Abigail Adams National Bancorp (AANB) 10-Q 2007 Q1 Quarterly report

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 March 31, 2007

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

(Registrant’s telephone number, including area code)

n/a

(Former name, former address and former fiscal year, if changed since last report)

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. YESþ     NOo

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

Large accelerated filero          Accelerated filero          Non-accelerated filerþ

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

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

     As of May 11, 2007, there were issued and outstanding 3,461,799 shares 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		10
Item 3 - Quantitative and Qualitative Disclosures about Market Risk		16
Item 4 - Controls and Procedures		16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings		17
Item 1A- Risk Factors		17
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds		17
Item 3 - Defaults Upon Senior Securities		17
Item 4 - Submission of Matters to Vote of Security Holders		17
Item 5 - Other Information		17
Item 6 - Exhibits		17
Signatures		17
Exhibit 31.1		18
Exhibit 31.2		19
Exhibit 32		20

ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2007 (unaudited) and December 31, 2006
(Dollars in thousands)

	March 31, 2007			December 31, 2006
Assets
Cash and due from banks	$	13,709		$	13,729
Federal funds sold		8,504			8,011
Interest-earning deposits in other banks		13,540			5,823
Total cash and cash equivalents		35,753			27,563
Investment securities available for sale, at fair value		47,675			45,347
Investment securities held to maturity, at amortized cost (market values of $15,263 and $17,418 for 2007 and 2006, respectively)		15,491			17,722
Loans		312,844			307,957
Less: allowance for loan losses		(4,479	)		(4,432	)
Loans, net		308,365			303,525
Premises and equipment, net		4,878			4,904
Other assets		7,251			6,441
Total assets	$	419,413		$	405,502
Liabilities and Stockholders’ Equity
Liabilities:
Deposits
Noninterest-bearing deposits	$	73,178		$	76,887
Interest-bearing deposits		290,376			286,703
Total deposits		363,554			363,590
Short-term borrowings		4,986			2,378
Long-term debt		16,055			6,288
Other liabilities		4,351			3,064
Total liabilities		388,946			375,320
Commitments and contingencies (Note 2)
Stockholders’ equity:
Common stock, $0.01 par value, authorized 5,000,000 shares; issued 3,487,678 shares in 2007 and 2006; outstanding 3,461,799 shares in 2007 and 2006		35			35
Additional paid-in capital		25,123			25,123
Retained earnings		6,117			5,868
Less: treasury stock, 25,879 shares in 2007 and 2006, at cost		(210	)		(210	)
Accumulated other comprehensive loss		(598	)		(634	)
Total stockholders’ equity		30,467			30,182
Total liabilities and stockholders’ equity	$	419,413		$	405,502

See Notes to Unaudited Condensed Consolidated Financial Statements

1

ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended March 31, 2007 and 2006
(In thousands except per share data)

	2007		2006
Interest Income
Interest and fees on loans	$	6,442	$	4,821
Interest and dividends on investment securities, taxable		715		726
Other interest income		190		120
Total interest income		7,347		5,667
Interest Expense
Interest on deposits		2,918		1,533
Interest on short-term borrowings		64		108
Interest on long-term debt		142		157
Total interest expense		3,124		1,798
Net interest income		4,223		3,869
Provision for loan losses		85		50
Net interest income after provision for loan losses		4,138		3,819
Noninterest Income
Service charges on deposit accounts		362		348
Other income		48		135
Total noninterest income		410		483
Noninterest Expense
Salaries and employee benefits		1,693		1,724
Occupancy and equipment expense		570		530
Professional fees		170		160
Data processing fees		283		219
Other operating expense		692		589
Total noninterest expense		3,408		3,222
Income before provision for income taxes		1,140		1,080
Provision for income taxes		458		427
Net Income	$	682	$	653
Earnings per share:
Basic	$	0.20	$	0.19
Diluted	$	0.20	$	0.19
Average common shares outstanding:
Basic		3,462		3,462
Diluted		3,466		3,469
Dividends per share:	$	0.125	$	0.125

See Notes to Unaudited Condensed Consolidated Financial Statements

2

ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three Months Ended March 31, 2007 and 2006
(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, 2005	$	35	$	24,865	$	3,903		($	98	)	($	652	)	$	28,053
Comprehensive income:
Net income		—		—		653			—			—			653
Unrealized losses during the period of ($238) on investment securities available for sale, net of tax benefit of ($92)		—		—		—			—			(146	)		(146	)
Total comprehensive income		—		—		—			—			—			507
Dividends declared ($0.125 per share)		—		—		(433	)		—			—			(433	)
Balance at March 31, 2006	$	35	$	24,865	$	4,123		($	98	)	($	798	)	$	28,127
Balance at December 31, 2006	$	35	$	25,123	$	5,868		($	210	)	($	634	)	$	30,182
Comprehensive income:
Net income		—		—		682			—			—			682
Unrealized gains during the period of $59 on investment securities available for sale, net of tax expense of $23		—		—		—			—			36			36
Total comprehensive income		—		—		—			—			—			718
Dividends declared ($0.125 per share)		—		—		(433	)		—			—			(433	)
Balance at March 31, 2007	$	35	$	25,123	$	6,117		($	210	)	($	598	)	$	30,467

See Notes to Unaudited Condensed Consolidated Financial Statements

3

ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2007 and 2006
(In thousands)

	2007			2006
Cash flows from operating activities:
Net income	$	682		$	653
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		85			50
Depreciation and amortization		113			135
Accretion of loan discounts and fees		(136	)		(115	)
Gain on sale of guaranteed portion of SBA loans		—			(28	)
Net (discount) premium amortization on investment securities		(2	)		1
Loss on sale of other assets owned		42			—
Proceeds from the sale of other assets owned		132			—
Increase in other assets		(370	)		(592	)
Increase (decrease) in other liabilities		1,287			(161	)
Net cash provided by (used in) operating activities		1,833			(57	)
Cash flows from investing activities:
Proceeds from maturities of investment securities held to maturity		2,000			—
Proceeds from maturities of investment securities available for sale		3,000			2,000
Proceeds from repayment of mortgage-backed securities held to maturity		232			—
Proceeds from repayment of mortgage-backed securities available for sale		231			258
Purchase of investment securities available for sale		(5,500	)		(2,000	)
Purchase of FHLB and FRB stock		(1,534	)		(771	)
Redemption of FHLB stock		892			—
Net increase in loans		(4,758	)		(3,105	)
Purchase of premises and equipment, net		(112	)		(206	)
Net cash used in investing activities		(5,549	)		(3,824	)
Cash flows from financing activities:
Net decrease in transaction and savings deposits		(17,585	)		(14,032	)
Net increase in time deposits		17,549			5,311
Net increase in short-term borrowings		2,608			18,912
Proceeds from long-term debt		10,000			—
Repayment of long-term debt		(233	)		(230	)
Cash dividends paid to common stockholders		(433	)		(433	)
Net cash provided by financing activities		11,906			9,528
Net increase in cash and cash equivalents		8,190			5,647
Cash and cash equivalents at beginning of period		27,563			18,549
Cash and cash equivalents at end of period	$	35,753		$	24,196
Supplementary disclosures:
Interest paid on deposits and borrowings	$	2,714		$	1,557
Income taxes paid	$	255		$	785

See Notes to Unaudited Condensed Consolidated Financial Statements

4

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, 2006, 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 for 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 2006 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 months ended March 31, 2007 (unaudited) are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. Certain reclassifications may have been made to amounts previously reported for 2006 to conform with the 2007 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, 2006.

Note 3 Earnings per Share

The basic earnings per share computation is based upon the weighted average number of shares outstanding during the period. The diluted earnings per share computations are determined using the treasury stock method and based upon the weighted average number of shares outstanding during the period plus the dilutive effect of outstanding stock options. The following table provides a reconciliation of the number of shares between the computation of basic and diluted earnings per share for the quarters ended March 31, 2007 and 2006.

	For the three months ended
	March 31,
	2007		2006
Weighted average shares		3,461,799		3,462,129
Effect of dilutive stock options		3,940		6,575
Dilutive potential average common shares		3,465,739		3,468,704

5

Note 4 Securities

The amortized cost and estimated fair value of investment securities held to maturity and investment securities available for sale at March 31, 2007 and December 31, 2006 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated Fair
(In thousands)	Cost Basis		Gains		Losses		Value
March 31, 2007:
Investment Securities – available for sale:
U.S. government sponsored agencies and corporations	$	36,478	$	3	$	433	$	36,048
Mortgage-backed securities		4,208		—		136		4,072
Corporate securities		1,068		—		136		932
Other debt securities		6,703		33		113		6,623
Total	$	48,457	$	36	$	818	$	47,675
Investment Securities – held to maturity:
U.S. government sponsored agencies and corporations	$	13,492	$	—	$	229	$	13,263
Mortgage-backed securities		1,999		12		11		2,000
Total	$	15,491	$	12	$	240	$	15,263
December 31, 2006
Investment Securities – available for sale:
U.S. government sponsored agencies and corporations	$	33,967	$	—	$	546	$	33,421
Mortgage-backed securities		4,444		—		159		4,285
Corporate securities		1,071		—		122		949
Other debt securities		6,706		32		46		6,692
Total	$	46,188	$	32	$	873	$	45,347
Investment Securities – held to maturity:
U.S. government sponsored agencies and corporations	$	15,490	$	—	$	304	$	15,186
Mortgage-backed securities		2,232		12		12		2,232
Total	$	17,722	$	12	$	316	$	17,418

The Company had no sales of securities in the periods ended March 31, 2007 or March 31, 2006.

At March 31, 2007, a portion of our investment securities portfolio had 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 March 31, 2007 and December 31, 2006, 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
March 31, 2007:
U.S. government sponsored agencies and corporations	$	2,992	$	4	$	43,316	$	658	$	46,308	$	662
Mortgage-backed securities		—		—		4,794		147		4,794		147
Corporate securities		—		—		932		136		932		136
Other debt securities		2,949		68		955		45		3,904		113
Total	$	5,941	$	72	$	49,997	$	986	$	55,938	$	1,058
December 31, 2006:
U.S. government sponsored agencies and corporations	$	2,990	$	6	$	44,617	$	844	$	47,607	$	850
Mortgage-backed securities		—		—		5,050		171		5,050		171
Corporate securities		—		—		949		122		949		122
Other debt securities		954		46		—		—		954		46
Total	$	3,944	$	52	$	50,616	$	1,137	$	54,560	$	1,189

6

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 Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

The Company’s total holdings with continuous unrealized losses existing 12 months or more consisted of two corporate bonds and one other debt security. The two corporate bonds, carried at fair value totaling $932,000 with an aggregate unrealized loss of $136,000 at March 31, 2007, were downgraded in 2005 to below investment grade. The other debt security, carried at fair value of $955,000 with an unrealized loss of $45,000, currently has a Moody’s rating of A1 and a Standard and Poor’s rating of A. Interest payments continue to be received as scheduled and the Company has the intent and ability to hold these investments until their maturity. Based on an evaluation of the creditworthiness of the issuers, the Company believes the issuers will not default and that it will recoup the entire principal at maturity; therefore, management did not record any other-than-temporary impairment charge at March 31, 2007 or at December 31, 2006

The other unrealized losses that existed as of March 31, 2007 and December 31, 2006, are a result of market changes in interest rates since the securities’ purchase. This factor, coupled with the fact the Bank 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 quarters ending March 31, 2007 and March 31, 2006.

The components of accumulated other comprehensive income, included in stockholders’equity, are as follows:

(In thousands)	March 31, 2007			March 31 2006
Net unrealized losses on securities available for sale	($	782	)	($	1,231	)
Tax effect		(314	)		(498	)
Net-of-tax amount		(468	)		(733	)
Net unrealized losses on pension plan assets and benefit obligations		(198	)		(99	)
Tax effect		68			34
Net-of-tax amount		(130	)		(65	)
Total accumulated other comprehensive income	($	598	)	($	798	)

Note 6 Defined Benefit Pension Plan

CB&T maintains a noncontributory defined benefit pension plan. Pension benefits vest after five years of service and were based on years of service and average final salary. During 1997, CB&T froze the accrual of future service benefits, however, benefits continued to accrue for future compensation adjustments. In 2003, the compensation levels were frozen at current rates for benefit calculation purposes. On January 10, 2007, the CB&T Board of Directors adopted a resolution to terminate the pension plan effective March 31, 2007. All participants became 100% vested on that date. The Company expects to contribute $380,000 to the pension plan in 2007 to make the plan sufficient at its termination. This contribution amount is based on actuarial assumptions and may vary depending on the timing of final distributions and the incidence of participants requesting, as permitted under the law, that an annuity be purchased for them.

7

The components of net periodic benefit cost for the three months ended March 31, 2007 and 2006 are shown in the following table. The cost does not reflect future expected settlement subsequent to March 31, 2007 plan termination.

	Pension Benefits
	Net Periodic Benefit Cost
	For the three months
(In thousands)	ended March 31,
	2007			2006
Service cost	$	—		$	—
Interest cost		68			66
Expected return on plan assets		(83	)		(70	)
Amortization of prior service cost		—			—
Amortization of net (gain) loss		—			—
Net periodic benefit cost	($	15	)	($	4	)

Note 7 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 schedule below.

	Segment Results and Reconciliation
	Adams National			Consolidated							Intercompany			Consolidated
(Dollars in thousands)	Bank			Bank & Trust			Other(1)				Eliminations			Totals
For three months ended March 31, 2007:
Interest income	$	5,962		$	1,385		$	—			$	—		$	7,347
Interest expense		2,658			363			103				—			3,124
Net interest income		3,304			1,022			(103	)			—			4,223
Provision for loan losses		75			10			—				—			85
Noninterest income		327			108			832				(857	)		410
Noninterest expense		2,199			1,085			149				(25	)		3,408
Net income		810			22			682				(832	)		682
Assets		333,422			85,478			35,500				(34,987	)		419,413
Return on average assets		1.00	%		0.10	%		NM		(2)		—			0.67	%
Return on average equity		12.11	%		1.10	%		NM		(2)		—			9.07	%
For three months ended March 31, 2006:
Interest income	$	4,589		$	1,078		$	—				—		$	5,667
Interest expense		1,482			209			107				—			1,798
Net interest income		3,107			869			(107	)			—			3,869
Provision for loan losses		50			—			—				—			50
Noninterest income		392			116			817				(842	)		483
Noninterest expense		2,119			958			170				(25	)		3,222
Net income		800			17			653				(817	)		653
Assets		274,950			77,634			33,152				(32,800	)		352,936
Return on average assets		1.19	%		0.09	%		NM		(2)		—			0.76	%
Return on average equity		12.52	%		0.90	%		NM		(2)		—			9.37	%

(1)	Amounts represent parent company before intercompany eliminations.
(2)	Not considered a meaningful performance ratio for parent company.

8

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

	Three months			Three months
	ended March 31,			ended March 31,
(In thousands)	2007			2006
Noninterest income — elimination of parent company’s undistributed earnings from subsidiaries	($	832	)	($	817	)
Net income — elimination of parent company’s earnings from subsidiaries	($	832	)	($	817	)
Assets — elimination of parent company’s investment in subsidiaries	($	34,856	)	($	32,746	)

Note 8 Adoption of Financial Accounting Standards Board Interpretation No. 48

The Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. Interpretation No. 48 requires the company to review outstanding tax positions and establish a liability in its balance sheet for those positions that more likely than not, based on technical merits, would not be sustained upon examination by taxing authorities. The Company files U.S. federal income tax returns and state income tax returns in Maryland and the District of Columbia. Based on the statute of limitations, the Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2003. Based on the review of the tax returns filed for the years 2003 through 2005 and the tax benefits accrued in the 2006 annual financial statements, management determined that 100% of the benefits accrued were expected to be realized and has a high confidence level in the technical merits of the positions. It believes that the deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law. As a result of this evaluation, management did not record a liability for unrecognized tax benefits.

Note 9 Recent Accounting Pronouncements

In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the effects of this statement.

9

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, 2006.

Results of Operations

Overview

The Company recorded net income of $682,000 for the first three months of 2007, a 4.4% increase over $653,000 for the first quarter of 2006. Net interest income increased $354,000, which was partially offset by a $73,000 decrease in noninterest income and a $186,000 increase in noninterest expense. Book value per share was $8.80 at March 31, 2007, as compared to $8.12 at March 31, 2006. The return on average assets was 0.67% and the return on average equity was 9.07% for the first quarter of 2007, compared to a return on average assets of 0.76% and a return on average equity of 9.37% for the same period last year. Basic and diluted earnings per share were $0.20 for the first quarter of 2007 and $0.19 for the first quarter of 2006.

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 March 31, 2007 increased 9.1% to $4.2 million from $3.9 million in the first quarter of 2006. The growth in net interest income was attributable to the growth in average earning assets, particularly loans. Average loans increased 26.4% or $65.6 million to $314.7 million from $249.1 million at March 31, 2006. The average yields on loans increased to 8.30 % in the first quarter of 2007 from 7.85% in first quarter of 2006, primarily as a result of increases in Prime rate. In the first quarter of 2007, the average balance on investments decreased 4.1% to $79.1 million from $82.5 million in the same period of 2006. The 2007 first quarter yield on average earning assets was 7.57%, an increase of 64 basis points from the 2006 first quarter yield of 6.93%.

Funding for earning assets comes from deposits, long and short-term borrowings, and stockholders’ equity. The percentage of average earning assets funded by average interest-bearing liabilities increased to 77.9% during the first quarter of 2007, compared to 73.5% for the same period in 2006. Average interest bearing liabilities increased 26.0% over the first quarter of 2006. The cost of interest-bearing funds for the quarter ended March 31, 2007, increased 114 basis points to 4.13%. The increase in the cost of interest-bearing liabilities reflects deposits and short-term borrowings bearing higher interest rates in a rising interest rate environment.

The net interest margin, which is net interest income as a percentage of average interest-earning assets, decreased 38 basis points to 4.35% in the first quarter of 2007 from 4.73% in the first quarter of 2006. 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 3.44% for 2007, reflecting a decrease of 50 basis points from the 3.94% reported in the first quarter of 2006. The decline in the net interest margin and spread reflects the strong competition for deposits and loans and the effects of the inverted yield curve.

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The following table presents the average balances, net interest income and interest yields/rates for the first three months of 2007 and 2006.

Distribution of Assets, Liabilities and Stockholders’ Equity Yields and Rates
For the Three Months Ended March 31, 2007 and 2006
(Dollars in thousands)

	2007								2006
				Interest								Interest
	Average			Income/		Average			Average			Income/		Average
	Balances			Expense		Rates			Balances			Expense		Rates
Assets
Loans (1)	$	314,711		$	6,442		8.30	%	$	249,065		$	4,821		7.85	%
Investment securities		64,554			715		4.49	%		71,429			726		4.12	%
Federal funds sold		9,166			119		5.27	%		8,336			91		4.43	%
Interest-earning bank balances		5,418			71		5.31	%		2,723			29		4.32	%
Total earning assets		393,849		$	7,347		7.57	%		331,553		$	5,667		6.93	%
Allowance for loan losses		(4,457	)							(4,410	)
Cash and due from banks		12,783								12,981
Other assets		11,045								8,950
Total assets	$	413,220							$	349,074
Liabilities and Stockholders’ Equity
Savings, NOW and money market accounts	$	127,439		$	913		2.91	%	$	141,932		$	824		2.35	%
Certificates of deposit		163,169			2,005		4.98	%		80,001			709		3.59	%
Short term borrowings		7,655			64		3.39	%		10,702			108		4.09	%
Long-term debt		8,734			142		6.59	%		11,106			157		5.73	%
Total interest-bearing liabilities		306,997			3,124		4.13	%		243,741			1,798		2.99	%
Noninterest-bearing deposits		70,959								73,543
Other liabilities		4,783								3,522
Stockholders’ equity		30,481								28,268
Total liabilities and stockholders’ equity	$	413,220							$	349,074
Net interest income				$	4,223							$	3,869
Net interest spread							3.44	%							3.94	%
Net interest margin							4.35	%							4.73	%

(1) The loan averages are stated net of unearned income and include loans on which the accrual of interest has been discontinued.

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Noninterest Income

Total noninterest income consists primarily of service charges on deposits and other fee-based services, as well as gains on the sales of investment securities and loans. Noninterest income totaled $410,000, a decrease of $73,000 or 15.1% from the first quarter of 2006. Service charges on deposit accounts totaled $362,000, an increase of 4.0% from the prior year total of $348,000 reflecting an increase in overdraft fee income. Other income, consisting of other fee-based services and the gain on the sale of loans, decreased by $87,000 in the first quarter of 2007 to $48,000, compared to the same period in 2006. We had no gain from sales of the guaranteed portion of SBA loans during the three months ended March 31, 2007 and $28,000 during the three months March 31, 2006. There was no gain on the sale of investment securities in the first quarter of 2007 or 2006.

Noninterest Expense

Noninterest expense in the first quarter of 2007 totaled $3.4 million, an increase of 5.8% compared to the first quarter of 2006. The increase of $40,000 in net occupancy cost reflects three full months of rental expense for additional office space acquired for the loan department during the first quarter of 2007 compared to two months in the first quarter of 2006. The increase of $64,000 in data processing fees is primarily due to data system deconversion costs incurred at CB&T in the first quarter of 2007. The $103,000 or 17.5% increase in other operating expense is primarily due to a $36,000 increase in advertising costs and a $42,000 loss from the sale of other assets acquired in the acquisition of CB&T in 2005.

Income Tax Expense

Income tax expense totaled $458,000 for the quarter ended March 31, 2007, an increase of 7.3% from the income tax expense reported for the first quarter of 2006. The increase in income tax expense in 2007 was a result of the 5.6% increase in the Company’s pretax income, as compared to the first quarter of 2006. The effective tax rate for 2007 was 40.2%, compared to 39.5% for the first quarter of 2006.

Financial Condition

Overview

Total assets were $419.4 million at March 31, 2007, compared to $405.5 million at December 31, 2006, an increase of $13.9 million or 3.4%. Total liabilities increased $13.6 million or 3.6% to $388.9 million from December 31, 2006.

Loans

Total loans outstanding at March 31, 2007 increased $4.8 million or 1.6% from December 31, 2006 to a balance of $312.8 million.

Investment securities

Investment securities available-for-sale are carried at estimated fair value and totaled $47.7 million at March 31, 2007, an increase of $2.4 million or 5.1% from the balance at December 31, 2006. Investment securities classified as held-to-maturity were $15.5 million at March 31, 2007, a decrease of $2.2 million or 12.6% from December 31, 2006.

Short-term investments

Short-term investments, consisting of federal funds and interest earning deposits in banks, increased a total of $8.2 million or 59.3% in the first quarter of 2007, as compared to December 31, 2006.

Other assets

Total other assets increased $810,000 or 12.6% at March 31, 2007 compared to December 31, 2006. The most significant increases were $633,000 in FHLB stock purchases necessitated by the increase in FHLB borrowings and $467,000 in prepaid expenses due to annual renewals of various contracts. These increases were offset by a $232,000 decrease in accrued interest on loans and investments.

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Deposits

Deposits are the Company’s primary source of funds. Total deposits totalled $363.6 million at March 31, 2007 and at December 31, 2006. However, there were significant fluctuations in the product types. Noninterest-bearing deposits decreased $3.7 million or 4.8% to $73.2 million. Within the interest bearing category, NOW accounts decreased by $12.1 million or 18.8% predominately due to a seasonal outflow in a large governmental account. Certificates of deposit increased by $17.5 million or 11.6% as a result of an advertising campaign.

Short-term borrowings

Short-term borrowings, consisting of repurchase agreements, federal funds, and short-term FHLB borrowings, increased $2.7 million to $5.0 million at March 31, 2007 which was used to fund asset growth.

Long-term debt

Long-term debt, consisting of $11.0 million in term loans from the FHLB and $5.0 million in a term note, increased by $9.8 million from December 31, 2006. On March 7, 2007, ANB obtained a FHLB advance in the amount of $10 million at a rate of 4.286% due on March 9, 2012.

Stockholders’ equity

Stockholders’ equity at March 31, 2007 was $30.5 million, an increase of $285,000 from December 31, 2006. The increase was a combination of first quarter earnings of $682,000, plus the decrease in the unrealized loss on available-for-sale investment securities of $36,000, offset by $433,000 in dividends paid on the Company’s common stock.

Asset Quality

Adequacy of the Allowance for Loan Losses

The Company continuously monitors the quality of its loan portfolio and maintains an allowance for loan and lease losses (“ALLL”) sufficient to absorb probable losses inherent in its total loan portfolio. The ALLL policy is critical to the portrayal and understanding of our financial condition and results of operations. As such, selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. Although credit policies are designed to minimize risk, management recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio.

The Company’s ALLL framework has three basic components: a formula-based component for pools of homogeneous loans; a specific allowance for loans reviewed for individual impairment; and a pool specific allowance based upon other inherent risk factors and imprecision associated with the modeling and estimation process. The first component, the general allocation to homogenous loans, is determined by applying allowance factors to pools of loans that have similar characteristics in terms of business and product type. The general factors are determined by using an analysis of historical charge-off experience by loan pools. The second component of the ALLL analysis involves the estimation of allowances specific to impaired loans. The third component of the ALLL addresses inherent losses that are not otherwise captured in the other components and is applied to homogenous pools of loans. The qualitative factors are subjective and require a high degree of management judgment. These factors consider changes in nonperforming and past-due loans, concentrations of loans to specific borrowers and industries, and general and regional economic conditions, as well as other factors existing at the determination date.

The ALLL is established through provisions for loan losses as a charge to earnings based upon management’s ongoing evaluation. Loans deemed uncollectible are charged against the ALLL and any subsequent recoveries are credited to the ALLL. The provision for loan losses increased in the first quarter of 2007 to a total of $85,000, compared to $50,000 for the same period in 2006. The balance of the ALLL was $4.5 million or 1.43% of total loans at March 31, 2007, compared to $4.4 million or 1.44% of loans at December 31, 2006. Net loan charge-offs were $38,000 in the first quarter of 2007. The current level of the ALLL is intended to address known and inherent losses that are both probable and estimable at March 31, 2007.

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The following table presents an analysis of the ALLL for the three months ended March 31, 2007 and 2006.

	For the three months ended
	March 31,
(Dollars in thousands)	2007			2006
Balance at beginning of period	$	4,432		$	4,345
Loans charged off:
Commercial		85			44
Real estate – commercial		—			—
Real estate – residential		—			—
Construction and development		—			—
Installment – individuals		—			2
Total charge-offs		85			46
Recoveries:
Commercial		27			167
Real estate – commercial		—			—
Real estate – residential		6			5
Construction and development		—			—
Installment – individuals		14			8
Total recoveries		47			180
Net charge-offs (recoveries)		38			(134	)
Provision for loan losses		85			50
Balance at end of period	$	4,479		$	4,529
Ratio of net charge-offs (recoveries) to average loans		0.01	%		(0.05	)%

Nonperforming Assets

Nonperforming assets include nonaccrual loans, restructured loans, past-due loans and other real estate owned. Past due loans are loans that are 90 days or more delinquent and still accruing interest. There were $1.9 million past-due loans that were still accruing interest, at March 31, 2007 and December 31, 2006, respectively. Total nonperforming loans at March 31, 2007 were $3.2 million with balances of $727,000 guaranteed by the Small Business Association (SBA), and represented 0.76% of total assets. In comparison, nonperforming loans at December 31, 2006 represented 0.88% of total assets and totaled $3.6 million, with balances of $1.0 million guaranteed by the SBA. The largest component of nonperforming loans is a commercial loan with a balance of $1.3 million at March 31, 2007.

The following table presents nonperforming assets by category at March 31, 2007 and December 31, 2006.

	2007			2006
	(Dollars in thousands)
Nonaccrual loans:
Commercial	$	1,124		$	1,508
Real estate		—			—
Installment – individuals		—			—
Total nonaccrual loans		1,124			1,508
Past-due loans		1,913			1,919
Other real estate owned		137			137
Total nonperforming assets	$	3,174		$	3,564
Nonperforming assets exclusive of SBA guarantee	$	2,447		$	2,544
Ratio of nonperforming assets to gross loans		1.01	%		1.16	%
Ratio of nonperforming assets to total assets		0.76	%		0.88	%
Allowance for loan losses to nonperforming assets		141	%		124	%

Assets totaling $14.9 million and $16.4 million at March 31, 2007 and December 31, 2006, respectively, were classified as monitored credits subject to management’s attention and are not reported in the preceding table. The classification of monitored credits is reviewed on a quarterly basis. The balances of the monitored credits guaranteed by the SBA totaled $956,000 and $1.0 million as of March 31, 2007 and December 31, 2006, respectively.

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Liquidity and Capital Resources

Liquidity

Liquidity is a product of the Company’s operating, investing, and financing activities and is represented by cash and cash equivalents. Principal sources of funds are from deposits, short and long term debt, principal and interest payments on outstanding loans, maturity of investment securities, and funds provided from operations. Overall, net cash and cash equivalents increased for the quarter ended March 31, 2007 by $8.2 million, to a balance of $35.8 million, as compared to the balance of $27.6 million at December 31, 2006. Liquid assets increased to 8.5% of total assets at March 31, 2007, as compared to 6.8% of total assets at December 31, 2006.

The Company has additional sources of liquidity available through unpledged investment securities available-for-sale totaling $11.9 million, and unsecured lines of credit available from correspondent banks, which can provide up to $31.0 million, as well as a credit facility through its membership in the FHLB.

Capital Resources

Capital levels are monitored by management on a quarterly basis in relation to financial forecasts for the year and regulatory requirements. The Company and the Banks continue to be capitalized well in excess of required levels. The following table presents the Company’s and the Banks’ capital position relative to their various minimum statutory and regulatory capital requirements at March 31, 2007. The Company and the Banks are considered “well-capitalized” under regulatory guidelines.

											Minimum To Be Well
											Capitalized Under
						Minimum Capital					Prompt Corrective Action
	Actual					Requirements					Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount			Ratio
March 31, 2007:
Total capital to risk weighted assets:
Consolidated	$	35,268		9.76	%	$	28,898		8.00	%			(1)
ANB		30,959		10.36	%		23,909		8.00	%		29,887			10.00	%
CB&T		8,733		14.18	%		4,925		8.00	%		6,157			10.00	%
Tier 1 capital to risk weighted assets:
Consolidated		30,789		8.52	%		14,449		4.00	%			(1)
ANB		27,217		9.11	%		11,955		4.00	%		17,932			6.00	%
CB&T		7,960		12.93	%		2,463		4.00	%		3,694			6.00	%
Tier I capital to average assets:
Consolidated		30,789		7.46	%		16,518		4.00	%			(1)
ANB		27,217		8.32	%		13,088		4.00	%		16,360			5.00	%
CB&T		7,960		9.34	%		3,410		4.00	%		4,262			5.00	%

(1) The Company is not subject to this requirement

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Forward Looking Statements

When used in this Form 10-Q, the words or phrases “will likely result,” “are expected to”, “will continue”, “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market areas and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions, which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to various market risks in the normal course of conducting its’ business. Market risk is the potential loss arising from adverse changes in interest rates, prices, and liquidity. The Company has established the Asset/Liability Committee (ALCO) to monitor and manage those risks. ALCO meets periodically and is responsible for approving asset/liability policies, formulating and implementing strategies to improve balance sheet and income statement positioning, and monitoring the interest rate sensitivity. The Company manages its interest rate risk sensitivity through the use of a simulation model that projects the impact of rate shocks, rate cycles, and rate forecast estimates on the net interest income and economic value of equity (the net present value of expected cash flows from assets and liabilities). These simulations provide a test for embedded interest rate risk and takes into consideration factors such as maturities, reinvestment rates, prepayment speeds, repricing limits, decay rates and other factors. The results are compared to risk tolerance limits set by ALCO policy. Based on the Company’s most recent interest rate sensitivity analysis, the impact to the net interest income and economic value of equity are well within the tolerance limits for both a rising or declining interest rate environment and sensitivity to market risk is moderate.

Item 4 — Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.

Item 1 -	Legal Proceedings
	None
Item 1A -	Risk Factors
	There have been no material changes from risk factors as previously disclosed in response to Item 1A. to Part 1 of the Form 10-K filed by the registrant for fiscal year ending December 31, 2006.
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds
	None
Item 3 -	Defaults Upon Senior Securities
	None
Item 4 -	Submission of Matters to Vote of Security Holders
	None
Item 5 -	Other Information
	None
Item 6 -	Exhibits
	(a)     Exhibits

Exhibit 31.1	Certification of the Chief Executive Officer
Exhibit 31.2	Certification of the Chief Financial Officer
Exhibit 32	Certification of Chief Executive Officer and Chief Financial Officer

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ABIGAIL ADAMS NATIONAL BANCORP, INC.
Registrant

Date:    May 11, 2007	/s/ Jeanne D. Hubbard
	Jeanne D. Hubbard
	Chairwoman of the Board, President and Director (Principal Executive Officer)

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