AANB Abigail Adams National Bancorp (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		quarterly report pursuant to section 13 or 15( d ) of the securities exchange act of 1934

For the quarterly period ended June 30, 2008

Or

o		transition report pursuant to section 13 or 15( d ) of the securities exchange act of 1934

For the transition period from                      To                     

Commission File Number: 0-10971

ABIGAIL ADAMS NATIONAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware		52-1508198
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1130 Connecticut Ave., NW, Washington, DC		20036
(Address of principal executive offices)		(Zip Code)

202.772.3600

n/a

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     As of August 13, 2008, there were 3,463,569 shares outstanding of Registrant’s Common Stock.

 

 

TABLE OF CONTENTS

		PAGE
PART I — FINANCIAL INFORMATION
Item 1 — Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Income			2
Condensed Consolidated Statements of Changes in Stockholders’ Equity			3
Condensed Consolidated Statements of Cash Flows			4
Notes to Unaudited Condensed Consolidated Financial Statements			5
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3 — Quantitative and Qualitative Disclosures about Market Risk			19
Item 4T — Controls and Procedures			20
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings			21
Item 1A Risk Factors			21
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			21
Item 3 — Defaults Upon Senior Securities			21
Item 4 — Submission of Matters to Vote of Security Holders			22
Item 5 — Other Information			22
Item 6 — Exhibits			22
Signatures			23
Exhibit 31.1			24
Exhibit 31.2			25
Exhibit 32			26

ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

June 30, 2008 (unaudited) and December 31, 2007

(Dollars in thousands)

		June 30, 2008				December 31, 2007
Assets
Cash and due from banks		$	14,035			$	15,567
Federal funds sold			34				12,816
Interest-earning deposits in other banks			8,872				20,380
Total cash and cash equivalents			22,941				48,763
Investment securities available for sale, at fair value			70,992				66,392
Investment securities held to maturity (market values of $3,356 and $13,269 for 2008 and 2007, respectively)			3,390				13,309
Loans			337,774				307,483
Less: allowance for loan losses			(3,603	)			(4,202	)
Loans, net			334,171				303,281
Premises and equipment, net			5,177				4,985
Other assets			10,911				9,145
Total assets		$	447,582			$	445,875
Liabilities and Stockholders’ Equity
Liabilities:
Deposits
Noninterest-bearing deposits		$	67,355			$	74,833
Interest-bearing deposits			301,473				312,109
Total deposits			368,828				386,942
Short-term borrowings			27,506				8,494
Long-term debt			17,288				15,120
Other liabilities			3,250				3,880
Total liabilities			416,872				414,436
Commitments and contingencies (Note 2)
Stockholders’ equity:
Common stock, $0.01 par value, authorized 5,000,000 shares; issued 3,492,633 shares in 2008 and 3,491,633 in 2007; outstanding 3,463,569 shares in 2008 and 3,462,569 in 2007			35				35
Additional paid-in capital			25,132				25,127
Retained earnings			6,977				7,196
Less: Treasury stock, 29,064 shares in 2008 and 2007, at cost			(255	)			(255	)
Accumulated other comprehensive loss			(1,179	)			(664	)
Total stockholders’ equity			30,710				31,439
Total liabilities and stockholders’ equity		$	447,582			$	445,875

See Notes to Unaudited Condensed Consolidated Financial Statements

ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income

For the Periods Ended June 30, 2008 and 2007

(In thousands except per share data)

		For the three months ended								For the six months ended
		June 30,								June 30,
		2008				2007				2008				2007
Interest Income
Interest and fees on loans		$	5,523			$	6,383			$	11,056			$	12,785
Interest and dividends on investment securities			940				802				1,903				1,517
Other interest income			61				474				270				664
Total interest income			6,524				7,659				13,229				14,966
Interest Expense
Interest on deposits			2,159				3,181				4,779				6,099
Interest on short-term borrowings			108				17				171				81
Interest on long-term debt			179				222				361				364
Total interest expense			2,446				3,420				5,311				6,544
Net interest income			4,078				4,239				7,918				8,422
Provision for loan losses			970				75				1,075				160
Net interest income after provision for loan losses			3,108				4,164				6,843				8,262
Noninterest Income
Service charges on deposit accounts			334				344				666				706
Other income			83				48				158				96
Total noninterest income			417				392				824				802
Noninterest Expense
Salaries and employee benefits			1,651				1,630				3,343				3,323
Occupancy and equipment expense			576				600				1,186				1,170
Professional fees			122				204				287				374
Data processing fees			220				297				397				580
Other operating expense			852				660				1,431				1,312
Total noninterest expense			3,421				3,391				6,644				6,759
Income before provision for income taxes			104				1,165				1,023				2,305
Provision for income taxes			21				454				376				912
Net Income		$	83			$	711			$	647			$	1,393
Earnings per share:
Basic		$	0.02			$	0.21			$	0.19			$	0.40
Diluted		$	0.02			$	0.21			$	0.19			$	0.40

See Notes to Unaudited Condensed Consolidated Financial Statements

ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

Six Months Ended June 30, 2007 and 2008

(In thousands except per share data))

																		Accumulated
						Additional												Other
		Common				Paid-in				Retained				Treasury				Comprehensive
		Stock				Capital				Earnings				Stock				Loss				Total
Balance at December 31, 2006		$	35			$	25,123			$	5,868				($210	)			($634	)		$	30,182
Comprehensive income:
Net income			—				—				1,393				—				—				1,393
Unrealized losses during the period of ($366) on investment securities available for sale, net of tax benefit of ($147)			—				—				—				—				(219	)			(219	)
Total comprehensive income																							1,174
Issuance of shares under stock option program			—				4				—				—				—				4
Acquisition and issuance of shares for ESOP			—				—				—				(45	)			—				(45	)
Dividends declared ($0.25 per share)			—				—				(866	)			—				—				(866	)
Balance at June 30, 2007		$	35			$	25,127			$	6,395				($255	)			($853	)		$	30,449
Balance at December 31, 2007		$	35			$	25,127			$	7,196				($255	)			($664	)		$	31,439
Comprehensive income:
Net income			—				—				647				—				—				647
Unrealized losses during the period of ($855) on investment securities available for sale, net of tax benefit of ($340)			—				—				—				—				(515	)			(515	)
Total comprehensive income																							132
Issuance of shares under stock option program			—				5				—				—				—				5
Dividends declared ($0.25 per share)			—				—				(866	)			—				—				(866	)
Balance at June 30, 2008		$	35			$	25,132			$	6,977				($255	)			($1,179	)		$	30,710

See Notes to Unaudited Condensed Consolidated Financial Statements

ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2008 and 2007

(In thousands)

		2008				2007
Cash flows from operating activities:
Net income		$	647			$	1,393
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,075				160
Depreciation			304				279
Net amortization (accretion) of deferred loan costs and fees			35				(99	)
Net accretion of purchase accounting adjustments			(63	)			(51	)
Gain on sale of guaranteed portion of SBA loans			(38	)			—
Net premium amortization/discount (accretion) on investment securities			7				(2	)
Loss on the sale of foreclosed and other assets			—				29
Increase in other assets			(340	)			(921	)
(Decrease) increase in other liabilities			(630	)			784
Net cash provided by operating activities			997				1,572
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale			28,500				6,000
Proceeds from maturities of investment securities held to maturity			11,500				3,000
Proceeds from repayment of mortgage-backed securities available for sale			921				465
Proceeds from repayment of mortgage-backed securities held to maturity			431				286
Proceeds from the sale of foreclosed and other assets			—				282
Purchase of investment securities available for sale			(34,882	)			(18,498	)
Purchase of investment securities held to maturity			(2,011	)			—
Purchase of FHLB and FRB stock			(3,238	)			(1,534	)
Redemption of FHLB stock			2,744				892
Net increase in loans			(31,984	)			(12,223	)
Purchase of collateral and build out cost of foreclosed assets			(509	)			—
Purchase of premises and equipment, net			(497	)			(358	)
Net cash used in investing activities			(29,025	)			(21,688	)
Cash flows from financing activities:
Net (decrease) increase in transaction and savings deposits			(28,211	)			25,932
Net increase in time deposits			10,097				17,438
Net increase (decrease) in short-term borrowings			19,013				(111	)
Proceeds from long-term debt			7,210				10,000
Repayment of long-term debt			(5,042	)			(467	)
Proceeds from issuance of common stock in stock option program			5				4
Purchased treasury stock			—				(45	)
Cash dividends paid to common stockholders			(866	)			(866	)
Net cash provided by financing activities			2,206				51,885
Net (decrease) increase in cash and cash equivalents			(25,822	)			31,769
Cash and cash equivalents at beginning of period			48,763				27,563
Cash and cash equivalents at end of period		$	22,941			$	59,332
Supplementary disclosures:
Interest paid on deposits and borrowings		$	5,413			$	6,345
Income taxes paid		$	910			$	520

See Notes to Unaudited Condensed Consolidated Financial Statements

ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 Basis of presentation

Abigail Adams National Bancorp, Inc. (the “Company”) is the parent company of The Adams National Bank (“ANB”) and Consolidated Bank and Trust (“CB&T”). As used herein, the term Company includes ANB and CB&T, unless the context otherwise requires.

The Company prepares its condensed consolidated financial statements on the accrual basis and in conformity with accounting principles generally accepted in the United States for interim financial information, the instructions for Form 10-Q, and Regulation S-X. The accompanying financial statements are unaudited except for the balance sheet at December 31, 2007, which was derived from the audited consolidated financial statements as of that date. The unaudited information furnished herein reflects all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These statements should be read in conjunction with the consolidated financial statements and accompanying notes included with the Company’s 2007 Annual Report to Stockholders, since they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. Operating results for the three and six months ended June 30, 2008 (unaudited) are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. Certain reclassifications may have been made to amounts previously reported for 2007 to conform with the 2008 presentation.

Note 2 Contingent Liabilities

In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit that are not reflected in the accompanying consolidated financial statements. No material losses are anticipated as a result of these transactions. There were no material changes since December 31, 2007.

Note 3 Earnings per share

Basic earnings per share (“EPS”) computations are based upon the weighted average number of shares outstanding during the periods. Diluted earnings per share computations are determined using the treasury stock method and based upon the weighted average number of shares outstanding during the periods plus the dilutive effect of outstanding stock options. The following table provides a reconciliation of the number of shares between the computation of basic EPS and diluted EPS for the three and six months ended June 30, 2008 and 2007.

		For the three months								For the six months
		ended June 30,								ended June 30,
		2008				2007				2008				2007
Weighted average shares			3,463,569				3,462,146				3,463,074				3,461,973
Effect of dilutive stock options			2,694				3,834				2,865				3,887
Dilutive potential average common shares			3,466,263				3,465,980				3,465,939				3,465,860

Note 4 Securities

The amortized cost and estimated fair value of investment securities held to maturity and investment securities available for sale at June 30, 2008 and December 31, 2007 are as follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated Fair
(In thousands)		Cost Basis				Gains				Losses				Value
June 30, 2008:
Investment Securities — available for sale:
U.S. government sponsored agencies and corporations		$	51,193			$	255			$	305			$	51,143
Mortgage-backed securities			12,132				21				274				11,879
Municipal securities			953				—				41				912
Corporate debt securities			7,742				—				1,329				6,413
Marketable equity securities			1,004				—				359				645
Total		$	73,024			$	276			$	2,308			$	70,992
Investment Securities — held to maturity:
U.S. government sponsored agencies and corporations		$	2,010			$	—			$	49			$	1,961
Mortgage-backed securities			1,380				15				—				1,395
Total		$	3,390			$	15			$	49			$	3,356
December 31, 2007:
Investment Securities — available for sale:
U.S. government sponsored agencies and corporations		$	52,709			$	308			$	34			$	52,983
Mortgage-backed securities			7,105				50				64				7,091
Corporate debt securities			6,750				29				1,179				5,600
Marketable equity securities			1,005				—				287				718
Total		$	67,569			$	387			$	1,564			$	66,392
Investment Securities — held to maturity:
U.S. government sponsored agencies and corporations		$	11,498			$	—			$	57			$	11,441
Mortgage-backed securities			1,811				20				3				1,828
Total		$	13,309			$	20			$	60			$	13,269

The Company had no gains or losses on sales of securities in the three and six month periods ended June 30, 2008 or June 30, 2007.

At June 30, 2008, a portion of our investment securities portfolio has unrealized losses. The fair value of investment securities with unrealized losses by length of time that the individual securities have been in a continuous loss position at June 30, 2008 and December 31, 2007, are presented in the following table:

		Continuous unrealized losses								Continuous unrealized losses
		existing for less than 12 months								existing 12 months or more								Total
						Unrealized								Unrealized								Unrealized
(In thousands )		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
June 30, 2008:
U.S. government sponsored agencies and corporations		$	23,637			$	354			$	—			$	—			$	23,637			$	354
Mortgage-backed securities			8,605				218				1,545				56				10,150				274
Municipal securities			912				41				—				—				912				41
Corporate debt securities			1,620				55				3,783				1,274				5,403				1,329
Marketable equity securities			—				—				645				359				645				359
Total		$	34,774			$	668			$	5,973			$	1,689			$	40,747			$	2,357
December 31, 2007:
U.S. government sponsored agencies and corporations		$	999			$	1			$	19,407			$	90			$	20,406			$	91
Mortgage-backed securities			—				—				4,046				67				4,046				67
Corporate debt securities			2,981				697				1,580				482				4,561				1,179
Marketable equity securities			718				287				—				—				718				287
Total		$	4,698			$	985			$	25,033			$	639			$	29,731			$	1,624

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (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.

The Company had six corporate debt securities and one marketable equity security which have been valued below cost for greater than 12 months. Two corporate debt securities, carried at fair value totaling $686,000 with an aggregate unrealized loss of $371,000 at June 30, 2008, were downgraded in 2005 to below investment grade. The other four corporate debt securities, carried at fair value of $3.1 million with an unrealized loss of $903,000, currently have Moody ratings in the range of A1 to Aa2 and Standard and Poors ratings ranging from A to AA-. The marketable equity security, carried at fair value of $645,000 with an unrealized loss of $359,000, currently has a Moody’s rating of A1 and a Standard and Poors rating of A. Interest payments continue to be received as scheduled and the Company has the intent and ability to hold these securities until their maturity or recovery. Based on an evaluation of the creditworthiness of the issuers, the Company believes the issuers will not default and that the Company will receive all contractual interest payments and the entire principal at maturity; therefore, management did not record any other-than-temporary impairment charge at June 30, 2008 or at December 31, 2007.

The other unrealized losses that existed as of June 30, 2008 and December 31, 2007, are a result of market changes in interest rates since the securities’ purchase. This factor, coupled with the fact the Company has both the intent and the ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value substantiates that the unrealized losses in the held to maturity and available-for-sale portfolios are temporary.

Note 5 Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and unrealized gains and losses on pension plan assets and benefit obligations. There were no reclassification adjustments realized in income for gains or losses from components of other comprehensive income in the three and six month periods ended June 30, 2008 and June 30, 2007.

The components of comprehensive income are as follows:

		For the three months								For the six months
		ended June 30,								ended June 30,
(In thousands)		2008				2007				2008				2007
Net income		$	83			$	711			$	647			$	1,393
Unrealized losses on securities			(1,589	)			(425	)			(855	)			(366	)
Income tax benefit			627				170				340				147
Total comprehensive (loss) income			($879	)		$	456			$	132			$	1,174

Note 6 Segments

Management regularly reviews the performance of the Company’s operations on a reporting basis by legal entity. The Company has two operating segments comprised of its subsidiaries, ANB and CB&T, for which there is discrete financial information available. Both segments are engaged in providing financial services in their respective market areas and are similar in each of the following: the nature of their products, services and processes; type or class of customer for their products and services; methods used to distribute their products or provide their services; and the nature of the banking regulatory environment. The parent company is deemed to represent an overhead function rather than an operating segment and its financial information is presented as the “Other” category in the schedules below.

		Segment Results and Reconciliation
		Adams National				Consolidated								Intercompany				Consolidated
(Dollars in thousands)		Bank				Bank & Trust				Other (1)				liminations				Totals
For three months ended June 30, 2008:
Interest income		$	5,185			$	1,339			$	—			$	—			$	6,524
Interest expense			2,027				350				69				—				2,446
Net interest income			3,158				989				(69	)			—				4,078
Provision for loan losses			959				11				—				—				970
Noninterest income			350				92				216				(241	)			417
Noninterest expense			2,292				999				155				(25	)			3,421
Net income			168				48				83				(216	)			83
Assets			355,809				89,065				37,957				(35,249	)			447,582
Return on average assets (annualized)			0.19	%			0.22	%			NM	(2)			—				0.08	%
Return on average equity (annualized)			2.44	%			2.22	%			NM	(2)			—				1.05	%
For three months ended June 30, 2007:
Interest income		$	6,225			$	1,434			$	—			$	—			$	7,659
Interest expense			2,911				405				104				—				3,420
Net interest income			3,314				1,029				(104	)			—				4,239
Provision for loan losses			75				—				—				—				75
Noninterest income			318				99				866				(891	)			392
Noninterest expense			2,215				1,044				157				(25	)			3,391
Net income			803				63				711				(866	)			711
Assets			360,785				98,114				35,466				(35,020	)			459,345
Return on average assets (annualized)			0.91	%			0.29	%			NM	(2)			—				0.65	%
Return on average equity (annualized)			11.83	%			3.11	%			NM	(2)			—				9.30	%

		Segment Results and Reconciliation
		Adams National				Consolidated								Intercompany				Consolidated
(Dollars in thousands)		Bank				Bank & Trust				Other (1)				liminations				Totals
For six months ended June 30, 2008:
Interest income		$	10,549			$	2,680			$	—			$	—			$	13,229
Interest expense			4,436				736				139				—				5,311
Net interest income			6,113				1,944				(139	)			—				7,918
Provision for loan losses			1,049				26				—				—				1,075
Noninterest income			680				194				906				(956	)			824
Noninterest expense			4,441				1,957				296				(50	)			6,644
Net income			800				106				647				(906	)			647
Assets			355,809				89,065				37,957				(35,249	)			447,582
Return on average assets (annualized)			0.46	%			0.24	%			NM	(2)			—				0.30	%
Return on average equity (annualized)			5.85	%			2.37	%			NM	(2)			—				4.07	%
For six months ended June 30, 2007:
Interest income		$	12,187			$	2,779			$	—			$	—			$	14,966
Interest expense			5,569				768				207				—				6,544
Net interest income			6,618				2,011				(207	)			—				8,422
Provision for loan losses			150				10				—				—				160
Noninterest income			645				207				1,698				(1,748	)			802
Noninterest expense			4,414				2,089				306				(50	)			6,759
Net income			1,613				85				1,393				(1,698	)			1,393
Assets			360,785				98,114				35,466				(35,020	)			459,345
Return on average assets (annualized)			0.96	%			0.20	%			NM	(2)			—				0.66	%
Return on average equity (annualized)			11.97	%			2.11	%			NM	(2)			—				9.19	%

Description of significant amounts included in the “Intercompany Eliminations” column in the segment report schedules are as follows:

		Three months ended June 30,								Six months ended June 30,
(In thousands)		2008				2007				2008				2007
Noninterest income — elimination of parent company’s undistributed earnings from subsidiaries		$	(241	)		$	(891	)		$	(956	)		$	(1,748	)
Net income — elimination of parent company’s earnings from subsidiaries		$	(216	)		$	(866	)		$	(906	)		$	(1,698	)
Assets — elimination of parent company’s investment in subsidiaries		$	(35,249	)		$	(35,020	)		$	(35,249	)		$	(35,020	)

Note 7 Fair Value Disclosures

Effective January 1, 2008, the Company adopted the Statement of Financial Accounting Standard No. 157, Fair Value Measurements (“SFAS No. 157”) issued by the Financial Accounting Standards Board (“FASB”). SFAS No. 157 provides a framework for measuring fair value under generally accepted accounting principles, outlines a fair value hierarchy based on inputs used to measure fair value and enhances disclosure requirements for fair value meaurements. The statement applies to all financial instruments that are being measured and reported on a fair value basis. In accordance with FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, the Company will delay application of SFAS 157 for non-financial assets and non-financial liabilities, until January 1, 2009.

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

Basis of Fair Value Measurement

Level 1		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2		Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The table below presents the Company’s balances of financial instruments measured at fair value on a recurring basis by level within the hierarchy at June 30, 2008.

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Inputs

In thousands

(Level 1)

(Level 2)

(Level 3)

Total

Investment securities available for sale

$

—

$

70,226

$

766

$

70,992

The Company outsources the recordkeeping for investment securities held by ANB to FTN Financial and for those held by CB&T to Suntrust Robinson Humphrey. For 55 of the 58 securities categorized in Level 2 in the table above, the source utilized by FTN and Suntrust for valuation was the Interactive Data Corporation (“IDC”). IDC’s evaluations are based on market data. IDC utilizes evaluated pricing models that vary based by asset class and include available trade, bid, and other market information. Generally, methodology includes broker quotes, proprietary modes, vast descriptive terms and conditions databases, as well as extensive quality control programs. For the remaining three securities categorized in Level 2, FTN used, as valuation sources, the FTN proprietary valuation Matrices model, and FTN Financial capital market trading staff. The security in Level 3 was valued by an FTN capital market trading staff. The FTN Matrices model is used for valuing municipals. The model includes a separate curve structure for the Bank-Qualified versus general market municipals. The grouping of municipals are further broken down according to insurer, credit support, state of issuance, and rating to incorporate additional spreads and municipal curves. The FTN Financial capital markets trading staff offers valuations for certain securities not available from the other sources. If the inputs used to provide the evaluation are “unobservable” and/or there is very little, if any, market activity for the security or similar securities, the securities are categorized in Level 3.

The table below presents the Company’s balances of financial instruments measured at fair value on a nonrecurring basis by level within the hierarchy at June 30, 2008.

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Balance at

Identical

Observable

Unobservable

June 30,

Assets

Inputs

Inputs

In thousands

2008

(Level 1)

(Level 2)

(Level 3)

Impaired loans

$

7,765

$

—

$

7,765

$

—

Impaired loans that are collateral dependent are written down to their fair value, less costs to sell, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeds the fair value. Valuation techniques consistent with the market approach, income approach, and/or cost approach were used to measure fair value and primarily included observable inputs for the individual nonaccrual loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs.

Note 8 Subsequent Event

By letter dated August 1, 2008, the Adams National Bank was advised by the Office of the Comptroller of the Currency that it is deemed to be in “troubled condition” (as defined in Section 914 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989). As a result, the Bank must obtain prior regulator approval before adding or replacing a director or employing any senior executive officers or changing the responsibilities of a current employee to those of a senior executive officer.

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Abigail Adams National Bancorp, Inc. (the “Company”) is the parent of The Adams National Bank (“ANB”), a national bank with six full-service branches located in the greater metropolitan Washington, D.C. area and, Consolidated Bank and Trust (“CB&T”), a Virginia chartered commercial bank, with two branches in Richmond and one in Hampton, Virginia. The Company reports its financial results on a consolidated basis with ANB and CB&T.

The following analysis of financial condition and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto for the year ended December 31, 2007.

Results of Operations

Overview

The Company recorded net income of $83,000 during the three months ending June 30, 2008, as compared to $711,000 for the second quarter of 2007. Net income decreased $628,000 or 88.3% compared to the same quarter period in 2007 primarily due to a $895,000 increase in the provision for loan losses. The increase in the provision is intended to address increased loan charge-offs during the three month period and the overall deterioration in the local economy. In addition, net interest income decreased $161,000. For a detailed discussion of our asset quality, see the “Asset Quality” section of the Management’s Discussion and Analysis. The second quarter return on average assets was 0.08% and the return on average equity was 1.05% compared to 0.65% and 9.30%, respectively, for the same period last year. Basic and diluted earnings per share were $0.02 for the second quarter of 2008 and $0.21 for the second quarter of 2007.

The Company recorded $647,000 in net income for the first six months of 2008 compared to $1.4 million during the same period in 2007. During the first half of 2008, net income decreased $746,000 or 53.6% primarily due to a $915,000 increase in the provision for loan losses and a decrease of $504,000 in net interest income. The year to date return on average assets decreased 36 basis points to 0.30% and the return on average equity decreased to 4.07% from 9.19% for the same period in 2007. Book value per share increased to $8.87 at June 30, 2008 from $8.79 at June 30, 2007. The key components of net income are discussed in the following paragraphs.

Analysis of Net Interest Income

Net interest income, which is the sum of interest and certain fees generated by earning assets minus interest paid on deposits and other funding sources, is the principal source of the Company’s earnings. Net interest income for the quarter ended June 30, 2008 decreased $161,000 or 3.8% from $4.2 million for the second quarter of 2007. The decrease in net interest income was attributable, for the most part, to the decline in the average yield on loans and the increase in average nonaccrual loans, partially offset by an increase in average loans and a decline in the cost of liabilities. Average loans increased $18.4 million to $334.5 million during the second quarter of 2008 from $316.1 million in the second quarter of 2007. The average yield on loans decreased 146 basis point to 6.64% in the second quarter of 2008 from 8.10% in the second quarter of 2007, primarily as a result of decreases in the Prime rate, a key index to which a substantial portion of our loan rates are tied. During the second quarter of 2008, the average Prime rate was 5.08% compared to 8.25% during the same time last year. The second quarter 2008 yield on average earning assets was 6.23%, a decrease of 105 basis points from the second quarter of 2007. Average total investments decreased 18.25% to $86.7 million from $106.0 million in the prior year reflecting a $28.8 million decrease in federal funds sold and other short-term investments partially offset by a $9.4 million increase in investment securities.

Funding for earning assets comes from deposits, short and long-term borrowings, and stockholders’ equity. Average interest bearing liabilities increased $6.1 million or 1.9% during the second quarter of 2008 compared to the same period last year, reflecting a $15.2 million increase in total average borrowings partially offset by a $9.1 million decrease in average interest bearing deposits. During the second quarter of 2008, the cost of interest-bearing funds decreased 123 basis points to 2.92% from 4.15% in the second quarter of 2007. The decrease in the cost of interest-bearing liabilities reflects deposits and borrowings bearing lower interest rates as shorter and medium term interest rates in the second quarter of 2008 were significantly lower than during the second quarter of 2007.

The net interest margin, which is net interest income as a percentage of average interest-earning assets, was 3.89% for the second quarter of 2008, a decrease of 14 basis points from 4.03% for the second quarter of 2007. The decline in the net interest margin reflects the decrease in the average loan yield, and the decrease in the federal funds sold and other short-term investments yields in a declining interest rate environment. The net interest spread, which is the difference between the average interest rate earned on interest-earning assets and interest paid on interest-bearing liabilities, was 3.31% for the second quarter of 2008, reflecting an increase of 18 basis points from 3.13% reported in the second quarter of 2007. The increase in the net interest spread reflects the decrease in the cost of liabilities in a declining interest rate environment.

The following table presents the average balances, net interest income and interest yields/rates for the second quarters of 2008 and 2007.

Distribution of Assets, Liabilities and Stockholders’ Equity Yields and Rates
For the Three Months Ended June 30, 2008 and 2007
(Dollars in thousands)

		2008												2007
						Interest												Interest
		Average				Income/				Average				Average				Income/				Average
		Balances				Expense				Rates				Balances				Expense				Rates
Assets
Loans (1)		$	334,535			$	5,523				6.64	%		$	316,122			$	6,383				8.10	%
Investment securities			78,667				940				4.81	%			69,228				802				4.65	%
Federal funds sold			2,719				13				1.92	%			20,080				260				5.19	%
Interest-earning bank balances			5,304				48				3.64	%			16,735				214				5.13	%
Total interest-earning assets			421,225				6,524				6.23	%			422,165				7,659				7.28	%
Allowance for loan losses			(4,322	)											(4,514	)
Cash and due from banks			11,516												13,148
Other assets			13,764												10,623
Total assets		$	442,183											$	441,422
Liabilities and Stockholders’ Equity
Savings, NOW and money market accounts		$	129,169				414				1.29	%		$	143,114				1,096				3.07	%
Certificates of deposit			172,661				1,745				4.06	%			167,823				2,085				4.98	%
Short-term borrowings			18,945				108				2.29	%			3,899				17				1.75	%
Long-term debt			16,137				179				4.46	%			15,945				222				5.58	%
Total interest-bearing liabilities			336,912				2,446				2.92	%			330,781				3,420				4.15	%
Noninterest-bearing deposits			68,768												75,685
Other liabilities			4,656												4,297
Stockholders’ equity			31,847												30,659
Total liabilities and stockholders’ equity		$	442,183											$	441,422
Net interest income						$	4,078											$	4,239
Net interest spread											3.31	%											3.13	%
Net interest margin											3.89	%											4.03	%

The net interest income for the first six months of 2008 totaled $7.9 million, a decrease of $504,000 or 6.0%, as compared to $8.4 million for the same period in 2007. The decrease in the year to date net interest income was primarily the result of the 103 basis point decrease in the yield on average interest earning assets to 6.37% at June 30, 2008 from 7.40% in the six months ending June 30, 2007 partially offset by a 96 basis point decrease in the cost of interest bearing liabilities. The average yield on loans decreased 128 basis points to 6.89% during the first six months of 2008 compared to the same time last year reflecting a decline in the average Prime rate from 8.25% to 5.65%, a key index to which a substantial portion of our loan rates are tied, and an increase in average nonaccrual loans. Average total investments increased to $94.9 million from $92.7 million in the prior year reflecting a $12.6 million increase in investment securities, an $8.9 million decrease in federal funds sold and a $1.4 million decrease on other short-term investments.

Average interest bearing liabilities increased $16.4 million or 5.1% during the first half of 2008 compared to the same period last year, reflecting a $5.0 million increase in average interest bearing deposits and an $11.4 million increase in total average borrowings. During the first half of 2008, the cost of interest-bearing funds decreased 96 basis points to 3.18% from 4.14% in the first half of 2007. The decrease in the cost of interest-bearing liabilities reflects deposits and borrowings bearing lower interest rates as shorter and medium term interest rates in the first half of 2008 were significantly lower than during the first half of 2007.

The net interest margin was 3.81% and the net interest spread was 3.19% for the first six months of 2008, reflecting a decrease of 35 basis points in net interest margin and an increase of 7 basis points in net interest spread compared to the same period in 2007. The decline in the net interest margin reflects the decrease in the average loan yield in a declining rate environment and the loss of income from the increase in nonaccrual loan balances. The improvement in the net interest spread reflects the decrease in the cost of liabilities in a declining rate environment.

The following table presents the average balances, net interest income and interest yields/rates for the first half of 2008 and 2007.

Distribution of Assets, Liabilities and Stockholders’ Equity Yields and Rates
For the Six Months Ended June 30, 2008 and 2007
(Dollars in thousands)

		2008												2007
						Interest												Interest
		Average				Income/				Average				Average				Income/				Average
		Balances				Expense				Rates				Balances				Expense				Rates
Assets
Loans (1)		$	322,588			$	11,056				6.89	%		$	315,421			$	12,785				8.17	%
Investment securities			79,500				1,903				4.81	%			66,904				1,517				4.57	%
Federal funds sold			5,717				87				3.06	%			14,653				379				5.22	%
Interest-earning bank balances			9,662				183				3.81	%			11,108				285				5.17	%
Total interest-earning assets			417,467				13,229				6.37	%			408,086				14,966				7.40	%
Allowance for loan losses			(4,290	)											(4,486	)
Cash and due from banks			12,906												12,967
Other assets			13,258												10,405
Total assets		$	439,341											$	426,972
Liabilities and Stockholders’ Equity
Savings, NOW and money market accounts		$	134,987				1,080				1.61	%		$	135,320				2,009				2.99	%
Certificates of deposit			170,856				3,699				4.35	%			165,509				4,090				4.98	%
Short-term borrowings			13,880				171				2.48	%			5,767				81				2.83	%
Long-term debt			15,620				361				4.65	%			12,359				364				5.94	%
Total interest-bearing liabilities			335,343				5,311				3.18	%			318,955				6,544				4.14	%
Noninterest-bearing deposits			67,422												73,334
Other liabilities			4,594												4,113
Stockholders’ equity			31,982												30,570
Total liabilities and stockholders’ equity		$	439,341											$	426,972
Net interest income						$	7,918											$	8,422
Net interest spread											3.19	%											3.26	%
Net interest margin											3.81	%											4.16	%