 to $263.9 million at
December 31, 2004. Included in the growth of the loan portfolio for
2004 is the purchase during the fourth quarter of $13.1 million in residential
mortgage loans. Loan growth was funded through an increase in total deposits. At
December 31, 2004, the net loan to deposit ratio was 71.9% and the net
loan to asset ratio was 65.2%. At December 31, 2003, the net loan to
deposit ratio was 73.9%, and the net loan to asset ratio was 62.6%.
 
 During an
historic environment of lower interest rates, 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, 2004, 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
    
    $
    10,797
    
    $
    38,263
    
    $
    57,712
    
    $
    106,772Residential
      real estate
    
    
    6,047
    
    
    3,757
    
    
    27,162
    
    
    36,966Construction
      loans
    
    
    46,391
    
    
    28,207
    
    
    -
    
    
    74,598Commercial
      loans
    
    
    7,209
    
    
    9,695
    
    
    659
    
    
    17,563Consumer
      installment
    
    
    1,219
    
    
    167
    
    
    -
    
    
    1,386Consumer
      home equity
    
    
    93
    
    
    4,732
    
    
    26,050
    
    
    30,875Total
    
    $
    71,756
    
    $
    84,821
    
    $
    111,583
    
    $
    268,160Fixed
      rate loans
    
    $
    5,242
    
    $
    21,454
    
    $
    10,796
    
    $
    37,492Variable
      rate loans
    
    
    66,514
    
    
    63,367
    
    
    100,787
    
    
    230,668Total
    
    $
    71,756
    
    $
    84,821
    
    $
    111,583
    
    $
    268,160
 
 
 The
following table presents loan concentrations at
December 31, 2004:
 
 DollarsCategory
    
    Percentage
    
    Outstanding(thousands
      of dollars)Construction
    
    
    27.8
    %
    
    $74,598Commercial
      Retail
    
    
    8.0
    %
    
    21,420Commercial
      Residential Rental
    
    
    5.2
    %
    
    13,987
 
 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 by the originating loan officer or 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 $3.5
million, at December 31, 2004, which represents 1.31% of gross loans
outstanding, is adequate, under prevailing economic conditions, to absorb losses
on existing loans. At December 31, 2003, the allowance for loan losses
was $2.9 million or 1.35% 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
 
 2004
    
    2003
    
    2002
    
    2001
    
    2000(thousands
      of dollars)Balance
      at beginning of period
    
    $
    2,934
    
    $
    2,372
    
    $
    1,894
    
    $
    1,645
    
    $
    1,360Charge-offs
    
    
    (9)
    
    
    (1)
    
    
    -
    
    
    (2)
    
    
    (44)Recoveries
    
    
    -
    
    
    -
    
    
    10
    
    
    1
    
    
    3Net
      (charge-offs) recoveries
    
    
    (9)
    
    
    (1)
    
    
    10
    
    
    (1)
    
    
    (41)Additions
      charged to operations
    
    
    556
    
    
    563
    
    
    468
    
    
    250
    
    
    326Balance
      at end of period
    
    $
    3,481
    
    $
    2,934
    
    $
    2,372
    
    $
    1,894
    
    $
    1,645Ratio
      of net (charge-offs) recoveriesduring
      the period to average loansoutstanding
      during the period
    
    
    (0.00%)
    
    
    (0.00%)
    
    
    0.01%
    
    
    (0.00%)
    
    
    (0.03%)
 
 Allocation
of the Allowance for Loan Losses
 
 Percent
      of loans in eachAmounts
      (thousands of dollars)
    
    category
      to total loansBalance
      at end of each period applicable to
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Real
      Estate:Commercial
    
    $
    1,319
    
    $
    1,183
    
    $
    893
    
    $
    833
    
    $
    700
    
    
    39.82
    %
    
    44.15
    %
    
    37.97
    %
    
    43.88
    %
    
    44.67
    %Residential
    
    
    304
    
    
    230
    
    
    276
    
    
    153
    
    
    34
    
    
    13.78
    %
    
    9.98
    %
    
    15.54
    %
    
    5.44
    %
    
    3.93
    %Construction
    
    
    1,358
    
    
    972
    
    
    726
    
    
    348
    
    
    270
    
    
    27.82
    %
    
    26.17
    %
    
    22.56
    %
    
    19.02
    %
    
    17.91
    %Commercial
    
    
    185
    
    
    155
    
    
    129
    
    
    142
    
    
    185
    
    
    6.55
    %
    
    7.12
    %
    
    7.49
    %
    
    10.63
    %
    
    10.01
    %Consumer
      installment
    
    
    11
    
    
    12
    
    
    11
    
    
    14
    
    
    12
    
    
    0.52
    %
    
    0.85
    %
    
    1.01
    %
    
    0.89
    %
    
    1.29
    %Consumer
      home equity
    
    
    233
    
    
    285
    
    
    283
    
    
    296
    
    
    312
    
    
    11.51
    %
    
    11.73
    %
    
    15.43
    %
    
    20.14
    %
    
    22.19
    %Unallocated
    
    
    71
    
    
    97
    
    
    54
    
    
    108
    
    
    132
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/ATotal
    
    $
    3,481
    
    $
    2,934
    
    $
    2,372
    
    $
    1,894
    
    $
    1,645
    
    
    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.
 
 2004
    
    2003
    
    2002
    
    2001
    
    2000(thousands
      of dollars)Loans
      delinquent over 90days
      still accruing
    
    $
    373
    
    $
    165
    
    $
    1,172
    
    $
    1,300
    
    $
    507Non-accruing
      loans
    
    
    3,669
    
    
    150
    
    
    201
    
    
    1,654
    
    
    1,759$
    4,042
    
    $
    315
    
    $
    1,373
    
    $
    2,954
    
    $
    2,266%
      of Total Loans
    
    
    1.51%
    
    
    0.14%
    
    
    0.79%
    
    
    2.14%
    
    
    1.77%%
      of Total Assets
    
    
    1.00%
    
    
    0.09%
    
    
    0.56%
    
    
    1.46%
    
    
    1.15%Additional
      income on non-accrualloans
      if recognized on an accrualbasis
    
    $
    18
    
    $
    18
    
    $
    67
    
    $
    159
    
    $
    115
 
 There
were no loans in either 2004 or 2003 considered as “troubled debt
restructurings.”
 
 Potential
Problem Loans
 
 The
$3.7 million of non-accruing loans at December 31, 2004 is comprised of
three loans, all of which are well collateralized and in the process of
collection. Two of the loans totaling $3.5 million are current as to
principal and interest payments.
 
 At
December 31, 2004, 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.
 
 2004
    
    2003
    
    2002Non-interest
      bearing
    
    $
    42,584,120
    
    $
    30,477,295
    
    $
    25,519,809Interest
      bearingTime
      certificates, less than $100,000
    
    
    131,764,662
    
    
    92,574,784
    
    
    57,202,908Time
      certificates, $100,000 or more
    
    
    71,287,106
    
    
    50,793,863
    
    
    28,681,345Money
      market
    
    
    72,450,663
    
    
    69,503,859
    
    
    56,973,507Savings
    
    
    22,104,121
    
    
    23,792,811
    
    
    26,847,780NOW
    
    
    26,814,653
    
    
    22,849,570
    
    
    22,685,911Total
      interest bearing
    
    
    324,421,205
    
    
    259,514,887
    
    
    192,391,451Total
      deposits
    
    $
    367,005,325
    
    $
    289,992,182
    
    $
    217,911,260
 
 Total
deposits increased $77.0 million or 26.6% to $367.0 million at December 31,
2004. Non-interest bearing deposits increased $12.1 million or 39.7% to
$42.6 million at December 31, 2004. Based upon expansion and the
increased penetration into the areas served by the Bank, commercial demand
accounts increased $7.5 million and personal demand accounts increased
$3.8 million, both of which represent increases of 39% as compared to
December 31, 2003. Interest bearing deposits increased
$64.9 million or 25.0% to $324.4 million at
December 31, 2004. During 2004, the Bank established two new branch
banking offices; these new offices attracted $19.1 million or 24.8% of the
annual growth in deposits. The new branch offices’ grand opening promotional
campaigns were also a contributing factor to the growth of deposits in existing
branches. Certificates of deposit and NOW account products increased $59.7
million and $4.0 million, respectively; money market fund accounts increased
$2.9 million, while savings accounts decreased $1.7 million. Much of the
growth in certificates of deposit is attributable to the promotional campaigns
run in conjunction with the new branch openings and the ten year anniversary of
the Bank; growth in certificates of deposit also resulted from the transfer of
funds from money market fund accounts. The increase in certificates of deposit
greater than $100 thousand of $20.5 million is the result of successful
sales efforts and branch expansion; these balances do not include brokered
deposits. 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, 2004, the Bank’s maturities of time deposits were:
 
 $100,000
      or
    
    Less
      thangreater
    
    $100,000
    
    Totals(thousands
      of dollars)Three
      months or less
    
    $
    5,858
    
    $
    11,502
    
    $
    17,360Three
      to six months
    
    
    13,249
    
    
    23,430
    
    
    36,679Six
      months to one year
    
    
    13,695
    
    
    27,494
    
    
    41,189Over
      one year
    
    
    38,485
    
    
    69,339
    
    
    107,824Total
    
    $
    71,287
    
    $
    131,765
    
    $
    203,052
 ***Borrowings***
 
 Borrowings
decreased $15.1 million to $16.2 million at December 31, 2004.
 
 Borrowings
include short term securities sold under agreements to repurchase, Federal Home
Loan Bank Advances, junior subordinated debentures, a capital lease and a
collateralized borrowing.
 
 During
2004, certain FHLB advances and short term securities sold under agreements to
repurchase matured and due to the liquidity position of the Bank were not
extended. The final payment on the lease classified as a capital lease was made
during 2004; in addition, the loan sold and classified as a collateralized
borrowing was refinanced at the end of 2004.
 
 The
following table sets forth short term borrowing amounts along with the
respective interest rates and maturities:
 
 Federal
      Home Loan Bank advances:Amount
    
    Maturity
    
    Rate
    
    Average
      amount
      outstanding$
       2,000,000
    
    
    04/29/2005
    
    
    1.930%
    
    $
    2,000,0002,000,000
    
    
    05/13/2005
    
    
    4.480%
    
    
    2,000,000$ 
      4,000,000
    
    
    
    
    
    3.205%
    
    $
    4,000,000
 
 The
maximum amount of short term borrowings outstanding under Federal Home Loan Bank
advances during 2004 was $9,000,000.
 
 At
December 31, 2004 the Bank had no securities sold under repurchase agreements;
the average amount outstanding during 2004 was $2,243,000 with a maximum
outstanding of $5,700,000.
 
 20
 
 ***Other***
 
 The
increase in premises and equipment is due primarily to the capitalized costs
associated with leasehold improvements made to and providing equipment for two
new branch offices and the relocation of one mortgage origination office from
Greenwich to Stamford.
 
 The
increase in accrued interest receivable is due to higher outstanding balances in
loans at December 31, 2004 as compared to those in effect at December
31, 2003.
 
 The
decrease in accrued expenses and other liabilities is due primarily to decreases
in accruals for incentive compensation arrangements and lower balances at year
end for other accrued expenses.
  21
  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)**
 
 2004
    
    2003Fluctuations
      in InterestInterest
    
    
    
    
    
    Interest
    
    
    
    Income/Expense(3)Average
    
    Income/
    
    Average
    
    Average
    
    Income/
    
    Average
    
    Due
      to change in:Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate
    
    Volume
    
    Rate
    
    TotalInterest
      earning assets:Loans(2)
    
    $
    239,239
    
    $
    15,632
    
    
    6.53%
    
    $
    193,990
    
    $
    12,782
    
    
    6.59%
    
    $
    2,967
    
    $
    (117
    )
    $
    2,850Short
      term investments
    
    
    8,356
    
    
    105
    
    
    1.26%
    
    
    7,124
    
    
    79
    
    
    1.11%
    
    
    13
    
    
    13
    
    
    26Investments(4)
    
    
    87,631
    
    
    2,752
    
    
    3.14%
    
    
    72,250
    
    
    2,256
    
    
    3.12%
    
    
    477
    
    
    19
    
    
    496Federal
      funds sold
    
    
    12,733
    
    
    189
    
    
    1.48%
    
    
    9,147
    
    
    97
    
    
    1.06%
    
    
    31
    
    
    61
    
    
    92Total
      interest earning assets
    
    
    347,959
    
    
    18,678
    
    
    5.37%
    
    
    282,511
    
    
    15,214
    
    
    5.39%
    
    
    3,488
    
    
    (24
    )
    
    3,464Cash
      and due from banks
    
    
    4,159
    
    
    
    
    
    
    
    
    4,001Premises
      and equipment, net
    
    
    1,621
    
    
    
    
    
    
    
    
    1,083Allowance
      for loan losses
    
    
    (3,190
    )
    
    
    
    
    
    
    
    (2,652
    )Other
    
    
    6,396
    
    
    
    
    
    
    
    
    5,798Total
      Assets
    
    $
    356,945
    
    
    
    
    
    
    
    $
    290,741Interest
      bearing liabilities:Time
      certificates
    
    $
    156,623
    
    $
    4,901
    
    
    3.13%
    
    $
    110,129
    
    $
    3,512
    
    
    3.19%
    
    $
    1,456
    
    $
    (67
    )
    $
    1,389Savings
      accounts
    
    
    23,666
    
    
    294
    
    
    1.24%
    
    
    24,824
    
    
    337
    
    
    1.36%
    
    
    (15
    )
    
    (28
    )
    
    (43
    )Money
      market accounts
    
    
    70,264
    
    
    867
    
    
    1.23%
    
    
    62,217
    
    
    863
    
    
    1.39%
    
    
    105
    
    
    (101
    )
    
    4NOW
      accounts
    
    
    23,107
    
    
    152
    
    
    0.66%
    
    
    22,627
    
    
    149
    
    
    0.66%
    
    
    3
    
    
    -
    
    
    3Repurchase
      agreements
    
    
    2,243
    
    
    28
    
    
    1.25%
    
    
    5,700
    
    
    91
    
    
    1.60%
    
    
    (46
    )
    
    (17
    )
    
    (63
    )FHLB
      advances
    
    
    14,197
    
    
    372
    
    
    2.62%
    
    
    11,671
    
    
    327
    
    
    2.80%
    
    
    67
    
    
    (22
    )
    
    45Subordinated
      debt
    
    
    8,248
    
    
    380
    
    
    4.61%
    
    
    6,159
    
    
    271
    
    
    4.40%
    
    
    88
    
    
    21
    
    
    109Other
      borrowings
    
    
    226
    
    
    14
    
    
    6.19%
    
    
    471
    
    
    38
    
    
    8.07%
    
    
    (17
    )
    
    (7
    )
    
    (24
    )Total
      interestbearing
      liabilities
    
    
    298,574
    
    
    7,008
    
    
    2.35%
    
    
    243,798
    
    
    5,588
    
    
    2.29%
    
    
    1,641
    
    
    (221
    )
    
    1,420Demand
      deposits
    
    
    36,456
    
    
    
    
    
    
    
    
    25,892Accrued
      expenses andother
      liabilities
    
    
    2,362
    
    
    
    
    
    
    
    
    2,140Shareholders’
      equity
    
    
    19,553
    
    
    
    
    
    
    
    
    18,911Total
      liabilities and equity
    
    $
    356,945
    
    
    
    
    
    
    
    $
    290,741Net
      interest income
    
    
    
    
    $
    11,670
    
    
    
    
    
    
    
    $
    9,626
    
    
    
    
    $
    1,847
    
    $
    197
    
    $
    2,044Interest
      margin
    
    
    
    
    
    
    
    
    3.35%
    
    
    
    
    
    
    
    
    3.41%Interest
      Spread
    
    
    
    
    
    
    
    
    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.
  22
  **RESULTS
OF OPERATIONS**
 
 For the
year ended December 31, 2004, Bancorp earned $926,000 ($0.38 basic income per
share and $0.37 diluted income per share) a decrease of 30.9% as compared to
2003 when Bancorp earned $1,341,000 ($0.56 basic income per share and $0.55
diluted income per share). Noninterest income decreased $2.1 million or 43.9% to
$2.7 million for 2004 from $4.8 million in 2003. An increase in long
term interest rates during the year resulted in a decrease in the volume of
residential mortgage refinance transactions; the interest rate increase along
with the turnover of loan originators in the New York office which created a
temporary staffing reduction, resulted in a decrease in mortgage brokerage and
referral fees and loan processing fees of $1.9 million. The results for
2003 included a gain from the sale of investment securities of $308,000; there
were no such sales of investment securities during 2004.
 
 Interest
income increased $3.5 million to $18.7 million in 2004 as compared to
2003 when interest income was $15.2 million. This increase is due mainly to
the growth in the loan portfolio and higher average balances in the available
for sales securities portfolio.
 
 Interest
expense increased $1.4 million or 25.4% to $7.0 million in 2004 compared to
$5.6 million in 2003. The increase in interest expense is due to the
increase in total deposits and higher average balances in Federal Home Loan Bank
borrowings and subordinated debt.
 
 Noninterest
expenses for 2004 totaled $12.3 million which represents an increase of $597,000
or 5.1% over the prior year. The higher operating costs were primarily the
result of the full year impact in 2004 of the three branch offices opened in
2003, the two new branch offices opened in 2004, and the relocation of a
residential mortgage loan origination office from Greenwich to Stamford, all of
which resulted in an increase in occupancy and equipment expenses of $397,000
over last year.
 
 The
following are measurements relating to Bancorp’s earnings.
 
 2004
    
    2003
    
    2002Return
      on average assets
    
    
    .26
    %
    
    .46
    %
    
    .47
    %Return
      on average equity
    
    
    4.74
    %
    
    7.09
    %
    
    5.82
    %Dividend
      payout ratio
    
    
    35.26
    %
    
    20.54
    %
    
    21.59
    %Average
      equity to average assets
    
    
    5.48
    %
    
    6.50
    %
    
    8.13
    %Basic
      income per share
    
    
    $ 
      0.38
    
    
    $ 
      0.56
    
    
    $ 
      0.44Diluted
      income per share
    
    
    $ 
      0.37
    
    
    $ 
      0.55
    
    
    $ 
      0.43
 
 ***Interest
income and expense***
 
 Bancorp’s
net interest income increased $2.1 million or 21.2%, to $11.7 million in
2004 from $9.6 million in 2003. An increase in average earning assets of
$65.4 million, or 23.2%, increased Bancorp’s interest income $3.5 million or
22.8% from $15.2 million in 2003 to $18.7 million in 2003. Average loans
outstanding increased $45.2 million, or 23.3%, led by growth in
construction and real estate loans, which reflects the continuing strength of
the local real estate
 
 23
 
 market.
An increase in average investments and related yields resulted in an increase in
interest income on available for sale securities of $496,000. Higher average
balances in federal funds sold and short-term investments combined with interest
rates which began increasing in the latter part of the year resulted in an
increase of $118,000 in interest earned on Federal funds sold and short term
investments. Total average interest bearing liabilities increased by
$54.8 million or 22.5%; average certificates of deposits increased by
$46.5 million; average money market deposits and NOW accounts increased
$8.0 million and $0.5 million, respectively; average savings accounts
decreased $1.2 million; average FHLB advances increased $2.5 million;
average subordinated debt which was issued at the end of the first quarter of
2003 increased $2.1 million. Interest expense increased from
$5.6 million in 2003 to $7.0 million in 2004. Interest expense on
certificates of deposit increased $1.4 million as a result of higher
average outstanding balances partially offset by a decrease in the cost of funds
for that portfolio from 3.19% in 2003 to 3.13% in 2004.
 
 ***Noninterest
income***
 
 Noninterest
income decreased $2.1 million from $4.8 million in 2003 to
$2.7 million in 2004. The decrease is due primarily to an increase in long
term interest rates which resulted in a decrease in the volume of residential
mortgage refinance transactions; this increase in interest rates combined with
the turnover of loan originators in the New York office, which created a
temporary staffing reduction, resulted in a decrease in mortgage brokerage
referral fees of $1.6 million and a reduction in loan origination and
processing fees of $260,000. Included in the results for 2003 are gains from the
sale of investment securities of $308,000; during 2004 there were no sales of
investment securities. Increases in deposit accounts and transaction volumes
resulted in an increase in fees and service charges of $87,000 or 22.9% from
$378,000 for the year ended December 31, 2003 to $465,000 for the year
ended December 31, 2004.
 
 ***Noninterest
expenses***
 
 Noninterest
expenses increased $597,000 in 2004 from $11.7 million in 2003 to
$12.3 million in 2004. Salaries and benefits decreased slightly in 2004 as
compared to 2003; increases in salaries, due primarily to staff additions
resulting from the full year impact in 2004 of three branches opened in 2003 and
two in 2004, loan and deposit sales and incentive compensation and stock based
compensation, were more than offset by lower levels of commissions and
production and target related incentive compensation expense as a direct result
of the decrease in the volume of residential mortgage refinance transactions.
Higher staffing levels and incentive compensation also resulted in higher
payroll taxes and employee benefit costs. Occupancy and equipment expenses
increased $397,000 from $1.3 million 2003 to $1.7 million in 2004;
this increase is due primarily to the full year impact in 2004 of opening three
new branch offices in 2003 and of opening two branches in 2004, as well as the
costs associated with the relocation of the Greenwich loan origination office to
a new facility in Stamford. Loan administration and processing expenses
decreased $195,000 or 48.2% from $404,000 for the year ended
December 31, 2003 to $209,000 for the year ended
December 31, 2004; this decrease is related to the decrease in the
volume of residential mortgage loans and the resultant decreases in mortgage
brokerage and loan processing fees. Other non-interest expenses increased
$192,000 or 18.3% from $1.0 million for the year ended
December 31, 2003 to $1.2 million for the year
 
 24
 
 ended
December 31, 2004; included in the results for 2004 are nonrecurring items for a
payment made to the State of Connecticut for an amendment to Bancorp’s Articles
of Incorporation for the increase in the number of shares the Company is
authorized to issue and the write off of an externally perpetuated fraud of a
customer’s checks for which the Bank has submitted an insurance claim. In
addition, there were increases in regulatory assessments as a direct result of
the growth of the Bank.
 
 The
provision for income taxes of $633,000 in 2004 and $877,000 for 2003 represents
the tax expense recognized for both federal and state income tax. The effective
tax rates for 2004 and 2003 are 40.6% and 39.5%, respectively. Fluctuations in
effective tax rates are due to the change in pre-tax income as well as to the
exclusion, for state tax purposes, of certain holding company expenses.
 
 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.
 
 **LIQUIDITY**
 
 Bancorp’s
liquidity position was 32.6% and 35.1% at December 31, 2004 and 2003,
respectively. The liquidity ratio is defined as the percentage of liquid assets
to total assets. The following categories of assets as described in the
accompanying balance sheets are considered liquid assets: cash and due from
banks, federal funds sold, short-term investments and available-for-sale
securities. Liquidity is a measure of Bancorp’s ability to generate adequate
cash to meet financial obligations. The principal cash requirements of a
financial institution are to cover increases in its loan portfolio and downward
fluctuations in deposit accounts. Management 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 the Bank’s regulatory capital ratios for each of the
years shown:
 
 December
      31,2004
    
    2003
    
    2002Total
      Risk-Based Capital
    
    
    10.50
    %
    
    11.67
    %
    
    10.36
    %Tier
      1 Risk-Based Capital
    
    
    9.29
    %
    
    10.47
    %
    
    9.11
    %Leverage
      Capital
    
    
    6.98
    %
    
    7.85
    %
    
    6.98
    %
 
 
 25
 
 The
following table illustrates Bancorp’s regulatory capital ratios for each of the
years shown:
 
 December
      31,2004
    
    2003
    
    2002Total
      Risk-Based Capital
    
    
    10.70
    %
    
    11.87
    %
    
    10.39
    %Tier
      1 Risk-Based Capital
    
    
    9.04
    %
    
    10.00
    %
    
    9.13
    %Leverage
      Capital
    
    
    6.79
    %
    
    7.51
    %
    
    6.99
    %
 
 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 2003 was due primarily to the issuance of
trust preferred securities through the formation of a statutory trust. The
decrease in capital ratios during 2004 is due primarily to the growth of the
bank.
 
 Management
continuously assesses the adequacy of the Bank’s capital to ensure that the Bank
maintains 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 two
new branches in 2005. The Board and management are in the planning stages of an
offering of common stock scheduled for 2005 to support the growth plans of the
Company.
 
 **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.
 
 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 Asset and Liability
Management Committee (“ *ALCO* ”)
consisting of senior management personnel. ALCO reviews the
 
 26
 
 interrelationships
within the balance sheet to maximize net interest income within acceptable
levels of risk. ALCO reports to the Board of Directors on a monthly basis
regarding its activities.
 
 **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
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 permitted to 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, 2004 and
December 31, 2003 and the related consolidated statements of income,
shareholders’ equity and cash flows for the years ended
December 31, 2004 and December 31, 2003, together with the
report thereon of McGladrey & Pullen, LLP dated March 3, 2005, are
included as part of this Form 10-KSB in the “Financial Report” following page 33
hereof.
 
 27
 
 Item 8.
Changes in and Disagreements with Accountants on Accounting and
 Financial Disclosure
 
 Not
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 Bancorp’s fiscal year ended
December 31, 2004 that has materially affected, or is reasonably
likely to materially affect, Bancorp’s internal control over financial
reporting.
 
 
 Item 8B. Other
Information
 
 Not
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
2004 Annual Meeting of Shareholders, to be filed within 120 days following
December 31, 2004.
 
 28
 
 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.
 
 Item 13. Exhibits
and Reports on Form 8-K
 
  (a)
    Exhibits
 
 Exhibit
      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, 2004.3(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)).
 
 
 29
 
 
 
 Exhibit
      No.
    Description10(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.10(a)(5)
    Employment
      Agreement dated as of November 3, 2003 among Patriot National Bank,
      Bancorp and Robert F. O’Connell. (incorporated by reference to Exhibit
      10(a)(5) to Bancorp’s Annual Report on Form 10-KSB for the year ended
      December 31, 2003 (Commission File No.
000-29599)).10(a)(6)
    Change
      of Control Agreement, dated as of 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, 2005 between Patriot National Bank and
      Marcus Zavattaro.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)).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)).14
    Code
      of Conduct for Senior Financial Officers21
    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, 2004, Bancorp filed two current Reports
of Form 8-K; the first was dated October 25, 2004 (filed
October 25, 2004) 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, 2004 and its financial
condition at September 30, 2004; the second report was dated December
21, 2004 (filed December 21, 2004) 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 16, 2005
 
 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
      16, 2005Angelo
      De Caro, Chairman, Chief Executive
    DateOfficer
      and Director/s/
      Robert F. O’Connell
    March
      16, 2005Robert
      F. O’Connell
    DateSenior
      Executive Vice President,Chief
      Financial Officer and Director/s/
      Michael A. Capodanno
    March
      16, 2005Michael
      A. Capodanno
    DateSenior
      Vice President & Controller/s/
      John J. Ferguson
    March
      16, 2005John
      J. Ferguson
    DateDirector/s/
      Brian A. Fitzgerald
    March
      16, 2005Brian
      A. Fitzgerald
    DateDirector
 ****
 32
 ****
 **Form
10 KSB - Signatures continued**
 
 
 
 /s/
      John A. Geoghegan
    March
      16, 2005John
      A. Geoghegan
    DateDirector/s/
      L. Morris Glucksman
    March
      16, 2005L.
      Morris Glucksman
    DateDirector/s/
      Charles F. Howell
    March
      16, 2005Charles
      F. Howell
    DateDirector/s/
      Michael Intrieri
    March
      16, 2005Michael
      Intrieri
    DateDirector/s/
      Paul Settelmeyer
    March
      16, 2005Paul
      Settelmeyer
    DateDirector/s/
      Philip Wolford
    March
      16, 2005Philip
      Wolford
    DateDirector
 
 
 33
  **Patriot
National Bancorp, Inc.**
 **Financial
Report**
 **December
31, 2004 and 2003**
 CONTENTSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM
      ****
    1CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheets
    2Consolidated statements of income
    3Consolidated statements of shareholders’
      equity
    4Consolidated statements of cash flows
    5-6Notes to consolidated financial
    statements
    7-39
   
      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, 2004 and 2003, 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, 2004 and 2003, 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, LLP  New Haven,
Connecticut March 3,
2005
 
 **PATRIOT
      NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
      BALANCE SHEETS****December
      31, 2004 and 2003****2004**
    
    2003**ASSETS**Cash
      and due from banks (Note 2)
    
    **$**
    **6,670,409**
    
    $
    4,023,732Federal
      funds sold
    
    
    **37,500,000**
    
    
    15,000,000Short-term
      investments
    
    
    **11,460,057**
    
    
    10,430,939**Cash
      and cash equivalents**
    
    
    **55,630,466**
    
    
    29,454,671Available
      for sale securities (at fair value) (Note 3)
    
    
    **76,269,475**
    
    
    90,562,083Federal
      Reserve Bank stock
    
    
    **692,600**
    
    
    691,150Federal
      Home Loan Bank stock (Note 7)
    
    
    **1,296,700**
    
    
    1,077,300Loans
      receivable (net of allowance for loan losses: 2004
    $3,481,525;2003
      $2,934,675) (Note 4)
    
    
    **263,874,820**
    
    
    214,420,528Accrued
      interest receivable
    
    
    **1,758,339**
    
    
    1,470,622Premises
      and equipment, net (Notes 5 and 8)
    
    
    **2,132,633**
    
    
    1,421,098Deferred
      tax asset (Note 9)
    
    
    **1,677,042**
    
    
    1,524,125Goodwill
      (Note 10)
    
    
    **930,091**
    
    
    930,091Other
      assets (Note 7)
    
    
    **784,789**
    
    
    917,381**Total
      assets**
    
    **$**
    **405,046,955**
    
    $
    342,469,049**LIABILITIES
      AND SHAREHOLDERS' EQUITY**LiabilitiesDeposits
      (Note 6):Noninterest
      bearing deposits
    
    **$**
    **42,584,120**
    
    $
    30,477,295Interest
      bearing deposits
    
    
    **324,421,205**
    
    
    259,514,887**Total
      deposits**
    
    
    **367,005,325**
    
    
    289,992,182Repurchase
      agreements (Note 7)
    
    
    **-**
    
    
    5,700,000Federal
      Home Loan Bank borrowings (Note 7)
    
    
    **8,000,000**
    
    
    17,000,000Subordinated
      debt (Note 7)
    
    
    **8,248,000**
    
    
    8,248,000Capital
      lease obligation (Note 8)
    
    
    **-**
    
    
    103,941Collateralized
      borrowings
    
    
    **-**
    
    
    249,444Accrued
      expenses and other liabilities
    
    
    **2,037,196**
    
    
    2,395,569**Total
      liabilities**
    
    
    **385,290,521**
    
    
    323,689,136Commitments
      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: 2004 2,486,391; 2003 2,408,607
    
    
    **4,972,782**
    
    
    4,817,214Additional
      paid-in capital
    
    
    **11,830,173**
    
    
    11,519,037Retained
      earnings
    
    
    **3,346,718**
    
    
    2,752,541Accumulated
      other comprehensive loss - net unrealized losson
      available for sale securities, net of taxes
    
    
    **(393,239**
    **)**
    
    (308,879
    )**Total
      shareholders' equity**
    
    
    **19,756,434**
    
    
    18,779,913**Total
      liabilities and shareholders' equity**
    
    **$**
    **405,046,955**
    
    $
    342,469,049See
      Notes to Consolidated Financial Statements.
 2


**CONSOLIDATED
      STATEMENTS OF INCOME****Years
      Ended December 31, 2004 and 2003****2004**
    
    2003Interest
      and Dividend IncomeInterest
      and fees on loans
    
    **$**
    **15,631,838**
    
    $
    12,782,457Interest
      and dividends on investment securities
    
    
    **2,856,928**
    
    
    2,335,552Interest
      on Federal funds sold
    
    
    **189,485**
    
    
    96,693**Total
      interest and dividend income**
    
    
    **18,678,251**
    
    
    15,214,702Interest
      ExpenseInterest
      on deposits (Note 6)
    
    
    **6,213,732**
    
    
    4,861,152Interest
      on Federal Home Loan Bank borrowings
    
    
    **371,699**
    
    
    327,020Interest
      on subordinated debt
    
    
    **380,194**
    
    
    270,610Interest
      on other borrowings
    
    
    **42,883**
    
    
    129,473**Total
      interest expense**
    
    
    **7,008,508**
    
    
    5,588,255**Net
      interest income**
    
    
    **11,669,743**
    
    
    9,626,447Provision
      for Loan Losses (Note 4)
    
    
    **556,000**
    
    
    563,000**Net
      interest income after provision for loan losses**
    
    
    **11,113,743**
    
    
    9,063,447Noninterest
      IncomeMortgage
      brokerage referral fees
    
    
    **1,717,756**
    
    
    3,356,470Loan
      origination and processing fees
    
    
    **408,152**
    
    
    668,410Fees
      and service charges
    
    
    **465,018**
    
    
    378,415Gain
      on sale of investment securities
    
    
    **-**
    
    
    307,739Other
      income
    
    
    **111,278**
    
    
    102,706**Total
      noninterest income**
    
    
    **2,702,204**
    
    
    4,813,740Noninterest
      ExpensesSalaries
      and benefits (Note 12)
    
    
    **7,544,055**
    
    
    7,574,532Occupancy
      and equipment expense, net
    
    
    **1,707,769**
    
    
    1,311,038Data
      processing and other outside services
    
    
    **802,536**
    
    
    690,168Professional
      services
    
    
    **386,110**
    
    
    301,016Advertising
      and promotional expenses
    
    
    **369,638**
    
    
    332,852Loan
      administration and processing expenses
    
    
    **209,283**
    
    
    404,231Other
      operating expenses
    
    
    **1,237,159**
    
    
    1,045,630**Total
      noninterest expenses**
    
    
    **12,256,550**
    
    
    11,659,467**Income
      before income taxes**
    
    
    **1,559,397**
    
    
    2,217,720Provision
      for Income Taxes (Note 9)
    
    
    **633,000**
    
    
    877,000**Net
      income**
    
    **$**
    **926,397**
    
    $
    1,340,720**Basic
      income per share (Note 11)**
    
    **$**
    **0.38**
    
    $
    0.56**Diluted
      income per share (Note 11)**
    
    **$**
    **0.37**
    
    $
    0.55**Dividends
      per share**
    
    **$**
    **0.135**
    
    $
    0.115See
      Notes to Consolidated Financial Statements.






3


**PATRIOT
      NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY****Years
      Ended December 31, 2004 and 2003**AccumulatedAdditional
    
    
    
    OtherNumber
      of
    
    Common
    
    Paid-in
    
    Retained
    
    ComprehensiveShares
    
    Stock
    
    Capital
    
    Earnings
    
    Income
      (Loss)
    
    TotalBalance
      at December 31, 2002
    
    
    2,400,525
    
    $
    4,801,050
    
    $
    11,484,649
    
    $
    1,688,158
    
    $
    571,098
    
    $
    18,544,955Comprehensive
      incomeNet
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    1,340,720
    
    
    -
    
    
    1,340,720Unrealized
      holding loss on available forsale
      securities, net of taxes (Note 16)
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (879,977
    )
    
    (879,977
    )**Total
      comprehensive income**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    460,743Dividends
    
    
    -
    
    
    -
    
    
    -
    
    
    (276,337
    )
    
    -
    
    
    (276,337
    )Issuance
      of capital stock
    
    
    8,082
    
    
    16,164
    
    
    34,388
    
    
    -
    
    
    -
    
    
    50,552Balance
      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
    
    
    -
    
    
    -
    
    
    466,704**Balance,
      December 31, 2004**
    
    
    **2,486,391**
    
    **$**
    **4,972,782**
    
    **$**
    **11,830,173**
    
    **$**
    **3,346,718**
    
    **$**
    **(393,239**
    **)**
    **$**
    **19,756,434**See
      Notes to Consolidated Financial Statements.






4


**PATRIOT
      NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
      STATEMENTS OF CASH FLOWS****Years
      Ended December 31, 2004 and 2003****2004**
    
    2003Cash
      Flows from Operating ActivitiesNet
      income
    
    **$**
    **926,397**
    
    $
    1,340,720Adjustments
      to reconcile net income to net cash provided byoperating
      activities:Amortization
      and accretion of investment premiums and discounts, net
    
    
    **500,847**
    
    
    593,490Provision
      for loan losses
    
    
    **556,000**
    
    
    563,000Gain
      on sales of investment securities
    
    
    **-**
    
    
    (307,739
    )Depreciation
      and amortization of premises and equipment
    
    
    **536,029**
    
    
    417,377Loss
      on disposal of bank premises and equipment
    
    
    **3,804**
    
    
    2,037Deferred
      income taxes
    
    
    **(101,212**
    **)**
    
    (230,089
    )Change
      in assets and liabilities:Increase
      in deferred loan fees
    
    
    **235,734**
    
    
    270,013Increase
      in accrued interest receivable
    
    
    **(287,717**
    **)**
    
    (159,169
    )Decrease
      in other assets
    
    
    **132,592**
    
    
    31,555(Decrease)
      increase in accrued expenses and other liabilities
    
    
    **(373,139**
    **)**
    
    635,461**Net
      cash provided by operating activities**
    
    
    **2,129,335**
    
    
    3,156,656Cash
      Flows from Investing ActivitiesPurchases
      of available for sale securities
    
    
    **(16,020,313**
    **)**
    
    (71,907,123
    )Proceeds
      from sales of available for sale securities
    
    
    **-**
    
    
    7,094,321Proceeds
      from maturities of available for sale securities
    
    
    **6,000,000**
    
    
    8,200,000Principal
      repayments on available for sale securities
    
    
    **23,676,009**
    
    
    24,964,017Purchase
      of Federal Reserve Bank stock
    
    
    **(1,450**
    **)**
    
    (210,100
    )Purchase
      of Federal Home Loan Bank stock
    
    
    **(219,400**
    **)**
    
    (456,000
    )Net
      increase in loans
    
    
    **(50,246,026**
    **)**
    
    (44,458,602
    )Purchases
      of premises and equipment
    
    
    **(1,251,368**
    **)**
    
    (1,058,215
    )Proceeds
      from sale of bank premises and equipment
    
    
    **-**
    
    
    6,900Investment
      in trust (Note 7)
    
    
    **-**
    
    
    (248,000
    )**Net
      cash used in investing activities**
    
    
    **(38,062,548**
    **)**
    
    (78,072,802
    )(Continued)




5


**PATRIOT
      NATIONAL BANCORP, INC. AND SUBSIDIARY****CONSOLIDATED
      STATEMENTS OF CASH FLOWS, Continued****Years
      Ended December 31, 2004 and 2003****2004**
    
    2003Cash
      Flows from Financing ActivitiesNet
      increase in demand, savings and money market deposits
    
    
    **17,330,022**
    
    
    14,596,528Net
      increase in time certificates of deposit
    
    
    **59,683,121**
    
    
    57,484,394Decrease
      in securities sold under repurchase agreements
    
    
    **(5,700,000**
    **)**
    
    -Proceeds
      from FHLB borrowings
    
    
    **17,000,000**
    
    
    16,000,000Principal
      repayments of FHLB borrowings
    
    
    **(26,000,000**
    **)**
    
    (3,000,000
    )Proceeds
      from issuance of subordinated debt
    
    
    **-**
    
    
    8,248,000Debt
      issuance costs
    
    
    **-**
    
    
    (240,000
    )Decrease
      in other borrowings
    
    
    **(353,385**
    **)**
    
    (239,290
    )Proceeds
      from issuance of common stock
    
    
    **466,704**
    
    
    50,552Dividends
      paid on common stock
    
    
    **(317,454**
    **)**
    
    (264,092
    )**Net
      cash provided by financing activities**
    
    
    **62,109,008**
    
    
    92,636,092**Net
      increase in cash and cash equivalents**
    
    
    **26,175,795**
    
    
    17,719,946Cash
      and cash equivalentsBeginning
    
    
    **29,454,671**
    
    
    11,734,725Ending
    
    **$**
    **55,630,466**
    
    $
    29,454,671**Supplemental
      Disclosures of Cash Flow Information**Cash
      paid for:Interest
    
    **$**
    **7,020,278**
    
    $
    5,569,011Income
      taxes
    
    **$**
    **850,970**
    
    $
    1,102,971**Supplemental
      Disclosure of Noncash Investing and Financing****Activities**Unrealized
      holding losses on available for sale securitiesarising
      during the period
    
    **$**
    **(136,065**
    **)**
    $
    (1,419,317
    )Accrued
      dividends declared on common stock
    
    **$**
    **87,024**
    
    $
    72,258See
      Notes to Consolidated Financial Statements.






6




**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 eight 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 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 principles:





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


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
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 terms 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


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.  The Company has the
ability and intent to hold its loans for the foreseeable future or until
maturity or payoff.





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.





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.





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


of “nine” reflecting the most risk or a complete loss. 
Risk ratings are assigned by the originating loan officer or 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.  An unallocated component is maintained to cover uncertainties
that could affect management’s estimate of probable losses.  The
unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.





The Company's real estate loans are collateralized by real
estate located principally in Connecticut and 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.





Loan origination fees, net of 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 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

10


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


Collateralized borrowings





Collateralized borrowings represent the portion of loans
transferred to other institutions under loan participation agreements. 
Such transfers were not recognized as sales due to recourse provisions and/or
restrictions on the participant's right to transfer their portion of the
loan.





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

12


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 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 2004 and 2003, 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 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.

13




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.





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 January 2003, the FASB issued Interpretation No. 46,
“Consolidation of Variable Interest Entities,” (“FIN 46”), which establishes
guidance for determining when an entity should consolidate another entity that
meets the definition of a variable interest entity.  FIN 46 requires a
variable interest entity to be consolidated by a company if that company will
absorb a majority of the expected losses, will receive a majority of the
expected residual returns, or both.  Transfers to qualified special-purpose
entities (“QSPEs”) and certain other interests in a QSPE are not subject to the
requirements of FIN 46.  On December 17, 2003, the FASB revised
FIN 46 (FIN 46R) and deferred the effective date of FIN 46 to no later than the
end of the first reporting period that ends after March 15, 2004, however, for
special-purpose entities, FIN 46 would be required to be applied as of December
31, 2003.  See Note 7 for the impact of the adoption of FIN 46 by the
Company.





In April 2003, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 149,
“Amendment of Statement 133 on Derivative Instruments and Hedging
Activities.”  This Statement amends SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133.  This
Statement is effective for contracts entered into or modified after June 30,
2003.  This Statement had no effect on the Company’s financial
statements.





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

14


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 more cash flows subsequently are expected to be received than originally
estimated, the effective yield would be adjusted on a prospective basis. 
SOP 03-3 will be effective for loans and debt securities acquired after December
31, 2004.  Management does not expect the adoption of this statement to
have a material 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
will be superseded concurrent with the final issuance of proposed FSP Issue
03-1-a.  Proposed FSP Issue 03-1-a is intended to provide implementation
guidance with respect to all securities analyzed for impairment under paragraphs
10-20 of EITF 03-1.  Management continues to closely monitor and evaluate
how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect the
Company.





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 stock options
based on 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.

15




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 has not completed its study of the transition
methods or made any decisions about how it will adopt FAS 123(R).  However,
the Company does not believe that the adoption of SFAS 123(R) related to
existing share-based payment transactions will have a significant effect on the
Company’s financial statements.





In March 2004, the Securities and Exchange Commission
(“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 105, “Application of
Accounting Principles to Loan Commitments,” which provides guidance regarding
loan commitments that are accounted for as derivative instruments.  In this
SAB, the SEC determined that an interest rate lock commitment should generally
be valued at zero at inception.  The rate locks will continue to be
adjusted for changes in value resulting from changes in market interest
rates.  This SAB did not have any effect on the Company’s financial
position or results of operations.



**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, 2004 and 2003, the Bank was required to have cash and
liquid assets of approximately $2,820,000 and $1,617,000, respectively, to meet
these requirements.  In addition, at December 31, 2004 and 2003, the
Company was required to maintain $25,000 in the Federal Reserve Bank for
clearing purposes.

16


**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, 2004 and 2003 are as follows:





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






2003
    Amortized
      Cost
    Gross
      Unrealized
      Gains
    Gross
      Unrealized
      Losses
    Fair
      ValueU.S. Government agency  and sponsored agency
      obligations
    $
    12,018,111
    $
    7,500
    $
    (159,993)
    $
    11,865,618Mortgage-backed securities
    
    67,042,163
    
    147,589
    
    (493,287)
    
    66,696,465Money market preferred equity securities
    
    12,000,000
    
    -
    
    -
    
    12,000,000$
    91,060,274
    $
    155,089
    $
    (653,280)
    $
    90,562,083








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, 2004:





Less Than 12
      Months
    
    12 Months or
      More
    
    TotalFair
      Value
    Unrealized
      Loss
    
    Fair
      Value
    Unrealized
      Loss
    
    Fair
      Value
    Unrealized
      LossU.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)






17




At December 31, 2003, all unrealized losses on available for
sale securities existed for a period of less than twelve months.





At December 31, 2004, the Company had 27 available for sale
securities in an unrealized loss position.  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, 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, 2004 and 2003, available for sale securities
with a carrying value of $1,280,000 and $7,599,558, respectively, were pledged
to secure obligations under repurchase agreements and municipal
deposits.





The amortized cost and fair value of available for sale debt
securities at December 31, 2004 by contractual maturity are presented
below.  Actual maturities of mortgage-backed securities may differ from
contractual maturities because the mortgages underlying the securities may be
called or repaid without any penalties.  Because mortgage-backed securities
are not due at a single maturity date, they are not included in the maturity
categories in the following maturity summary.





Amortized
    
    FairCost
    
    ValueMaturity:1-5
      years
    $
    14,000,000
    $
    13,822,9835-10
      years
    
    1,000,000
    
    1,000,312Mortgage-backed securities
    
    52,903,731
    
    52,446,180Total
    $
    67,903,731
    $
    67,269,475






During 2003, proceeds from sales of available for sale
securities were $7,094,321, and there were gross gains of $307,739 on such
sales.



18


****

**Note
4.**              
**Loans Receivable and Allowance for Loan
Losses**

****



A summary of the
Company’s loan portfolio at December 31, 2004 and 2003 is as follows:





2004
    
    2003Real
      estate:Commercial
    $
    106,771,441
    $
    96,339,220Residential
    
    36,965,661
    
    21,772,759Construction
    
    74,598,919
    
    57,122,445Commercial
    
    17,562,523
    
    15,532,902Consumer
      installment
    
    1,386,709
    
    1,861,924Consumer home
      equity
    
    30,874,894
    
    25,607,775**Total loans**
    
    268,160,147
    
    218,237,025Premiums on
      purchased loans
    
    313,754
    
    -Net deferred loan
      fees
    
    (1,117,556)
    
    (881,822)Allowance for
      loan losses
    
    (3,481,525)
    
    (2,934,675)**Loans receivable, net**
    **$**
    263,874,820
    $
    214,420,528






The changes in the
allowance for loan losses for the years ended December 31, 2004 and
2003 are as follows:





2004
    
    2003Balance,
      beginning of year
    $
    2,934,675
    $
    2,372,454Provision
      for loan losses
    
    556,000
    
    563,000Recoveries
      of loans previously charged-off
    
    -
    
    -Loans
      charged-off
    
    (9,150)
    
    (779)Balance, end of
      year
    $
    3,481,525
    $
    2,934,675






At December 31, 2004 and 2003, the unpaid
principal balances of loans delinquent 90 days or more were $522,751 and
$315,127, respectively, and the unpaid principal balances of loans placed on
nonaccrual status were $3,669,148 and $150,000, respectively.  If
nonaccrual loans had been performing in accordance with their original terms,
the Company would have recorded approximately $18,000 of additional income
during both of the years ended December 31, 2004 and 2003.



19




The following
information relates to impaired loans as of and for the years ended
December 31, 2004 and 2003:





2004
    
    2003Loans
      receivable for which there is a related allowance for credit
      losses
    $
    150,000
    $
    -Loans
      receivable for which there is no related allowance for credit
      losses
    $
    3,519,148
    $
    150,000Allowance
      for credit losses related to impaired loans
    $
    22,500
    $
    -Average
      recorded investment in impaired loans
    $
    2,990,191
    $
    157,678






During 2004, interest income collected and recognized on
impaired loans was $184,565.  There was no interest income on impaired
loans collected or recognized in 2003.  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.



20




Note
5. Premises and Equipment







At
December 31, 2004 and 2003, premises and equipment consisted of the
following:





2004
    
    2003Premises under
      capital lease
    $
    -
    $
    783,000Leasehold
      improvements
    
    1,811,187
    
    1,372,576Furniture,
      equipment and software
    
    2,332,962
    
    1,561,5794,144,149
    
    3,717,155Less accumulated
      depreciation and amortization
    
    (2,011,516)
    
    (2,296,057)$
    2,132,633
    $
    1,421,098






For the years ended December 31, 2004 and 2003,
depreciation and amortization expense related to premises and equipment totaled
$536,029 and $417,377, respectively.



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

****



At
December 31, 2004 and 2003, deposits consisted of the
following:





2004
    
    2003Noninterest
      bearing
    $
    42,584,120
    $
    30,477,295Interest
      bearing:Time
      certificates, less than $100,000
    
    131,764,662
    
    92,574,784Time
      certificates, $100,000 or more
    
    71,287,106
    
    50,793,863Money
      market
    
    72,450,663
    
    69,503,859Savings
    
    22,104,121
    
    23,792,811NOW
    
    26,814,653
    
    22,849,570Total
      interest bearing
    
    324,421,205
    
    259,514,887Total
      deposits
    $
    367,005,325
    $
    289,992,182






Interest expense on certificates of deposit in denominations
of $100,000 or more was $1,883,047 and $1,297,461 for the years ended
December 31, 2004 and 2003, respectively.



21




Contractual maturities
of time certificates of deposit as of December 31, 2004 are summarized
below:





Due
      within:1
      year
    $
    95,228,1571-2
      years
    
    42,562,2322-3
      years
    
    22,269,9213-4
      years
    
    24,022,1814-5
      years
    
    18,969,277$
    203,051,768




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

****



Federal Home Loan
Bank borrowings







The Bank is a member of the Federal Home LoanBank of Boston ("FHLB").  At
December 31, 2004, 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, 2004 and 2003, there were no advances
outstanding under this line of credit.  At December 31, 2004, other
outstanding advances from the FHLB aggregated $8,000,000 at interest rates
ranging from 1.93% to 5.11%, and at December 31, 2003, other outstanding
advances aggregated $17,000,000 at interest rates ranging from 1.27% 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, 2004, the Company has available borrowings
under repurchase agreements of $10,000,000, and no amounts outstanding at
December 31, 2004.  At December 31, 2003, the Company had $5,700,000
outstanding under short-term securities sold under agreements to repurchase at
1.25%.





Subordinated
debt







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.



22






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.  As a result, the balance
sheet as of December 31, 2003 includes $8,248,000 of subordinated debt, which
was previously presented in the Company’s 2003 quarterly unaudited balance
sheets as $8,000,000 in trust preferred securities after a consolidation
elimination entry of $248,000.  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% (5.69% at December 31, 2004), 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, 2004, the Bank also has the ability to
borrow up to $3,000,000 in federal funds or letters of credit from its
correspondent bank.



23




Maturity of
borrowings







The contractual
maturities of the Company’s borrowings at December 31, 2004, by year, are as
follows:





Fixed
    
    FloatingRate
    
    Rate
    
    Total2005
    
    $
    4,000,000
    
    $
    -
    
    $
    4,000,0002006
    
    
    1,000,000
    
    
    -
    
    
    1,000,0002007
    
    
    3,000,000
    
    
    -
    
    
    3,000,0002008
    
    
    -
    
    
    -
    
    
    -2009
    
    
    -
    
    
    -
    
    
    -Thereafter
    
    
    -
    
    
    8,248,000
    
    
    8,248,000Total
      borrowings
    
    $
    8,000,000
    
    $
    8,248,000
    
    $
    16,248,000







**Note
8.**              
**Commitments and
Contingencies**

****



Capital
lease







The Company leased the Bank's main office under a capital
lease which expired in 2004.  Premises under capital lease of $783,000 and
related accumulated amortization of $730,800 as of December 31, 2003, were
included in premises and equipment.  During 2003, the Company entered into
a new lease agreement for its existing main office that commenced in August
2004.  This new lease was classified as an operating lease upon
commencement.





The Company is obligated under the lease to pay executory
costs including insurance, property taxes, maintenance and other related
expenses.





Operating
leases





The Company also has non-cancelable operating leases for its
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.



24




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





Years Ending
      December 31,
    
    Amount2005
    
    $
    926,3602006
    
    
    888,0522007
    
    
    744,6072008
    
    
    560,8392009
    
    
    503,017Thereafter
    
    
    2,265,723$
    5,885,598






Total rental expense charged to operations for cancelable
and noncancelable operating leases was $876,132 and $630,002 for the years ended
December 31, 2004 and 2003, respectively.





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.



25




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 is being recognized over four years under the terms of the
Prior Agreement.  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, 2004 and 2003, approximately $276,000
and $194,000, respectively, was charged to expense related to the stock and
option compensation components of the Prior Agreement.





Other Employment
Agreements

**





Effective January 1, 2005, 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,
2004.  The agreement provides for, among other things, a minimum and
maximum base salary and commission arrangement, as well as additional
compensation based upon the achievement of certain other financial results, and
for reimbursement of expenses incurred incidental to duties as an officer. 
The agreement terminates on December 31, 2005.





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.





26




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 $99,216 and $36,576,
respectively, was charged to operations under the SAR Plan for the years ended
December 31, 2004 and 2003.





Legal
Matters







The Company is involved in various legal proceedings which
have arisen in the normal course of business.  Management believes that
resolution of these matters will not have a material effect on the Company's
financial condition or results of operations.





Other





The Company expects to open two new branch offices in
2005.  Subsequent to December 31, 2004, the Company entered into
a non-cancelable lease for one of these locations.



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

****



The components of the income tax provision for the years
ended December 31, 2004 and 2003 are as follows:





2004
    
    2003CurrentFederal
    $
    554,723
    $
    842,241State
    
    179,489
    
    264,848**Total**
    
    734,212
    
    1,107,089DeferredFederal
    
    (81,723)
    
    (178,241)State
    
    (19,489)
    
    (51,848)**Total**
    
    (101,212)
    
    (230,089)**Provision for income taxes**
    **$**
    633,000
    $
    877,000




27




A reconciliation of the anticipated income tax provision
(computed by applying the statutory Federal income tax rate to the income before
income taxes) to the income tax provision as reported in the statements of
income for the years ended December 31, 2004 and 2003 is as
follows:





2004
    
    2003Provision for
      income taxes at statutory Federal rate
    $
    530,200
    $
    754,000State taxes, net
      of Federal benefit
    
    96,500
    
    129,000Dividends
      received deduction
    
    (52,300)
    
    (45,900)Nondeductible
      expenses
    
    16,800
    
    10,900Other
    
    41,800
    
    29,000**Total provision for income
taxes**
    **$**
    633,000
    $
    877,000






At
December 31, 2004 and 2003, the components of gross deferred tax
assets and gross deferred tax liabilities are as follows:





2004
    
    2003Deferred tax
      assets:Allowance
      for loan losses
    $
    1,356,056
    $
    1,172,111Investment
      securities
    
    241,017
    
    189,312Asset under
      capital lease
    
    -
    
    20,667Premises
      and equipment
    
    138,986
    
    230,643Accrued
      expenses
    
    14,022
    
    13,580Other
    
    -
    
    7,206Gross
      deferred tax assets
    
    1,750,081
    
    1,633,519Deferred tax
      liabilities:Tax bad
      debt reserve
    
    69,347
    
    109,394Other
    
    3,692
    
    -Gross
      deferred tax liabilities
    
    73,039
    
    109,394**Deferred tax asset, net**
    **$**
    1,677,042
    $
    1,524,125




****

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

****



Based on the Company’s annual goodwill impairment tests
performed in October 2004 and 2003, goodwill was not impaired for the years
ended December 31, 2004 and 2003.  In addition, no goodwill was
acquired during 2004 and 2003.



28







Note 11. Shareholders’ Equity






Income Per
Share





The following is
information about the computation of income per share for the years ended
December 31, 2004 and 2003.





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






2003Net
      Income
    Shares
    Per Share
      AmountBasic Income Per
      ShareIncome
      available to common shareholders
    $
    1,340,720
    2,400,879
    $
    0.56Effect of
      Dilutive SecuritiesWarrants
      and stock options outstanding
    
    -
    42,357
    
    (0.01)Diluted Income
      Per ShareIncome
      available to common shareholdersplus
      assumed conversions
    $
    1,340,720
    2,443,236
    $
    0.55








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.



29







A summary of the status of the warrants
at December 31, 2004 and 2003, and changes during the years ended on those
dates, is as follows:





**2004**
    
    2003**Number**
      **of**
      **Shares**
    **Weighted-**
      **Average**
      **Exercise**
      **Price**
    
    Number
      of
      Shares
    Weighted-
      Average
      Exercise
      PriceOutstanding
      at beginning of year
    
    **83,484**
    **$**
    **6.00**
    
    
    91,166
    $
    6.00Expired
    
    **5,700**
    
    **6.00**
    
    
    -Exercised
    
    **77,784**
    
    **6.00**
    
    
    7,682
    
    6.00Outstanding
      at end of year
    
    **-**
    
    
    
    
    83,484
    
    6.00Exercisable
      at end of year
    
    **-**
    
    
    
    
    83,484
    
    6.00












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 could have been granted, and subsequently the
Company assumed all obligations related to such options.  The Plan provided
for the grant of 110,000 non-qualified and incentive stock options in 1999 to
certain directors of the Company, with an exercise price equal to the market
value of the Company’s stock on the date of grant.  Such options were
immediately exercisable and expire if unexercised ten years after the date of
grant.  The Company has reserved 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, 2004 and 2003 is as follows:





**2004**
    
    2003**Number**
      **of**
      **Shares**
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**
    
    Number
      of
      Shares
    
    Weighted-
      Average
      Exercise
      PriceOutstanding
      at beginning of year
    **110,000**
    $
    **10.13**
    
    110,000
    $
    10.13Granted
    **-**
    
    
    
    -Outstanding
      at end of year
    **110,000**
    
    **10.13**
    
    110,000
    
    10.13Exercisable
      at end of year
    **110,000**
    
    **10.13**
    
    110,000
    
    10.13








The weighted-average remaining
contractual life for the options outstanding at December 31, 2004 is
4.7 years.




30




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.





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 Company contributions.  The Company contributed
approximately $127,000 and $73,000 to the 401(k) Plan in 2004 and 2003,
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 contract amounts of these instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments.



31




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, 2004 and 2003:





2004
    
    2003Commitments to
      extend credit:Future loan
      commitments
    $
    23,484,674
    $
    23,618,500Unused
      lines of credit
    
    36,018,661
    
    31,433,770Undisbursed
      construction loans
    
    37,224,376
    
    31,958,302Financial standby
      letters of credit
    
    197,000
    
    122,000$
    96,924,711
    $
    87,132,572






Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract.  Commitments to extend credit generally have fixed expiration
dates or other termination clauses and may require payment of a fee by the
borrower.  Since these commitments could expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.  The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's credit evaluation
of the counterparty.  Collateral held varies, but may include residential
and commercial property, deposits and securities.





Standby letters of credit are written commitments issued by
the Company to guarantee the performance of a customer to a third party. 
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.  As of January 1,
2003, newly issued or modified guarantees that are not derivative contracts have
been recorded on the Company’s consolidated balance sheet at their fair value at
inception.  No liability related to guarantees was required to be recorded
at December 31, 2004 and 2003.



**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-



32


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, 2004, 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.





The Company’s and the Bank’s actual capital amounts and
ratios at December 31, 2004 and 2003 were (dollars in
thousands):





**Actual**
    **For
      Capital**
      **Adequacy
      Purposes**
    **To
      Be Well**
      **Capitalized
      Under**
      **Prompt
      Corrective**
      **Action
      Provisions**


**2004**
    
    **Amount**
    **Ratio**
    
    **Amount**
    **Ratio**
    
    **Amount**
    **Ratio****The
      Company:****Total
      Capital (to Risk Weighted Assets)**
    **$**
    **30,701**
    **10.70%**
    **$**
    **22,954**
    **8.00%**
    **$**
    **N/A**
    **N/A****Tier
      I Capital (to Risk Weighted Assets)**
    
    **25,936**
    **9.04%**
    
    **11,476**
    **4.00%**
    
    **N/A**
    **N/A****Tier
      I Capital (Average Assets)**
    
    **25,936**
    **6.79%**
    
    **15,279**
    **4.00%**
    
    **N/A**
    **N/A**
 **The
      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%**
 33




Actual
    For
      Capital
      Adequacy
      Purposes
    To
      Be Well
      Capitalized
      Prompt
      Corrective
      Action
      Provisions


2003
    
    Amount
    Ratio
    
    Amount
    Ratio
    
    Amount
    RatioThe
      Company:Total
      Capital (to Risk Weighted Assets)
    $
    29,094
    11.87%
    $
    19,608
    8.00%
    $
    N/A
    N/ATier
      I Capital (to Risk Weighted Assets)
    
    24,522
    10.00%
    
    9,809
    4.00%
    
    N/A
    N/ATier
      I Capital (Average Assets)
    
    24,522
    7.51%
    
    13,061
    4.00%
    
    N/A
    N/A


The
      Bank:Total
      Capital (to Risk Weighted Assets)
    $
    28,568
    11.67%
    $
    19,584
    8.00%
    $
    24,480
    10.00%Tier
      I Capital (to Risk Weighted Assets)
    
    25,633
    10.47%
    
    9,793
    4.00%
    
    14,689
    6.00%Tier
      I Capital (to Average Assets)
    
    25,633
    7.85%
    
    13,061
    4.00%
    
    16,327
    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, 2004, the Bank had
retained earnings of approximately $4,467,000, 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 FRB 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.

34


Changes in loans outstanding to such related parties during
2004 and 2003 are as follows:





2004
    
    2003Balance,
      beginning of year
    $
    1,410,440
    $
    3,547,766Additional
      loans
    
    183,386
    
    8,823Repayments
    
    (22,998)
    
    (2,129,708)Adjustment for
      former related parties
    
    (1,372,242)
    
    (16,441)Balance, end of
      year
    $
    198,586
    $
    1,410,440






Related party deposits aggregated approximately $3,444,000
and $4,126,000 as of December 31, 2004 and 2003,
respectively.





The Company leases office space to a director of the Company
under two leases.  Rental income under these leases was approximately
$28,300 and $25,300, respectively, for the years ended
December 31, 2004 and 2003.





During 2004 and 2003, the Company paid legal fees of
approximately $20,900 and $30,400, respectively, to an attorney who is a
director of the Company.



**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:





2004




Before-Tax
      Amount
    Tax Effect
    Net-of-Tax
      Amount




Unrealized 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)






35






| |  | 2003
| |  | ----





| |  | Before-Tax
      Amount | Tax Effect | Net-of-Tax
      Amount
| |  | ----------------------- | ---------- | -----------------------





| | Unrealized
      holding losses arising during period | $ | (1,111,578) | $ | 422,399 | $ | (689,179)
| | ----------------------------------------------------- | - | ----------- | - | ------- | - | ---------
| |                                                       |   |             |   |         |   |          
| | Add
      reclassification adjustment for gains       |   |             |   |         |   |          
| | recognized
      in net income                        |   | (307,739)   |   | 116,941 |   | (190,798)
| |                                                       |   |             |   |         |   |          
| | Unrealized
      holding loss on available for sale   |   |             |   |         |   |          
| | securities,
      net of taxes                        | $ | (1,419,317) | $ | 539,340 | $ | (879,977)



**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 statements of condition, for which
it is practicable to estimate that value.  In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques.  Those techniques are significantly affected
by the assumptions used, including the discount rates and estimates of future
cash flows.  In that regard, the derived fair value estimates cannot be
substantiated by comparisons to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument.  Statement No.
107 excludes certain financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.





Management uses its best judgment in estimating the fair value of the
Company's financial instruments; however, there are inherent weaknesses in any
estimation technique.  Therefore, for substantially all financial
instruments, the fair value estimates presented herein are not necessarily
indicative of the amounts the Company could have realized in a sales transaction
at December 31, 2004 and 2003.  The estimated fair value amounts
for 2004 and 2003 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.



36




As
of December 31, 2004 and 2003, the recorded book balances and
estimated fair values of the Company’s financial instruments were (in
thousands):





**2004**
    
    2003**Recorded**
    
    
    Recorded**Book**
    
    
    Book**Balance**
    **Fair
      Value**
    
    Balance
    Fair
      Value**Financial
      Assets:**Cash and due
      from banks
    **$
      6,670**
    **$
      6,670**
    
    $ 4,024
    $ 4,024Federal funds
      sold
    **37,500**
    **37,500**
    
    15,000
    15,000Short-term
      investments
    **11,460**
    **11,460**
    
    10,431
    10,431Available for
      sale securities
    **76,269**
    **76,269**
    
    90,562
    90,562Federal
      Reserve Bank stock
    **693**
    **693**
    
    691
    691Federal Home
      Loan Bank stock
    **1,297**
    **1,297**
    
    1,077
    1,077Loans
      receivable, net
    **263,875**
    **265,206**
    
    214,421
    218,064Accrued
      interest receivable
    **1,758**
    **1,758**
    
    1,471
    1,471**Financial
      Liabilities:**Demand
      deposits
    **$
      42,584**
    **$
      42,584**
    
    $ 30,477
    $ 30,477Savings
      deposits
    **22,104**
    **22,104**
    
    23,793
    23,793Money market
      deposits
    **72,451**
    **72,451**
    
    69,504
    69,504NOW
      accounts
    **26,815**
    **26,815**
    
    22,850
    22,850Time
      deposits
    **203,052**
    **206,539**
    
    143,369
    148,005Repurchase
      agreements
    **-**
    **-**
    
    5,700
    5,700FHLB
      borrowings
    **8,000**
    **8,082**
    
    17,000
    17,107Subordinated
      debt
    **8,248**
    **8,248**
    
    8,248
    8,248Collateralized
      borrowings
    **-**
    **-**
    
    249
    249






Unrecognized  financial
instruments    Loan
commitments on which the committed interest rate is less than the current market
rate were insignificant at December 31, 2004 and 2003.  The
estimated fair value of fee income on letters of credit at
December 31, 2004 and 2003 was insignificant.   The
Company assumes interest rate risk (the risk that general interest rate levels
will change) as a result of its normal operations.  As a result, the fair
values of the Company’s financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company.  Management attempts to match maturities of assets and liabilities
to the extent believed necessary to minimize interest rate risk.  However,
borrowers with fixed rate obligations are less likely to prepay in a rising rate
environment and more likely to prepay in a falling rate environment. 
Conversely, depositors who are receiving fixed rates are more likely to withdraw
funds before maturity in a rising rate environment and less likely to do so in a
falling rate environment.  Management monitors rates and maturities of
assets and liabilities and attempts to minimize interest rate risk by adjusting
terms of new loans and deposits and by investing in securities with terms that
mitigate the Company’s overall interest rate risk.  37
 
 
 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, 2004 and 2003 is as follows (in
thousands):    2004
    Commercial
      Bank
    Mortgage
      Broker
    Consolidated
      Totals
  Net 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
   2003
    Commercial
      Bank
    Mortgage
      Broker
    Consolidated
      Totals
  Net interest income
    $
    9,626
    $
    -
    $
    9,626Noninterest income
    
    851
    
    3,963
    
    4,814Noninterest expenses
    
    8,441
    
    3,218
    
    11,659Provision for loan losses
    
    563
    
    -
    
    563Income before taxes
    
    1,473
    
    745
    
    2,218Assets
    
    341,473
    
    996
    
    342,469
  38
  The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.  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.  Intersegment revenues are accounted for at amounts that
assume the revenues were between unrelated third parties at the current market
prices at the time of the transactions.   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.   39