pnbk2nq-10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarter Ended June 30, 2007
Commission file number 000-29599

PATRIOT NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)

Connecticut
06-1559137
(State of incorporation)
(I.R.S. Employer Identification Number)

900 Bedford Street, Stamford, Connecticut 06901
(Address of principal executive offices)

(203) 324-7500
(Registrant’s telephone number)

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes     X      No         

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer:

Large Accelerated Filer ____     Accelerated Filer ____     Non-Accelerated Filer   X   

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

Yes ___   No    X    

State the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date.

Common stock, $2.00 par value per share, 4,741,844 shares issued and outstanding as of the close of business July 31, 2007.

Table of Contents

   
Page
     
Part I
FINANCIAL INFORMATION
 
     
Item 1.
Consolidated Financial Statements
3
     
Item 2.
Management’s Discussion and Analysis of
 
 
Financial Condition and Results of Operations
17
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
30
     
Item 4.
Controls and Procedures
33
     
Part II
OTHER INFORMATION
 
     
Item 1A.
Risk Factors
33
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
33
     
Item 4.
Submission of Matters to a Vote of Security Holders
34
     
Item 6.
Exhibits
35



2

PART I - FINANCIAL INFORMATION

Item 1.     Consolidated Financial Statements
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
 
   
June 30,
  December 31, 
   
2007
   
2006
 
 
 (Unaudited) 
     
ASSETS
           
Cash and due from banks
  $
11,615,448
    $
3,868,670
 
Federal funds sold
   
33,700,000
     
27,000,000
 
Short term investments
   
34,954,826
     
24,605,869
 
     Cash and cash equivalents
   
80,270,274
     
55,474,539
 
                 
Available for sale securities (at fair value)
   
63,633,344
     
67,093,135
 
Federal Reserve Bank stock
   
1,911,700
     
1,911,700
 
Federal Home Loan Bank stock
   
1,217,200
     
1,217,200
 
Loans receivable (net of allowance for loan losses:  2007 $5,597,656;
     2006 $5,630,432)
   
592,073,371
     
506,884,155
 
Accrued interest receivable
   
4,035,770
     
3,542,173
 
Premises and equipment
   
6,623,581
     
3,690,861
 
Deferred tax asset, net
   
2,815,045
     
2,914,562
 
Goodwill and other intangible assets
   
1,478,363
     
1,487,651
 
Other assets
   
1,845,388
     
1,766,819
 
          Total assets
  $
755,904,036
    $
645,982,795
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
     Deposits:
               
          Noninterest bearing deposits
  $
68,064,834
    $
56,679,836
 
          Interest bearing deposits
   
611,198,181
     
504,771,828
 
               Total deposits
   
679,263,015
     
561,451,664
 
     Federal Home Loan Bank borrowings
   
-
     
8,000,000
 
     Junior subordinated debt owed to unconsolidated trust
   
8,248,000
     
8,248,000
 
     Accrued expenses and other liabilities
   
3,273,236
     
3,999,786
 
               Total liabilities
   
690,784,251
     
581,699,450
 
                 
Shareholders' equity
               
     Preferred stock:  1,000,000 shares authorized; no shares issued
   
-
     
-
 
     Common stock, $2 par value: 60,000,000 shares authorized; shares
               
     issued and outstanding:  2007 - 4,741,844;  2006 - 4,739,494
   
9,483,688
     
9,478,988
 
     Additional paid in capital
   
49,508,568
     
49,463,307
 
     Retained earnings
   
6,646,119
     
6,022,012
 
     Accumulated other comprehensive income - net unrealized
               
          loss on available for sale securities, net of taxes
    (518,590 )     (680,962 )
               Total shareholders' equity
   
65,119,785
     
64,283,345
 
               Total liabilities and shareholders' equity
  $
755,904,036
    $
645,982,795
 
 
See accompanying notes to consolidated financial statements.
3

PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
   
2007
  
2006
 
                         
Interest and Dividend Income
                       
Interest and fees on loans
  $
11,270,743
    $
8,311,861
    $
21,606,864
    $
15,510,351
 
Interest and dividends
                               
     on investment securities
   
1,155,542
     
768,842
     
2,170,801
     
1,547,669
 
Interest on federal funds sold
   
567,730
     
71,889
    
780,958
    
134,664
 
Total interest and dividend income
   
12,994,015
     
9,152,592
    
24,558,623
    
17,192,684
 
                                 
Interest Expense
                               
Interest on deposits
   
6,897,473
     
3,595,580
     
12,590,716
     
6,681,625
 
Interest on Federal Home Loan Bank borrowings
   
22,598
     
422,407
     
121,047
     
607,805
 
Interest on subordinated debt
   
172,953
     
165,631
     
344,351
     
320,667
 
Interest on other borrowings
   
-
     
1,844
     
-
     
4,150
 
Total interest expense
   
7,093,024
     
4,185,462
    
13,056,114
     
7,614,247
 
                                 
Net interest income
   
5,900,991
     
4,967,130
     
11,502,509
     
9,578,437
 
                                 
Provision for Loan Losses
   
-
    
350,700
    
-
    
923,500
 
                                 
Net interest income after
                               
     provision for loan losses
   
5,900,991
    
4,616,430
    
11,502,509
    
8,654,937
 
                                 
Noninterest Income
                               
Mortgage brokerage referral fees
   
216,377
     
312,832
     
504,711
     
679,638
 
Loan origination & processing fees
   
57,642
     
86,633
     
106,244
     
153,850
 
Fees and service charges
   
194,038
     
143,211
     
375,381
     
288,410
 
Gain on redemption of investment securities
   
5,000
     
-
     
5,000
     
-
 
Other income
   
53,321
    
38,653
    
120,056
    
89,696
 
Total noninterest income
   
526,378
    
581,329
    
1,111,392
    
1,211,594
 
                                 
Noninterest Expenses
                               
Salaries and benefits
   
3,083,862
     
2,600,207
     
6,175,817
     
4,913,779
 
Occupancy and equipment expense, net
   
1,013,192
     
689,470
     
1,960,256
     
1,335,574
 
Data processing and other outside services
   
486,788
     
383,975
     
898,004
     
807,265
 
Professional services
   
89,870
     
119,385
     
226,205
     
247,958
 
Advertising and promotional expenses
   
208,376
     
150,826
     
407,678
     
295,866
 
Loan administration and processing expenses
   
52,155
     
49,996
     
90,974
     
80,473
 
Other real estate operations
    (10,594 )    
-
      (17,556 )    
-
 
Other noninterest expenses
   
629,371
    
401,108
    
1,154,755
    
752,881
 
Total noninterest expenses
   
5,553,020
    
4,394,967
    
10,896,133
    
8,433,796
 
                                 
Income before income taxes
   
874,349
     
802,792
     
1,717,768
     
1,432,735
 
                                 
Provision for Income Taxes
   
340,000
    
295,000
    
667,000
    
526,000
 
                                 
Net income
  $
534,349
   $
507,792
   $
1,050,768
   $
906,735
 
                                 
Basic income Per Share
  $
0.11
   $
0.16
   $
0.22
   $
0.28
 
                                 
Diluted income Per Share
  $
0.11
   $
0.16
   $
0.22
   $
0.28
 
                                 
Dividends per share
  $
0.045
   $
0.045
   $
0.090
   $
0.085
 
 
See accompanying notes to consolidated financial statements.
4

PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Net income
  $
534,349
    $
507,792
    $
1,050,768
    $
906,735
 
                                 
Unrealized holding gains (losses) on securities:
                               
     Unrealized holding gains (losses) arising
                               
 during the period, net of taxes
    (59,738 )     (167,510 )    
162,372
      (271,534 )
 
                               
Comprehensive income
  $
474,611
    $
340,282
    $
1,213,140
    $
635,201
 






See accompanying notes to consolidated financial statements.
5

PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
 
                           
Accumulated
       
               
Additional
         
Other
       
   
Number of
   
Common
   
Paid-In
   
Retained
   
Comprehensive
       
   
Shares
   
Stock
   
Capital
   
Earnings
   
Loss
   
Total
 
                                     
Six months ended June 30, 2006
                                   
                                     
Balance at December 31, 2005
   
3,230,649
    $
6,461,298
    $
21,709,224
    $
4,308,242
    $ (1,104,149 )   $
31,374,615
 
                                                 
Comprehensive income
                                               
  Net income
                           
906,735
             
906,735
 
  Unrealized holding loss on available for   
                                         
     sale securities, net of taxes
                                    (271,534 )     (271,534 )
               Total comprehensive income   
                                     
635,201
 
                                                 
Dividends
                         (274,605 )            (274,605 )
                                                 
Balance, June 30, 2006
   
3,230,649
   $
6,461,298
   $
21,709,224
   $
4,940,372
   $ (1,375,683 )   $
31,735,211
 
                                                 
Six months ended June 30, 2007
                                               
                                                 
Balance at December 31, 2006
   
4,739,494
    $
9,478,988
    $
49,463,307
    $
6,022,012
    $ (680,962 )   $
64,283,345
 
                                                 
Comprehensive income
                                               
  Net income
                           
1,050,768
             
1,050,768
 
  Unrealized holding gain on available for   
                                         
     sale securities, net of taxes
                                   
162,372
     
162,372
 
               Total comprehensive income   
                                     
1,213,140
 
                                                 
Issuance of common stock
                                               
  Stock issued to directors
   
2,350
     
4,700
     
45,261
                     
49,961
 
                                                 
Dividends
                         (426,661 )           (426,661 )
                                                 
Balance, June 30, 2007
   
4,741,844
   $
9,483,688
   $
49,508,568
   $
6,646,119
   $ (518,590 )  $
65,119,785
 

See accompanying notes to consolidated financial statements.
6

PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Six Months Ended   
 
   
June 30,   
 
   
2007
   
2006
 
             
Cash Flows from Operating Activities
           
Net income
  $
1,050,768
    $
906,735
 
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Amortization and accretion of investment premiums and discounts, net
   
92,662
     
103,291
 
Provision for loan losses
   
-
     
923,500
 
Gain on redemption of investment security
    (5,000 )    
-
 
Amortization of core deposit intangible
   
9,288
     
-
 
Depreciation and amortization
   
537,925
     
310,659
 
Loss on disposal of bank premises and equipment
   
633
     
-
 
Payment of fees to directors in common stock
   
49,961
     
-
 
Changes in assets and liabilities:
               
     Increase in deferred loan fees
   
157,304
     
415,593
 
     Increase in accrued interest receivable
    (493,597 )     (688,787 )
     Increase in other assets
    (78,569 )     (47,887 )
     (Decrease) increase in accrued expenses and other liabilities
    (726,655 )    
434,712
 
     Net cash provided by operating activities
   
594,720
     
2,357,816
 
                 
Cash Flows from Investing Activities
               
Purchases of available for sale securities
    (4,994,283 )    
-
 
Principal repayments on available for sale securities
   
6,623,301
     
5,985,116
 
Proceeds from redemptions of available for sale securities
   
2,005,000
     
-
 
Purchase of Federal Reserve Bank Stock
   
-
      (650 )
Purchase of Federal Home Loan Bank Stock
   
-
      (1,430,500 )
Net increase in loans
    (85,346,520 )     (87,547,071 )
Purchases of bank premises and equipment
    (3,471,278 )     (316,472 )
     Net cash used in investing activities
    (85,183,780 )     (83,309,577 )
                 
Cash Flows from Financing Activities
               
Net increase in demand, savings and money market deposits
   
20,964,306
     
3,432,825
 
Net increase in time certificates of deposits
   
96,847,045
     
50,120,597
 
Proceeds from FHLB borrowings
   
-
     
54,718,000
 
Principal repayments of FHLB borrowings
    (8,000,000 )     (20,718,000 )
Dividends paid on common stock
    (426,556 )     (258,452 )
     Net cash provided by financing activities
   
109,384,795
     
87,294,970
 
                 
     Net increase in cash and cash equivalents
   
24,795,735
     
6,343,209
 
                 
Cash and cash equivalents
               
Beginning
   
55,474,539
     
15,967,605
 
                 
Ending
  $
80,270,274
    $
22,310,814
 
7

PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
 
   
Six Months Ended   
 
   
June 30,   
 
   
2007
   
2006
 
             
Supplemental Disclosures of Cash Flow Information
           
Cash paid for:
           
     Interest
  $
13,068,208
    $
7,485,125
 
                 
     Income taxes
  $
820,000
    $
934,020
 
                 
Supplemental disclosures of noncash investing and financing activities:
               
                 
Unrealized holding gain (loss) on available for sale
               
securities arising during the period
  $
261,889
    $ (437,957 )
                 
Dividends declared on common stock
  $
213,383
    $
145,379
 

See accompanying notes to consolidated financial statements.
8

PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1.     Basis of Financial Statement Presentation

The Consolidated Balance Sheet at December 31, 2006 has been derived from the audited financial statements of Patriot National Bancorp, Inc. (“Bancorp”) at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The accompanying unaudited financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted.  The accompanying consolidated financial statements and related notes should be read in conjunction with the audited financial statements of Bancorp and notes thereto for the year ended December 31, 2006.

The information furnished reflects, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented.  The results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of the results of operations that may be expected for the remainder of 2007.

Note 2.     Investments

The following table is a summary of Bancorp’s available for sale securities portfolio, at fair value, at the dates shown:

   
June 30,
  December 31, 
   
2007
   
2006
 
             
U. S. Government sponsored
           
  agency obligations
  $
16,648,035
    $
16,566,822
 
U. S. Government Agency and sponsored
               
   agency mortgage-backed securities
   
36,941,027
     
43,476,313
 
Money market preferred
               
  equity securities
   
10,044,282
     
7,050,000
 
Total Available for Sale Securities
  $
63,633,344
    $
67,093,135
 
9

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of available for sale securities at June 30, 2007 are as follows:
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
  
Gains
  
Losses
  
Value
 
U. S. Government sponsored
                       
   agency obligations
  $
17,000,000
    $
-
    $ (351,965 )   $
16,648,035
 
U. S. Government Agency and sponsored
                               
   agency mortgage-backed securities
   
37,425,498
     
25,755
      (510,226 )    
36,941,027
 
Money market preferred
                               
  equity securities
   
10,044,282
    
-
    
-
    
10,044,282
 
Total Available For Sale Securities
  $
64,469,780
   $
25,755
   $ (862,191 )  $
63,633,344
 

At June 30, 2007, gross unrealized holding gains and gross unrealized holding losses on available for sale securities totaled $25,755 and $862,191, respectively.  Of the securities with unrealized losses, there are nine U. S. Government sponsored agency obligations and 23 mortgage-backed securities that have unrealized losses for a period in excess of twelve months, with a combined current unrealized loss of $823,193.  Management does not believe that any of the unrealized losses are other than temporary since they are the result of changes in the interest rate environment and they relate to debt and mortgage-backed securities issued by U.S. Government sponsored agencies.  Bancorp has the ability to hold these securities to maturity, if necessary, and expects to receive all contractual principal and interest related to these investments.  As a result, management believes that these unrealized losses will not have a negative impact on future earnings or a permanent negative effect on capital.
10

Note 3.     Loans

The following table is a summary of Bancorp’s loan portfolio at the dates shown:
 
 
   
June 30,
  December 31, 
   
2007
  
2006
 
Real Estate
           
   Commercial
  $
204,370,846
    $
166,799,341
 
   Residential
   
94,041,579
     
91,077,687
 
   Construction
   
250,270,942
     
203,828,453
 
Commercial
   
23,914,313
     
23,997,640
 
Consumer installment
   
1,355,466
     
1,251,300
 
Consumer home equity
   
25,308,352
     
26,933,277
 
Total Loans
   
599,261,498
     
513,887,698
 
Premiums on purchased loans
   
232,487
     
292,543
 
Net deferred fees
    (1,822,958 )     (1,665,654 )
Allowance for loan losses
    (5,597,656 )     (5,630,432 )
Loans receivable, net
  $
592,073,371
    $
506,884,155
 

Analysis of Allowance for Loan Losses

The changes in the allowance for loan losses for the periods shown are as follows:
 
   
Three months ending   
   
Six months ending   
 
   
June 30,   
   
June 30,   
 
(Thousands of dollars)
 
2007
   
2006
   
2007
   
2006
 
                         
Balance at beginning of period
  $
5,630
    $
5,161
    $
5,630
    $
4,588
 
Charge-offs
    (32 )     (1 )     (32 )     (1 )
Recoveries
   
-
     
-
     
-
     
-
 
Net charge-offs
    (32 )     (1 )     (32 )     (1 )
Provision charged to operations
   
-
     
351
     
-
     
924
 
Balance at end of period
  $
5,598
    $
5,511
    $
5,598
    $
5,511
 
                                 
Ratio of net charge-offs during
                               
     the period to average loans
                               
     outstanding during the period.
    0.00 %     0.00 %     0.00 %     0.00 %
11

 Note 4.     Deposits

The following table is a summary of Bancorp’s deposits at the dates shown:
 
   
June 30,
  December 31, 
   
2007
  
2006
 
             
Noninterest bearing
  $
68,064,834
    $
56,679,836
 
                 
Interest bearing
               
     NOW
   
33,414,691
     
26,881,927
 
     Savings
   
31,445,121
     
25,993,452
 
     Money market
   
38,530,503
     
40,935,628
 
     Time certificates, less than $100,000
   
297,606,236
     
248,414,014
 
     Time certificates, $100,000 or more
   
210,201,630
     
162,546,807
 
Total interest bearing
   
611,198,181
     
504,771,828
 
Total Deposits
  $
679,263,015
    $
561,451,664
 

Note 5.    Borrowings

In addition to the outstanding borrowings disclosed in the consolidated balance sheet, the Bank has the ability to borrow approximately $107.7 million in additional advances from the Federal Home Loan Bank of Boston which includes a $2.0 million overnight line of credit.  The Bank also has arranged a $3.0 million overnight line of credit from a correspondent bank and $10.0 million under a repurchase agreement; no amounts were outstanding under these two arrangements at June 30, 2007.

Note 6.    Income per share

Bancorp is required to present basic income per share and diluted income per share in its income statements.  Basic income per share amounts are computed by dividing net income by the weighted average number of common shares outstanding.  Diluted income per share reflects additional common shares that would have been outstanding if potentially 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 Bancorp relate to outstanding stock options and are determined using the treasury stock method.  Bancorp is also required to provide a reconciliation of the numerator and denominator used in the computation of both basic and diluted income per share.
 
The following is information about the computation of income per share for the three and six months ended June 30, 2007 and 2006:
12

Three months ended June 30, 2007
     
       
 
Net Income
Shares
Amount
Basic Income Per Share
     
   Income available to common shareholders
 $                 534,349
             4,739,546
 $                   0.11
     Effect of Dilutive Securities
     
        Stock Options outstanding
                               -
                  35,504
                          -
Diluted Income Per Share
     
   Income available to common shareholders
     
   plus assumed conversions
 $                 534,349
             4,775,050
 $                   0.11
       
Three months ended June 30, 2006
     
       
 
Net Income
Shares
Amount
Basic Income Per Share
     
   Income available to common shareholders
 $                 507,792
             3,230,649
 $                   0.16
     Effect of Dilutive Securities
     
        Stock Options outstanding
                               -
                  28,668
                          -
Diluted Income Per Share
     
   Income available to common shareholders
     
   plus assumed conversions
 $                 507,792
             3,259,317
 $                   0.16
       
Six months ended June 30, 2007
     
       
 
Net Income
Shares
Amount
Basic Income Per Share
     
   Income available to common shareholders
 $              1,050,768
             4,739,520
 $                   0.22
     Effect of Dilutive Securities
     
        Stock Options outstanding
                               -
                  36,627
                          -
Diluted Income Per Share
     
   Income available to common shareholders
     
   plus assumed conversions
 $              1,050,768
             4,776,147
 $                   0.22
       
Six months ended June 30, 2006
     
       
 
Net Income
Shares
Amount
Basic Income Per Share
     
   Income available to common shareholders
 $                 906,735
             3,230,649
 $                   0.28
     Effect of Dilutive Securities
     
        Stock Options outstanding
                               -
                  26,700
                          -
Diluted Income Per Share
     
   Income available to common shareholders
     
   plus assumed conversions
 $                 906,735
             3,257,349
 $                   0.28
13

Note 7.    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:

   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2007 
   
June 30, 2007 
 
   
Before Tax
         
Net of Tax
   
Before Tax
         
Net of Tax
 
   
Amount
  
Tax Effect
  
Amount
   
Amount
  
Tax Effect
  
Amount
 
                                     
Unrealized holding (loss) gain
                                   
arising during the period
  $ (96,352 )   $
36,614
    $ (59,738 )   $
261,889
    $ (99,517 )   $
162,372
 
                                                 
Reclassification adjustment
                                               
for gains recognized in income
   
-
     
-
     
-
     
-
     
-
     
-
 
                                                 
Unrealized holding (loss) gain
                                               
on available for sale securities,
                                               
net of taxes
  $ (96,352 )   $
36,614
    $ (59,738 )   $
261,889
    $ (99,517 )   $
162,372
 
                                                 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2006
   
June 30, 2006 
 
   
Before Tax
           
Net of Tax
   
Before Tax
           
Net of Tax
 
   
Amount
  
Tax Effect
  
Amount
   
Amount
  
Tax Effect
  
Amount
 
                                                 
Unrealized holding loss
                                               
arising during the period
  $ (270,177 )   $
102,667
    $ (167,510 )   $ (437,957 )   $
166,423
    $ (271,534 )
                                                 
Reclassification adjustment
                                               
for gains recognized in income
   
-
     
-
     
-
     
-
     
-
     
-
 
                                                 
Unrealized holding loss on
                                               
available for sale securities,
                                               
net of taxes
  $ (270,177 )   $
102,667
    $ (167,510 )   $ (437,957 )   $
166,423
    $ (271,534 )
14

Note 8.    Financial Instruments with Off-Balance Sheet Risk

In order to meet the financing needs of its customers, Bancorp, in the normal course of business, is a party to financial instruments with off-balance-sheet risk.  These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheets.  The contractual amounts of these instruments reflect the extent of involvement Bancorp has in particular classes of financial instruments.
 
The contractual amounts of commitments to extend credit and standby letters of credit represent the amounts of potential accounting loss should the contracts be fully drawn upon, the customers default and the values of any existing collateral become worthless.  Bancorp 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 Bancorp 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 contractual amounts represent credit risk are as follows at
June 30, 2007:
 
 
Commitments to extend credit:
   
 
 Future loan commitments
 $      93,339,854
 
 
 Unused lines of credit
         53,185,120
 
 
 Undisbursed construction loans
       107,575,943
 
 
Financial standby letters of credit
           1,248,049
 
    
 $    255,348,966
 
 
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 Bancorp 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 Bancorp 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.  Newly issued or modified guarantees that are not derivative contracts are recorded on Bancorp’s consolidated balance sheet at the fair value at inception.  No liability related to guarantees was required to be recorded at June 30, 2007.
15

Note 9.    Income Taxes

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes.  FIN 48 applies to all tax positions related to income taxes subject to SFAS No. 109, Accounting for Income Taxes.  This includes tax positions considered to be “routine” as well as those with a high degree of uncertainty.  FIN 48 utilizes a two-step approach for evaluating tax positions.  Recognition of the benefit (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination.  Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more-likely-than-not to be sustained).  FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Effective January 1, 2007, Bancorp has adopted the provisions of FIN 48 and has analyzed its federal and significant state filing positions.  The periods subject to examination for Bancorp’s federal returns are the tax years 2003 through 2006.  The periods subject to examination for Bancorp’s significant state return, which is Connecticut, are the tax years 2003 through 2006.  Bancorp believes that its income tax filing positions and deductions will be sustained upon examination and does not anticipate any adjustments that will result in a material change on its financial statements.  As a result, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48, nor was there a cumulative effect related to adopting FIN 48 recorded.

Bancorp’s policy for recording interest and penalties related to uncertain tax positions is to record such items as part of its provision for federal and state income taxes.

Note 10.     Recent Accounting Pronouncements

In February 2007, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB No. 155 (“SFAS 159”).  SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value.  SFAS 159 is effective for Bancorp beginning January 1, 2008.  Management is evaluating the impact of the adoption of SFAS 159 on Bancorp’s financial position and results of operation.
16

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

"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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

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.
17

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.  The adequacy of the general component is measured using a risk rating system.  Under this system, each loan is assigned a risk rating between one and nine; “one” being the least risk and “nine” reflecting the most risk or a complete loss.  Risk ratings are assigned based upon the recommendations of the credit analyst and originating loan officer, and are confirmed by the loan committee at the initiation of the transactions.  They are later reviewed and changed, when necessary, during the life of the loan.  Each of these risk ratings has a corresponding loan loss factor which is based on historical loss experience adjusted for qualitative factors.  These 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.  Finally, 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 such as unfavorable information about a borrower’s financial condition, difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors.

Loan quality control is continually monitored by management subject to oversight by the board of directors through its members who serve on the loan committee.  Loan quality control is also reviewed by the full board of directors on a monthly basis.  The methodology for determining the adequacy of the allowance for loan losses is consistently applied; however, revisions may be made to the methodology and assumptions based on historical information related to charge-off and recovery experience and management’s evaluation of the current loan portfolio.
18

SUMMARY

Bancorp’s net income of $534,000 ($0.11 basic and diluted income per share) for the quarter ended June 30, 2007 represents an increase of $26,000, or 5%, as compared to net income of $508,000 ($0.16 basic and diluted income per share) for the quarter ended June 30, 2006.  For the six-month period ended June 30, 2007, net income of $1,051,000 ($0.22 basic and diluted income per share) represents an increase of $144,000, or 16%, as compared to net income of $907,000 ($0.28 basic and diluted income per share) for the six months ended June 30, 2006.

Total assets increased $109.9 million from $646.0 million at December 31, 2006 to $755.9 million at June 30, 2007.  Cash and cash equivalents increased $24.8 million to $80.3 million at June 30, 2007 as compared to $55.5 million at December 31, 2006.  The available for sale securities portfolio decreased $3.5 million to $63.6 million at June 30, 2007 from $67.1 million at December 31, 2006.  The net loan portfolio increased $85.2 million from $506.9 million at December 31, 2006 to $592.1 million at June 30, 2007.  Deposits increased $117.8 million to $679.3 million at June 30, 2007 from $561.5 million at December 31, 2006.  Borrowings decreased $8.0 million.  Total shareholders’ equity increased $836,000 from $64.3 million at December 31, 2006 to $65.1 million at June 30, 2007.

FINANCIAL CONDITION

Assets

Bancorp’s total assets increased $109.9 million, or 17%, from $646.0 million at December 31, 2006 to $755.9 million at June 30, 2007.  The growth in the balance sheet was funded by an increase in deposits which was largely attributable to promotions associated with the opening of three branches in the first quarter and one in the second quarter.  Cash and cash equivalents increased $24.8 million to $80.3 million at June 30, 2007 as compared to $55.5 million at December 31, 2006.  Cash and due from banks increased $7.7 million.  Federal funds sold and short term investments increased $6.7 million and $10.3 million, respectively; these increases are the result of investing funds from the inflow of deposits primarily due to the opening of the new branches.

Investments

Available for sale securities decreased $3.5 million, or 5%, from $67.1 million at December 31, 2006 to $63.6 million at June 30, 2007.  The purchase of money market preferred equity securities was offset by principal repayments on mortgage backed securities and the redemption of two money market preferred securities, resulting in an overall decrease in the portfolio.
19

Loans

Bancorp’s net loan portfolio increased $85.2 million, or 17%, from $506.9 million at December 31, 2006 to $592.1 million at June 30, 2007.  The significant increases include $46.4 million in construction loans and $37.6 million in commercial real estate loans.

The continued growth in the loan portfolio in 2007 was attributable to the Bank’s hiring of additional lenders and credit analysts throughout 2006 in addition to offering a competitively priced and expanded product line.  Although short term rates have increased, the growth in loans reflects the continued demand for real estate based financing in the Fairfield County, Connecticut and Westchester County, New York areas where the Bank primarily conducts its lending business.  The Bank plans to further increase its lending and credit staff as it expands its franchise which should result in sustained strong loan growth, but from a wider market area.

At June 30, 2007, the net loan to deposit ratio was 87% and the net loan to total assets ratio was 78%.  At December 31, 2006, these ratios were 90% and 78%, respectively.

Allowance for Loan Losses

Based on management’s evaluation of the allowance for loan losses, management believes that the allowance of $5.6 million at June 30, 2007 and December 31, 2006 is adequate, but not excessive, under prevailing economic conditions, to absorb losses on existing loans.

Non-Accrual, Past Due and Restructured Loans

The following table presents non-accruing loans and loans past due 90 days or more and still accruing:
 
   
June 30,
December 31,
 
 
(Thousands of dollars)
2007
2006
 
         
 
Loans delinquent over 90 days
 $                 1,040
 $                 1,897
 
 
     still accruing
     
 
Non accruing loans
                    2,834
                    2,904
 
 
     Total
 $                 3,874
 $                 4,801
 
 
% of Total Loans
0.65%
0.93%
 
 
% of Total Assets
0.51%
0.74%
 
20

Potential Problem Loans

The $2.8 million in non-accruing loans at June 30, 2007 was comprised of three loans, all to the same borrower of which $1.0 million is guaranteed by the U.S. Small Business Administration.   Based on the Bank’s analysis for loan impairment, a specific reserve in the amount of $250,000 has been established.   The Bank has proposed a restructuring to the borrower who has yet to accept the terms; however, the Bank has commenced foreclosure proceedings.

Loans delinquent over 90 days and still accruing were comprised of two loans, one in the amount of $1.0 million is past its maturity, for which the bank has approved an extension; the Bank expects payment in full upon the borrower’s sale of one of the properties securing the loan.

At June 30, 2007, Bancorp had no loans, other than those disclosed in the table above, for which management has significant doubts as to the ability of the borrower to comply with the present repayment terms.

Deposits

Total deposits increased $117.8 million or 21% from $561.5 million at December 31, 2006 to $679.3 million at June 30, 2007.  During the six months ended June 30, 2007 the Bank opened four new branches which contributed significantly to the growth in deposits.  The Bank continues to execute its strategic plan and intends to open additional branches in Fairfield and Westchester Counties as good quality locations become available; deposit growth will therefore fluctuate based largely on that activity. Non-interest bearing deposits increased $11.4 million, or 20%, since December 31, 2006. This increase is due primarily to an unusually high volume of transactions in cashier checks that resulted in a higher than normal balance of outstanding items at the end of the quarter, the balance returned to a more normalized level in the beginning of July.  Interest bearing deposits increased $106.4 million, or 21%, from $504.8 million at December 31, 2006 to $611.2 million at June 30, 2007. NOW accounts increased $6.5 million or 24% as compared to December 31, 2006; increases in attorney escrow accounts of $10.2 million, were partially offset by a net decrease in other NOW account products of $3.7 million.  Money market fund accounts decreased $2.4 million, or 6%, from $40.9 million at December 31, 2006 to $38.5 million at June 30, 2007 while certificates of deposits increased $96.8 million during the same period.  This 24% increase is primarily due to attractive rates offered by the Bank in conjunction with the grand openings of four additional branches.
21

Borrowings

At June 30, 2007, total borrowings equaled $8.3 million.  This reflects a decrease of $8.0 since December 31, 2006, due to the repayment of Federal Home Loan borrowings during the second quarter of 2007.

Capital

Capital increased $836,000 as income for the six months ended June 30, 2007 combined with a slight improvement in the market value of available for sales securities was partially offset by the declaration of quarterly dividends.

Off-Balance Sheet Arrangements

Bancorp’s off-balance sheet arrangements, which primarily consist of commitments to lend, increased by $59.0 million from $196.3 million on December 31, 2006 to $255.3 million on June 30, 2007 due primarily to an increase in approved loan commitments, lines of credit, and undisbursed construction loans.
22

RESULTS OF OPERATIONS

Interest and dividend income and expense

The following tables present average balance sheets (daily averages), interest income, interest expense and the corresponding yields earned and rates paid for major balance sheet components:

   
Three months ended June 30,
 
         
2007
               
2006
       
         
Interest
               
Interest
       
   
Average
   
Income/
   
Average
   
Average
   
Income/
   
Average
 
   
Balance
   
Expense
   
Rate
   
Balance
   
Expense
   
Rate
 
   
(dollars in thousands)
 
Interest earning assets:
                                   
Loans
  $
573,079
    $
11,271
      7.87 %   $
439,255
    $
8,312
      7.57 %
Federal funds sold and
                                               
  other cash equivalents
   
78,482
     
1,020
      5.20 %    
6,199
     
76
      4.90 %
Investments
   
68,175
    
703
     4.12 %    
77,608
    
765
     3.94 %
Total interest
                                               
  earning assets
   
719,736
    
12,994
     7.22 %    
523,062
    
9,153
     7.00 %
                                                 
Cash and due from banks
   
4,158
                     
6,717
                 
Premises and equipment, net
   
6,201
                     
2,347
                 
Allowance for loan losses
    (5,627 )                     (5,384 )                
Other assets
   
9,992
                     
6,712
                 
Total Assets
  $
734,460
                    $
533,454
                 
                                                 
Interest bearing liabilities:
                                               
Deposits
  $
600,651
    $
6,897
      4.59 %   $
404,769
    $
3,596
      3.55 %
FHLB advances
   
1,868
     
23
      4.93 %    
33,593
     
422
      5.02 %
Subordinated debt
   
8,248
     
173
      8.39 %    
8,248
     
166
      8.05 %
Other borrowings
   
-
    
-
    
-
    
148
    
2
     5.41 %
Total interest
                                               
  bearing liabilities
   
610,767
    
7,093
     4.65 %    
446,758
    
4,186
     3.75 %
                                                 
Demand deposits
   
53,483
                     
50,496
                 
Accrued expenses and
                                               
  other liabilities
   
4,847
                     
4,108
                 
Shareholders' equity
   
65,363
                     
32,192
                 
Total liabilities and equity
  $
734,460
                    $
533,554
                 
                                                 
Net interest income
          $
5,901
                    $
4,967
         
Interest spread
                    2.57 %                     3.25 %
Interest margin
                    3.28 %                     3.80 %
23

   
Six months ended June 30,
 
         
2007
               
2006
       
         
Interest
               
Interest
       
   
Average
   
Income/
   
Average
   
Average
   
Income/
   
Average
 
   
Balance
   
Expense
   
Rate
   
Balance
   
Expense
   
Rate
 
   
(dollars in thousands)
 
Interest earning assets:
                                   
Loans
  $
552,027
    $
21,607
      7.83 %   $
414,761
    $
15,510
      7.48 %
Federal funds sold and
                                               
  other cash equivalents
   
59,881
     
1,548
      5.17 %    
6,230
     
144
      4.62 %
Investments
   
68,750
    
1,404
     4.08 %    
78,775
     
1,539
      3.91 %
Total interest
                                               
  earning assets
   
680,658
    
24,559
     7.22 %    
499,766
     
17,193
      6.88 %
                                                 
Cash and due from banks
   
4,367
                     
6,148
                 
Premises and equipment, net
   
5,553
                     
2,337
                 
Allowance for loan losses
    (5,629 )                     (5,072 )                
Other assets
   
9,739
                     
6,528
                 
Total Assets
  $
694,688
                    $
509,707
                 
                                                 
Interest bearing liabilities:
                                               
Deposits
  $
559,702
    $
12,591
      4.50 %   $
391,995
    $
6,682
      3.41 %
FHLB advances
   
4,917
     
121
      4.92 %    
25,084
     
608
      4.85 %
Subordinated debt
   
8,248
     
344
      8.34 %    
8,248
     
320
      7.76 %
Other borrowings
   
-
    
-
    
-
    
171
    
4
     4.68 %
Total interest
                                               
  bearing liabilities
   
572,867
    
13,056
     4.56 %    
425,498
    
7,614
     3.58 %
                                                 
Demand deposits
   
51,578
                     
48,065
                 
Accrued expenses and
                                               
  other liabilities
   
5,124
                     
4,160
                 
Shareholders' equity
   
65,119
                     
31,984
                 
Total liabilities and equity
  $
694,688
                    $
509,707
                 
                                                 
Net interest income
          $
11,503
                    $
9,579
         
Interest spread
                    2.66 %                     3.30 %
Interest margin
                    3.38 %                     3.83 %
 
The following rate volume analysis reflects the impact that changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities had on net interest income during the periods indicated.  Information is provided in each category with respect to changes attributable to changes in volume (changes in volume multiplied by prior rate), changes attributable to changes in rates (changes in rates multiplied by prior volume) and the total net change.  The change resulting from the combined impact of volume and rate is allocated proportionately to the change due to volume and the change due to rate.
24

 
Three months ended June 30,
 
Six months ended June 30,
 
2007 vs. 2006
 
2007 vs. 2006
 
Fluctuations in Interest
 
Fluctuations in Interest
 
Income/Expense
 
Income/Expense
 
Due to change in:
 
Due to change in:
 
Volume
Rate
Total
 
Volume
Rate
Total
 
(dollars in thousands)
 
(dollars in thousands)
Interest earning assets:
             
Loans
 $        2,618
 $           341
 $        2,959
 
 $        5,342
 $           755
 $        6,097
Federal funds sold and
             
  other cash equivalents
             939
                 5
             944
 
           1,385
               19
           1,404
Investments
            (248)
             186
              (62)
 
            (300)
             165
            (135)
Total interest
             
  earning assets
           3,309
             532
           3,841
 
           6,427
             939
           7,366
               
Interest bearing liabilities:
             
Deposits
 $        2,056
 $        1,245
 $        3,301
 
 $        3,382
 $        2,527
 $        5,909
FHLB advances
            (392)
               (7)
            (399)
 
            (514)
               27
            (487)
Subordinated debt
                 -
                 7
                 7
 
                 -
               24
               24
Other borrowings
               (2)
                 -
               (2)
 
               (4)
                 -
               (4)
Total interest
             
  bearing liabilities
           1,662
           1,245
           2,907
 
           2,864
           2,578
           5,442
               
Net interest income
 $        1,647
 $         (713)
 $           934
 
 $        3,563
 $       (1,639)
 $        1,924
 
An increase in average interest earning assets of $196.7 million, or 38%, combined with an increase in interest rates increased Bancorp’s interest income $3.8 million or 42% for the quarter ended June 30, 2007 as compared to the same period in 2006.  Interest and fees on loans increased $3.0 million, or 36%, from $8.3 million for the quarter ended June 30, 2006 to $11.3 million for the quarter ended June 30, 2007.  This increase was primarily the result of the increase in the average outstanding balances of the loan portfolio followed by the impact of a rising interest rate environment.  Interest income on investments increased slightly. This increase was primarily due to the increase in the balance of short term investments combined with an increase in money market preferred equity securities partially offset by the reduction in the portfolio due to principal payments on mortgage backed securities and the redemption of two securities.  Interest income on federal funds sold and other cash equivalents increased as a result of an increase in average balances followed by an increase in short term interest rates. For the six months ended June 30, 2007, interest and dividend income was $24.6 million which represents an increase of $7.4 million, or 43%, as compared to interest and dividend income of $17.2 million for the same period last year.  This increase was due to an increase in average balances followed by an increase in the yield on earning assets.
25

Total interest expense for the quarter ended June 30, 2007 of $7.1 million represents an increase of $2.9 million, or 69%, as compared to the same period last year.  This increase in interest expense is the result of higher average balances of interest bearing liabilities of $164.0 million or 37% combined with higher interest rates paid on deposits.  Average balances of deposit accounts increased $195.9 million, or 48%; this increase combined with an increase in rates paid on deposits resulted in an increase in interest expense on deposits of $3.3 million, or 92%.  Average FHLB advances decreased, resulting in a corresponding decrease in FHLB interest expense; and the increase in the index to which the junior subordinated debt is tied resulted in an increase in interest expense of $7,000, or 4%.  For the six months ended June 30, 2007, total interest expense increased $5.4 million, or 71%, to $13.1 million from $7.6 million for the six months ended June 30, 2007.  This increase in interest expense was due to the reasons cited earlier.

As a result of the above, Bancorp’s net interest income increased $934,000, or 19%, to $5.9 million for the three months ended June 30, 2007 as compared to $5.0 million for the same period last year; the net interest margin for the three months ended June 30, 2007 was 3.28% as compared to 3.80% for the three months ended June 30, 2007.  For the six months ended June 30, 2007, net interest income increased to $1.9 million, or 20%, to $11.5 million as compared to $9.6 million at June 30, 2006; the net interest margin for the six months ended June 30, 2007 was 3.38% as compared to 3.83% for the six months ended June 30, 2007.

Provision for loan losses

Based on management’s most recent evaluation of the adequacy of the allowance for loan losses, no provision for loan losses was charged to operations for the three and six months ended June 30, 2007, as compared to $351,000 and $924,000, respectively, for the same periods last year.

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

Non-interest income

Non-interest income decreased $55,000, or 9%, from $581,000 for the quarter ended June 30, 2006 to $526,000 for the quarter ended June 30, 2007.  A decrease in the volume of loans placed with outside investors resulted in a decrease in mortgage brokerage and referral fee income of $96,000 and a decrease in loan origination and processing fee income of $29,000.  Fees and service charges for the three months ended June 30, 2007 increased $51,000, or 35%, as compared to the same period last year.  This increase was primarily due to an increase in service charges assessed on deposit accounts resulting from increases in insufficient and uncollected funds transaction volumes.  Other income increased $15,000, or 38% as compared to the same period last year as a result of increases in debit card transactions and ATM surcharges.
26

For the six months ended June 30, 2007, non-interest income decreased $100,000, or 8%, to $1.1 million as compared to $1.2 million for the period ended June 30, 2006.  This decrease was due to the reasons cited above.

Non-interest expenses

Non-interest expenses increased $1.2 million, or 26%, to $5.6 million for the quarter ended June 30, 2007 from $4.4 million for the quarter ended June 30, 2006.  Salaries and benefits expense increased $484,000, or 19%, to $3.1 million for the three months ended June 30, 2007 from $2.6 million for the same period last year.  This increase was primarily due to staffing additions for two branches that were opened in the last quarter of 2006, four branches opened in the first half of 2007, additional loan officers and credit administration support personnel and the establishment of a formal marketing department.  Occupancy and equipment expense, net, increased $324,000, or 47% to $1.0 million for the quarter ended June 30, 2007 from $689,000 for the for the same period in 2006 due to the leasing of additional space for the new branches mentioned above.  Increased marketing campaigns and related activities resulted in an increase in advertising and promotional expenses of $57,000, or 38%, to $208,000 for the three months ended June 30, 2007 from $151,000 for the same period in 2006.    Data processing and other outside services increased $103,000, or 27%, from $384,000 for the quarter ended June 30, 2006, to $487,000 for the quarter ended June 30, 2007.  This increase was primarily due to an increase in data processing and correspondent banking expenses which occurred as a result of the growth in the branch network.  Other noninterest expenses increased $228,000 or 57% from $401,000 for the three months ended June 30, 2006 to $629,000 for the three months ended June 30, 2007; included in this variance is an increase in deposit insurance assessments of $126,000.

For the six months ended June 30, 2007, non-interest expenses increased $2.5 million, or 29%, to $10.9 million from $8.4 million for the same period in 2006.  Salaries and benefits increased $1.3 million to $6.2 million; occupancy and equipment expense, net increased $625,000 to $2.0 million; data processing and other outside services increased $91,000 to $898,000; and advertising and promotional expenses increased $112,000 to $408,000.  Other noninterest expenses increased $402,000 or 53% from $753,000 for the six months ended June 30, 2006 to $1,155,000 for the six months ended June 30, 2007.  The reasons for these increases are the same as those cited above in the discussion comparing the quarter ended June 2007 to the quarter ended June 2006.
27

Income Taxes

Bancorp recorded income tax expense of $340,000 for the quarter ended June 30, 2007 as compared to $295,000 for the quarter ended June 30, 2006.  For the six months ended June 30, 2007 and June 30, 2006, income tax expenses were $667,000 and $526,000, respectively. These changes were related primarily to the change in pre-tax income and the exclusion, for state tax purposes, of certain holding company expenses.  The effective tax rate for both the quarter and six months ended June 30, 2007 was 39%; the effective tax rate for both the quarter and six months ended June 30, 2006 was 37%.

LIQUIDITY

Bancorp's liquidity ratio was 19% and 17% at June 30, 2007 and June 30, 2006, 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 consolidated 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 downward fluctuations in deposit accounts and increases in its loan portfolio.  Management believes Bancorp’s short-term assets provide sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash operating requirements.

CAPITAL

The following table illustrates Bancorp’s regulatory capital ratios at June 30, 2007 and December 31, 2006 respectively:

     
June 30, 2007
   
December 31, 2006
   
 
Total Risk-based Capital
    12.85 %     15.34 %  
 
Tier 1 Risk-based Capital
    11.92 %     14.22 %  
 
Leverage Capital
    9.84 %     11.63 %  
                     

The following table illustrates the Bank’s regulatory capital ratios at June 30, 2007 and December 31, 2006 respectively:

     
June 30, 2007
   
December 31, 2006
   
 
Total Risk-based Capital
    12.64 %     15.02 %  
 
Tier 1 Risk-based Capital
    11.72 %     13.90 %  
 
Leverage Capital
    9.67 %     11.37 %  
28

Capital adequacy is one of the most important factors used to determine the safety and soundness of individual banks and the banking system.  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%.  Based on the above ratios, the Bank is considered to be “well capitalized” at June 30, 2007 under applicable regulations.

Management continuously assesses the adequacy of the Bank’s capital to ensure that the Bank remains a “well capitalized” institution.  Management’s strategic and capital plans contemplate various options to maintain the “well capitalized” classification.

IMPACT OF INFLATION AND CHANGING PRICES

Bancorp’s consolidated financial statements have been prepared in terms of historical dollars, without considering changes in the 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 general levels of inflation.  Interest rates do not necessarily move in the same direction or with 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.
29

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

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

Qualitative Aspects of Market Risk

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

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

Quantitative Aspects of Market Risk

In order to manage the risk associated with interest rate movements, management analyzes Bancorp’s interest rate sensitivity position through the use of interest income simulation and GAP analysis.  The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.”  An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period.
 
Management’s goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income.  Interest income simulations are completed
30

quarterly and presented to ALCO.  The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions.  Changes to these assumptions can significantly affect the results of the simulations.  The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.

Simulation analysis is only an estimate of Bancorp’s interest rate risk exposure at a particular point in time.  Management regularly reviews the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.
 
Management has established interest rate risk guidelines measured by behavioral GAP analysis calculated at the one year cumulative GAP level and a net interest income and economic value of portfolio equity simulation model measured by a 200 basis point interest rate shock.
 
The table below sets forth an approximation of Bancorp’s exposure to changing interest rates using management’s behavioral GAP analysis and as a percentage of estimated net interest income and estimated net portfolio value using interest income simulation.  The calculations use projected repricings of assets and liabilities at June 30, 2007 and December 31, 2006 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments.
 
 
Basis
Interest Rate
June 30,
December 31,
 
Points
Risk Guidelines
2007
2006
         
Gap percentage total
 
+/- 15%
-3.27%
1.53%
Net interest income
200
+/- 15%
7.81%
11.22%
 
-200
+/- 15%
-7.35%
-12.04%
Net portfolio value
200
+/- 25%
-5.13%
-3.25%
 
-200
+/- 25%
1.18%
1.19%

Bancorp’s net interest income benefited from the growth in the balance sheet during 2007; the increase in net interest income was partially offset by a compressed interest margin due to more competitive pricing on loans and higher rates on deposit accounts.  All of these factors contributed to higher levels of net interest income and net portfolio value in the base case scenario at June 30, 2007 as compared to December 31, 2006 using Bancorp’s interest income simulation model.  Bancorp’s interest rate risk position was within all of its interest rate risk guidelines at June 30, 2007.  The interest rate risk position is monitored on an ongoing basis and management reviews strategies designed to maintain all categories within guidelines.
 
31

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

Net Interest Income and Economic Value
Summary Performance
        
June 30, 2007
 
Net Interest Income 
 
Net Portfolio Value
Projected Interest
Estimated
$ Change
% Change
 
Estimated
$ Change
% Change
Rate Scenario
Value
from Base
from Base
 
Value
from Base
from Base
+ 200
      26,651
        1,931
7.81%
 
      79,447
      (4,295)
-5.13%
+ 100
      25,717
           997
4.03%
 
      82,307
      (1,435)
-1.71%
BASE
      24,720
     
      83,742
   
- 100
      23,858
         (862)
-3.49%
 
      84,783
        1,041
1.24%
- 200
      22,903
      (1,817)
-7.35%
 
      84,728
           986
1.18%
               
December 31, 2006
 
Net Interest Income 
 
Net Portfolio Value
Projected Interest
Estimated
$ Change
% Change
 
Estimated
$ Change
% Change
Rate Scenario
Value
from Base
from Base
 
Value
from Base
from Base
+ 200
      23,940
        2,415
11.22%
 
      68,230
      (2,290)
-3.25%
+ 100
      22,750
        1,225
5.69%
 
      69,491
      (1,029)
-1.46%
BASE
      21,525
     
      70,520
   
- 100
      20,307
      (1,218)
-5.66%
 
      71,533
        1,013
1.44%
- 200
      18,934
      (2,591)
-12.04%
 
      71,359
           839
1.19%
32

Item 4.    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” means 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 quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, Bancorp’s internal control over financial reporting.

PART II - OTHER INFORMATION.

Item 1A.
Risk Factors 
     
During the three and six months ended June 30, 2007, there were no material changes to the risk factors relevant to Bancorp’s operations, which are described in the Annual Report on Form 10-K for the year ended December 31, 2006.  
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds 
     
 
(a)
On June 25, 2007, the Company issued 2,350 shares of its common stock to its five outside directors. Pursuant to a policy adopted by the Board of Directors, outside directors serving on the board receive an annual award of the Company’s common stock at each year’s annual meeting valued at $10,000 based on the last reported sale price on the trading day immediately preceding the Annual Meeting.  The award is prorated for directors who have served less than a full year.  The shares have not been registered under the Securities Act of 1933 and therefore were issued in a private placement transaction exempt from registration under Section 4(2)
33

    of the Securities Act. For purposes of this transaction, the Company shares were valued at $21.26 per share, for a total value of $49,961. 
     
 
(b)
Not applicable
     
 
(c)
Not applicable
     
 
(d)
Not applicable
     
Item 4.
Submission of Matters to a Vote of Security Holders 
     
 
(a)
The Annual Meeting of Shareholders (the “Annual Meeting”) of Patriot National Bancorp, Inc was held on June 20, 2007.
     
 
(b)
Not applicable pursuant to Instruction 3 to Item 4 of Part II of Form 10-Q.
     
 
(c)
The following is a brief description of the matters voted upon at the Annual Meeting and the number of votes cast for, against or withheld as well as the number of abstentions to each such matter:
     
   
(i) The election of nine directors for the ensuing year:

   
Withheld
 
 
Authority to
 
For
Vote For
   
 
Angelo De Caro
4,360,472
124,984
John J. Ferguson
4,476,456
9,000
Brian A. Fitzgerald
4,476,456
9,000
John A. Geoghegan
4,476,456
9,000
L. Morris Glucksman
4,476,310
9,146
Charles F. Howell
4,360,472
124,984
Michael F. Intrieri
4,474,179
11,277
Robert F. O’Connell
4,360,472
124,984
Philip W. Wolford
4,476,036
9,420

   
There were no abstentions or broker non-votes for any of the nominees.
       
   
(ii)
The consideration of a proposal to ratify the appointment of McGladrey & Pullen, LLP as independent auditors for Bancorp for the year ending December 31, 2007.

 
For
Against
Abstain
 
 
4,480,639
4,500
317
 
 
(d)
Not applicable.
34

Item 6.
Exhibits
 
     
 
No.
Description
     
 
2
Agreement and Plan of Reorganization dated as of June 28, 1999 between Bancorp and the Bank (incorporated by reference to Exhibit 2 to Bancorp’s Current Report on Form 8-K dated December 1, 1999 (Commission File No. 000-29599)).
     
 
3(i)
Certificate of Incorporation of Bancorp, (incorporated by reference to Exhibit 3(i) to Bancorp’s Current Report on Form 8-K dated December 1, 1999 (Commission File No. 000-29599)).
     
 
3(i)(A)
Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc. dated July 16, 2004 (incorporated by reference to Exhibit 3(i)(A) to Bancorp's Annual Report on Form 10-KSB for the year ended December 31, 2004 (Commission File No. 000-29599)).
     
 
3(i)(B)
Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc. dated June 15, 2006 (incorporated by reference to Exhibit 3(i)(B) to Bancorp’s Quarterly Report of Form 10-Q for the quarter ended September 30, 2006 (commission File No. 000-29599)).
     
 
3(ii)
By-laws of Bancorp (incorporated by reference to Exhibit 3(ii) to Bancorp’s Current Report on Form 8-K dated December 1, 1999 (Commission File No. 000-29599)).
     
 
4
Reference is made to the Rights Agreement dated April 19, 2004 by and between Patriot National Bancorp, Inc. and Registrar and Transfer Company filed as Exhibit 99.2 to Bancorp’s Report on Form 8-K filed on April 19, 2004, which is incorporated herein by reference.
     
 
10(a)(1)
2001 Stock Appreciation Rights Plan of Bancorp (incorporated by reference to Exhibit 10(a)(1) to Bancorp’s Annual Report on Form 10-KSB for the year ended December 31, 2001 (Commission File No. 000-29599)).
35

 
No.
Description
     
 
10(a)(3)
Employment Agreement, dated as of October 23, 2000, as amended by a First Amendment, dated as of March 21, 2001, among the Bank, Bancorp and Charles F. Howell (incorporated by reference to Exhibit 10(a)(4) to Bancorp’s Annual Report on Form 10-KSB for the year ended December 31, 2000 (Commission File No. 000-29599)).
     
 
10(a)(4)
Change of Control Agreement, dated as of January 1, 2007 among Angelo De Caro and Patriot National Bank and Bancorp (incorporated by reference to Exhibit 10(a)(4) to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2006 (Commission File No. 000-29599)).
     
 
10(a)(5)
Employment Agreement dated as of November 3, 2003 among Patriot National Bank, Bancorp and Robert F. O’Connell (incorporated by reference to Exhibit 10(a)(5) to Bancorp’s Annual Report on Form 10-KSB for the year ended December 31, 2003 (Commission File No. 000-29599)).
     
 
10(a)(6)
Change of Control Agreement, dated as of January 1, 2007 among Robert F. O’Connell and Patriot National Bank and Bancorp (incorporated by reference to Exhibit 10(a)(6) to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2006 (Commission File No. 000-29599)).
     
 
10(a)(8)
Employment Agreement dated as of January 1, 2007 between Patriot National Bank and Marcus Zavattaro (incorporated by reference to Exhibit 10(a)(8) to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2006 (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 January 1, 2007 among the Bank, Bancorp and Charles F. Howell (incorporated by reference to Exhibit 10(a)(10) to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2006 (Commission File No. 000-29599)).
36

 
No.
Description
     
 
10(a)(11)
Change of Control Agreement, dated as of January 1, 2007 among Charles F. Howell, Patriot National Bank and Bancorp (incorporated by reference to Exhibit 10(a)(11) to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2006 (Commission File No. 000-29599)).
     
 
10(a)(12)
2005 Director Stock Award Plan (incorporated by reference to Exhibit 10(a)(12) to Bancorp’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (Commission File No. 000-295999)).
     
 
10(a)(13)
Change of Control Agreement, dated as of January 1, 2007 between Martin G. Noble and Patriot National Bank(incorporated by reference to Exhibit 10(a)(13) to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2006 (Commission File No. 000-29599)).
     
 
10(a)(14)
Change of Control Agreement, dated as of January 1, 2007 among Philip W. Wolford, Patriot National Bank and Bancorp(incorporated by reference to Exhibit 10(a)(14) to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2006 (Commission File No. 000-29599)).
     
 
10(c)
1999 Stock Option Plan of the Bank (incorporated by reference to Exhibit 10(c) to Bancorp’s Current Report on Form 8-K dated December 1, 1999 (Commission File No. 000-29599)).
     
 
14
Code of Conduct for Senior Financial Officers (incorporated by reference to Exhibit 14 to Bancorp’s Annual Report on Form 10-KSB for the year ended December 31, 2004 (Commission File No. 000-29599).
     
 
21
Subsidiaries of Bancorp (incorporated by reference to Exhibit 21 to Bancorp’s Annual Report on Form 10-KSB for the year ended December 31, 1999 (Commission File No. 000-29599)).
     
 
31(1)
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
     
 
31(2)
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
     
 
32
Section 1350 Certifications
37


SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, 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/ Robert F. O’Connell
 
Robert F. O’Connell,
 
Senior Executive Vice President
 
Chief Financial Officer
   
 
(On behalf of the registrant and as
 
chief financial officer)

August 14, 2007
 
 
 
 
 38