UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 ----------------------- or [ ] 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 (I.R.S. Employer Identification No.) incorporation or organization) 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. X Yes No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No 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 12, 2004, registrant had outstanding 3,020,913 shares of common stock. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION PAGE - -------------------------------- ---- Item 1- Condensed Consolidated Financial Statements 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 Condensed Consolidated Financial Statements 5 Item 2 - Management's Discussion and Analysis 6 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 14 Item 4 - Controls and Procedures 14 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 14 Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 14 Item 3 - Defaults Upon Senior Securities 14 Item 4 - Submission of Matters to Vote of Security Holders 14 Item 5 - Other Information 15 Item 6 - Exhibits and Reports on Form 8-K 15 Signatures 15 Exhibit 31.1 16 Exhibit 31.2 17 Exhibit 32 18 ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY Consolidated Balance Sheets June 30, 2004 (unaudited) and December 31, 2003 June 30, 2004 December 31, 2003 ----------------- ----------------- Assets Cash and due from banks $ 9,498,256 $ 9,746,854 Federal funds sold 9,136,000 8,690,315 Interest-bearing deposits in other banks 10,407,030 10,130,699 Investment securities available for sale at fair value 32,180,254 30,456,229 Investment securities held to maturity (market values of $11,073,455 and $13,901,669 for 2004 and 2003, respectively) 11,338,766 13,961,384 Loans 163,278,157 156,034,227 Less: allowance for loan losses (2,307,051) (2,119,448) ------------- ------------- Loans, net 160,971,106 153,914,779 ------------- ------------- Premises and equipment, net 1,376,876 1,475,535 Other assets 3,756,112 3,530,000 ------------- ------------- Total assets $ 238,664,400 $ 231,905,795 ============= ============= Liabilities and Stockholders' Equity Liabilities: Deposits Noninterest-bearing deposits $ 65,426,941 $ 56,828,660 Interest-bearing deposits 136,179,207 135,927,747 ------------- ------------- Total deposits 201,606,148 192,756,407 Short-term borrowings 3,505,222 5,390,326 Long-term debt 9,579,657 10,030,117 Other liabilities 924,804 853,863 ------------- ------------- Total liabilities 215,615,831 209,030,713 ------------- ------------- Commitments and contingencies (Note 2) Stockholders' equity: Common stock, $0.01 par value, authorized 5,000,000 shares; issued 3,030,783 shares in 2004 and 3,030,783 shares in 2003; outstanding 3,014,343 shares in 2004 and 3,014,343 shares in 2003 30,308 30,308 Additional paid-in capital 17,241,143 17,241,143 Retained earnings 6,474,222 5,578,431 Less: Treasury stock, 16,440 shares in 2004 and 2003, at cost (98,349) (98,349) Accumulated other comprehensive income (loss) (598,755) 123,549 ------------- ------------- Total stockholders' equity 23,048,569 22,875,082 ------------- ------------- Total liabilities and stockholders' equity $ 238,664,400 $ 231,905,795 ============= ============= See Notes to Condensed Consolidated Financial Statements ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income For the Periods Ended June 30, 2004 and 2003 (Unaudited) For the three months ended For the six months ended June 30, June 30, ------------------------- ------------------------- 2004 2003 2004 2003 ------------- ----------- ------------ ----------- Interest Income Interest and fees on loans $2,807,110 $2,685,729 $5,556,738 $5,467,721 Interest and dividends on investment securities 504,755 336,766 1,018,094 664,159 Other interest income 19,209 49,982 42,011 75,947 ---------- ---------- ---------- ---------- Total interest income 3,331,074 3,072,477 6,616,843 6,207,827 ---------- ---------- ---------- ---------- Interest Expense Interest on deposits 388,499 460,039 767,771 942,849 Interest on short-term borrowings 4,975 12,411 11,314 28,532 Interest on long-term debt 71,245 79,082 144,328 99,547 ---------- ---------- ---------- ---------- Total interest expense 464,719 551,532 923,413 1,070,928 ---------- ---------- ---------- ---------- Net interest income 2,866,355 2,520,945 5,693,430 5,136,899 Provision for loan losses 105,000 311,065 210,000 381,065 ---------- ---------- ---------- ---------- Net interest income after provision for loan 2,761,355 2,209,880 5,483,430 4,755,834 losses ---------- ---------- ---------- ---------- Noninterest income Service charges on deposit accounts 408,951 425,066 815,670 844,256 Gain on sale of investment securities 13,210 -- 40,265 29,252 Other income 34,406 52,795 55,863 124,280 ---------- ---------- ---------- ---------- Total noninterest income 456,567 477,861 911,798 997,788 ---------- ---------- ---------- ---------- Noninterest expense Salaries and employee benefits 893,595 795,395 1,792,303 1,604,592 Occupancy and equipment expense 340,034 326,364 673,571 602,878 Professional fees 86,913 68,968 197,322 118,604 Data processing fees 132,799 112,114 264,324 222,328 Other operating expense 383,233 340,712 727,333 651,747 ---------- ---------- ---------- ---------- Total noninterest expense 1,836,574 1,643,553 3,654,853 3,200,149 ---------- ---------- ---------- ---------- Income before provision for income taxes 1,381,348 1,044,188 2,740,375 2,553,473 Provision for income taxes 550,261 413,542 1,090,997 1,020,324 ---------- ---------- ---------- ---------- Net Income $ 831,087 $ 630,646 $1,649,378 $1,533,149 ========== ========== ========== ========== Earnings per share: Basic $ 0.28 $ 0.21 $ 0.55 $ 0.51 Diluted $ 0.28 $ 0.21 $ 0.55 $ 0.51 Average common shares outstanding: Basic 3,014,343 3,007,811 3,014,343 3,006,570 Diluted 3,025,901 3,023,380 3,026,188 3,022,533 Dividends per share: $ 0.125 $ 0.125 $ 0.25 $ 0.245 See Notes to Condensed Consolidated Financial Statements ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Six Months Ended June 30, 2004 and 2003 (Unaudited) Accumulated Additional Other Common Paid-in Retained Treasury Comprehensive Stock Capital Earnings Stock Income (loss) Total ---------- ----------- ------------- ---------- ----------- ------------ Balance at December 31, 2002 $ 30,211 $ 17,185,310 $ 3,886,313 ($ 98,349) $ 188,356 $ 21,191,841 Comprehensive income: Net income -- -- 1,533,149 -- -- 1,533,149 Change in net unrealized gain on investment securitiesavailable for sale, net of taxes of -- -- -- -- 59,811 59,811 40,853 ------------ Total comprehensive income -- -- -- -- -- 1,592,960 ----------- Dividends declared ($0.245 per share) -- -- (726,512) -- -- (726,512) Issuance of shares under Stock Option Programs 32 16,626 -- -- -- 16,658 -------- ------------ ------------ --------- --------- ----------- Balance at June 30, 2003 $ 30,243 $ 17,201,936 $ 4,692,950 ($ 98,349) $ 248,167 $ 22,074,947 ======== ============ ============ ========= ========= ============ Balance at December 31, 2003 $ 30,308 $ 17,241,143 $ 5,578,431 ($ 98,349) $ 123,549 $ 22,875,082 Comprehensive income: Net income -- -- 1,649,378 -- -- 1,649,378 Change in net unrealized loss on investment services available for sale, net of taxes of -- -- -- -- (722,304) (722,304) $(408,970) ------------ Total comprehensive income -- -- -- -- -- 927,074 ------------ ------------ Dividends declared ($0.25 per share) -- -- (753,587) -- -- (753,587) -------- ------------ ------------ --------- --------- ------------ Balance at June 30, 2004 $ 30,308 $ 17,241,143 $ 6,474,222 ($ 98,349) ($598,755) $ 23,048,569 ======== ============ ============ ========= ========= ============ See Notes to Condensed Consolidated Financial Statements ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2004 and 2003 (Unaudited) 2004 2003 ------------- --------------- Cash flows from operating activities: Net income $1,649,378 $1,533,149 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 210,000 381,065 Depreciation and amortization 150,462 145,526 Accretion of loan discounts and fees (121,535) (119,097) Gain on sale of investment securities (40,265) (29,252) Net discount (accretion)/premium amortization on investment securities 95,405 33,042 Decrease in other assets 267,244 311,318 Increase in other liabilities 70,942 201,017 ------------- --------------- Net cash provided by operating activities 2,281,631 2,456,768 ------------- --------------- Cash flows from investing activities: Proceeds from maturities of investment securities held to maturity 2,000,000 11,000,000 Proceeds from maturities of investment securities available for sale -- 14,500,000 Proceeds from repayment of mortgage-backed securities held to maturity 606,568 680,560 Proceeds from repayment of mortgage-backed securities available for sale 798,571 1,288,951 Proceeds from the sale of investment securities available for sale 1,089,497 500,000 Purchase of investment securities held to maturity -- (10,499,375) Purchase of investment securities available for sale (4,866,845) (23,000,805) Net increase in interest-bearing deposits in other banks (276,331) (9,343,398) Net (increase) decrease in loans (7,144,791) 5,699,212 Purchase of premises and equipment (51,803) (350,638) ------------- --------------- Net cash used in investing activities (7,845,134) (9,525,493) ------------- --------------- Cash flows from financing activities: Net increase in transaction and savings deposits 6,960,817 7,201,067 Net increase (decrease) in time deposits 1,888,924 (4,676,225) Net decrease in short-term borrowings (1,885,104) (1,595,715) Repayment of Federal Home Loan Bank borrowings (450,460) (245,905) Proceeds from Federal Home Loan Bank borrowings -- 10,000,000 Proceeds from issuance of common stock, net of expenses -- 16,658 Cash dividends paid to common stockholders (753,587) (726,512) ------------- --------------- Net cash provided by financing activities 5,760,590 9,973,368 ------------- --------------- Cash and cash equivalents at beginning of year 18,437,169 15,976,161 ------------- --------------- Cash and cash equivalents at end of year $18,634,256 $18,880,804 ============= =============== Supplementary disclosures: Interest paid on deposits and borrowings $949,244 $1,022,466 ============= =============== Income taxes paid $1,135,000 $1,020,000 ============= =============== See Notes to Condensed Consolidated Financial Statements ABIGAIL ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARY Notes to Condensed Consolidated Financial Statements 1. Basis of presentation Abigail Adams National Bancorp, Inc. (the "Company") is the parent company of The Adams National Bank (the "Bank"). As used herein, the term Company includes the Bank, unless the context otherwise requires. The Company prepares its consolidated financial statements on the accrual basis and in conformity with accounting principles generally accepted in the United States, the instructions for Form 10-Q, and regulation S-X. The accompanying financial statements are unaudited except for the balance sheet at December 31, 2003, 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 2003 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 six months ended June 30, 2004 (unaudited) are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. Certain reclassifications may have been made to amounts previously reported for 2003 to conform with the 2004 presentation. 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, 2003. 3. Earnings per share Basic earnings per share computations are based upon the weighted average number of shares outstanding during the periods. Diluted earnings per share computations are based upon the weighted average number of shares outstanding during the period plus the dilutive effect of outstanding stock options and stock performance awards. The following table provides a reconciliation between the computation of basic EPS and diluted EPS: For the 3 months For the 6 months ended June 30 ended June 30 --------------------- ---------------------- 2004 2003 2004 2003 --------- --------- --------- --------- Weighted Average Shares 3,014,343 3,007,811 3,014,343 3,006,570 Effect of dilutive stock options 11,558 15,569 11,845 15,963 --------- --------- --------- --------- Dilutive potential average common shares 3,025,901 3,023,380 3,026,188 3,022,533 ========= ========= ========= ========= 4. Stock-based compensation plans At June 30, 2004, the Company has five stock-based compensation plans. The Company continues to account for grants under its stock option plans based on the recognition and measurement principals of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. There were no new stock-based compensation plans issued during the periods presented. 5. Securities The amortized cost and estimated fair value of investment securities to be held to maturity and investment securities available for sale at June 30, 2004 and December 31, 2003 are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Basis Gains Losses Value ------------- ------------ -------------- ------------- June 30, 2004: Investment Securities - available for sale: U.S. government agencies and corporations $14,000,000 -- $ 387,910 $13,612,090 Mortgage-backed securities 7,078,447 9,005 228,503 6,858,949 Marketable equity securities 12,109,532 266,798 667,115 11,709,215 ----------- ----------- ----------- ----------- Total $33,187,979 $ 275,803 $ 1,283,528 $32,180,254 =========== =========== =========== =========== Investment Securities - held to maturity: U.S. government agencies and corporations $ 9,500,000 -- 247,045 $ 9,252,955 Mortgage-backed securities 1,838,766 -- 18,266 1,820,500 ----------- ----------- ----------- ----------- Total $11,338,766 -- $ 265,311 $11,073,455 =========== =========== =========== =========== December 31, 2003: Investment Securities - available for sale: U.S. government agencies and corporations $12,000,000 $ 13,900 $ 123,760 $11,890,140 Mortgage-backed securities 7,897,502 17,049 94,937 7,819,614 Marketable equity securities 10,350,790 460,929 65,244 10,746,475 ----------- ----------- ----------- ----------- Total $30,248,292 $ 491,878 $ 283,941 $30,456,229 =========== =========== =========== =========== Investment Securities-held to maturity: U.S. government agencies and corporations $11,499,462 $ 21,343 $ 76,860 $11,443,945 Mortgage-backed securities 2,461,922 331 4,529 2,457,724 ----------- ----------- ----------- ----------- Total $13,961,384 $ 21,674 $ 81,389 $13,901,669 =========== =========== =========== =========== 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, 2004, is presented in the following table: Continuous unrealized losses existing for: (Dollars in thousands) less than 12 months greater than 12 months Total ------------------------------------------------------------------------------------ Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized Losses Losses Losses ------------------------------------------------------------------------------------ U.S. government agencies $22,865 $ 635 $ -- $ -- $22,865 $ 635 Mortgage-backed securities 5,074 90 2,893 157 7,967 247 Equity securities 7,429 667 -- -- 7,429 667 ------- ------- ----------- ----------- ------- ------- Total $35,368 $ 1,392 $ 2,893 $ 157 $38,261 $ 1,549 ======= ======= =========== =========== ======= ======= The unrealized losses that existed at June 30, 2004, are the result of market changes in interest rates, since the securities' purchase. The unrealized losses associated with these investments are considered temporary as the Company has both the intent and ability to hold these investment securities for a period of time sufficient to allow for any anticipated recovery in fair value. 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 (the "Bank"), a national bank with six full-service branches located in the greater metropolitan Washington, D.C. area. The Company reports its financial results on a consolidated basis with the Bank. 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, 2003. Results of Operations Overview The Company recorded net income of $831,000 for the three months ended June 30, 2004, as compared to $631,000 for the second quarter of 2003. Diluted earnings per share were $0.28 and $0.21 for the second quarter of 2004 and 2003, respectively. The 31.8% increase in net income compared to the same quarter last year was predominantly due to a 13.7% increase in net interest income and a 66.2% decrease in provision for loan losses. The return on average assets was 1.49% and the return on average equity was 14.38% for the second quarter of 2004, compared to a return on average assets of 1.21% and a return on average equity of 11.46% for the same period last year. The Company recorded net income for the first six months of 2004 of $1,649,000, or $0.55 per share diluted, for an annualized return on average assets of 1.49% and an annualized return on average equity of 14.29%. Net income for the current year increased 7.6%, as compared to the same period in 2003. In comparison, net income for the six months ended June 30, 2003 was $1,533,000 or $0.51 per share diluted, with a return on average assets of 1.52% and a return on average equity of 14.18%. The increase in net income in 2004 compared to 2003 was predominately due to a 10.8% increase in net interest income combined with a 44.9% decrease in the provision for loan losses and was offset by a 14.2% increase in nonoperating expenses. Book value per share was $7.65 at June 30, 2004, an increase of $0.30 from the book value per share of $7.35 at June 30, 2003. 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, 2004 increased 13.7% to $2,866,000 from $2,521,000 for the second quarter of 2003. The growth in net interest income was attributable to the growth in average earning assets. Average loans increased 4.9% to $159,491,000, compared to $152,097,000 for the second quarter of 2003. Average investment securities increased 52.8% to $45,157,000 compared to $29,561,000 in the prior year. The yield on average assets was 6.28%, an increase of 10 basis points from the second quarter of 2003. Average interest bearing liabilities increased 1.8% to $140,594,000 in the second quarter of 2004 compared to the second quarter of 2003. The cost of interest-bearing funds decreased 27 basis points to 1.33%, as compared to 1.60% for the second quarter of 2003. The decrease in the cost of interest-bearing funds was due to the repricing of existing deposits at lower interest rates. Our net interest margin, which is net interest income as a percentage of average interest-earning assets, was 5.40% for the second quarter of 2004, an increase of 33 basis points from 5.07% for the second quarter of 2003. 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 4.95% for the second quarter of 2004, reflecting an increase of 37 basis points from the 4.58% reported in the second quarter of 2003. The net interest income for the first six months of 2004 totaled $5,693,000, an increase of $556,000 or 10.8%, as compared to $5,137,000 for the same period in 2003. Average earning assets increased 9.1% to $211,957,000, as compared to $194,214,000 reported last year. Earning assets were funded with a 4.7% increase in the Company's average interest-bearing liabilities and a 24.0% increase in noninterest-bearing deposits. The improvement in the net interest income was a result of the increase in average earning assets combined with a decrease in the cost of interest-bearing liabilities. The net interest spread was 4.96% and the net interest margin was 5.40% for the first six months of 2004, reflecting an increase of 12 basis points in net interest spread and an increase of 7 basis points in net interest margin, compared to the same period in 2003. The following table presents the average balances, net interest income and interest yields/rates for the second quarter and the year-to-date periods of 2004 and 2003. Distribution of Assets, Liabilities and Stockholders' Equity Yields and Rates For the Three Months Ended June 30, 2004 and 2003 (Dollars in thousands) 2004 2003 ------------------------------------- ----------------------------------- Interest Interest Average Income/ Average Average Income Average Balances Expense Rates Balances Expense Rates ---------- ---------- --------- ---------- ---------- ---------- Assets Loans (1) $ 159,491 $ 2,807 7.06% $ 152,097 $ 2,686 7.08% Investment securities 45,157 505 4.49% 29,561 337 4.57% Federal funds sold 1,485 4 1.08% 10,375 28 1.08% Interest-earning bank balances 6,677 15 .90% 7,377 21 1.14% ---------- -------- --------- -------- Total earnings assets 212,810 3,331 6.28% 199,410 3,072 6.18% ------- --------- --------- ------ Allowance for loan losses (2,232) (2,390) Cash and due from banks 8,073 7,560 Other assets 4,920 4,626 --------- --------- Total assets $ 223,571 $ 209,206 ========= ========= Liabilities and Stockholders' Equity Savings, NOW and money market accounts $ 78,656 168 0.86% $ 73,687 199 1.08% Certificates of deposit 48,765 221 1.82% 47,720 261 2.19% Short term borrowings 3,458 5 0.58% 6,071 12 0.79% Long-term debt 9,715 71 2.93% 10,597 79 2.99% -------- --------- --------- ------- Total interest-bearing 140,594 465 1.33% 138,075 551 1.60% liabilities -------- --------- --------- ------- Noninterest-bearing deposits 58,391 47,348 Other liabilities 1,409 1,719 Stockholders' equity 23,177 22,064 --------- Total liabilities and $ 223,571 $ 209,206 stockholders' equity ========= Net interest income $ 2,866 $ 2,521 ========= ========= Net interest spread 4.95% 4.58% Net interest margin 5.40% 5.07% (1) The loan averages are stated net of unearned income and include loans on which the accrual of interest has been discontinued. Distribution of Assets, Liabilities and Stockholders' Equity Yields and Rates For the Six Months Ended June 30, 2004 and 2003 (Dollars in thousands) 2004 2003 ------------------------------- ---------------------------------- Interest Interest Average Income/ Average Average Income Average Balances Expense Rates Balances Expense Rates ------------------------------- ---------------------------------- Assets Loans (1) $ 157,484 $ 5,557 7.10% $ 152,597 $ 5,468 7.23% Investment securities 45,735 1,018 4.48% 28,011 664 4.78% Federal funds sold 2,503 11 .88% 7,434 41 1.11% Interest-earning bank balances 6,235 31 1.00% 6,172 35 1.14% --------- -------- ---------- -------- Total earnings assets 211,957 6,617 6.28% 194,214 6,208 6.45% --------- -------- ---------- -------- Allowance for loan losses (2,201) (2,363) Cash and due from banks 7,829 7,593 Other assets 4,900 4,563 --------- --------- Total assets $ 222,485 $ 204,007 ========= ========= Liabilities and Stockholders' Equity Savings, NOW and money market accounts $ 79,266 341 0.87% $ 72,333 400 1.12% Certificates of deposit 47,548 428 1.81% 49,035 543 2.23% Short term borrowings 4,070 11 0.54% 6,741 28 0.84% Long-term debt 9,829 144 2.95% 6,347 100 3.18% --------- -------- --------- -------- Total interest-bearing 140,713 924 1.32% 134,456 1,071 1.61% liabilities --------- -------- --------- -------- Noninterest-bearing deposits 57,307 46,229 Other liabilities 1,251 1,511 Stockholders' equity 23,214 21,811 --------- --------- Total liabilities and $ 222,485 $ 204,007 stockholders' equity ========= ========= Net interest income $ 5,693 $ 5,137 ========= ========= Net interest spread 4.96% 4.84% Net interest margin 5.40% 5.33% (1) The loan averages are stated net of unearned income and include loans on which the accrual of interest has been discontinued. 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 decreased 4.4% in the second quarter of 2004 to $457,000 from $478,000 reported in the second quarter of 2003. Service charges on deposit accounts totaled $409,000, a decrease of 3.8% from the prior year total of $425,000. The decrease in service charge income was predominantly due to a lower level of overdraft fees. Other income, consisting of other fee-based services and the gain on the sale of loans, decreased in the second quarter of 2004 by 35.9% to $34,000, compared to $53,000 reported for the second quarter of 2003. The gain on sale of the guaranteed portion of SBA loans was $8,000 greater in the second quarter of 2003 than 2004. The gain on the sale of investment securities for the second quarter of 2004 was $13,000. Total noninterest income for the six months ended June 30, 2004 was $912,000, a decrease of $86,000 or 8.6%, compared to $998,000 for the same period in 2003. Service charges on deposits decreased to a total of $816,000, compared to $844,000 for the same period last year, and was predominantly due to a decrease in the level of overdraft fees. Other income totaled $56,000, which was a decrease of $68,000, compared $124,000 reported for the first six months of 2003. The gain on the sale of the guaranteed portion of SBA loans was $ 41,000 less than the prior year period. The gain on the sale of investment securities was $40,000 for the first six months of 2004, as compared to $29,000 for the same period in 2003. Noninterest Expense Total noninterest expense for the second quarter of 2004 totaled $1,837,000, an increase of 11.7% or $193,000, as compared to $1,644,000 reported for second quarter of 2003. Salaries and benefits expense increased 12.5% to $894,000, due to increased staffing and benefit cost. Occupancy and equipment expense increased 4.3% to $340,000, primarily due to the opening of a branch office in Maryland in September 2003. Professional fees increased 26.0% to a total of $87,000, as a result of an increase in legal fees. Data processing fees increased 18.8% to $133,000, compared to $112,000, as a result of increases in software and maintenance costs. Other operating expense totaling $383,000 increased 12.3% or $42,000 in the second quarter of 2004 compared to 2003. The efficiency ratio declined slightly in the second quarter of 2004 to 55.3%, compared to 54.8% for the same period in 2003. Total noninterest expense for the six months ended June 30, 2004 increased $455,000 or 14.2% to $3,655,000, as compared to $3,200,000 for the same period in 2003. The Company's efficiency ratio was 55.3%, up from the 52.2% reported in 2003, as a result of the decrease in noninterest income combined with the increase in noninterest expense. Salaries and benefit expense increased $187,000 or 11.7% to a total of $1,792,000, due to additional staff and the related benefit expense. Professional fees increased 65.6% to $197,000, as a result of an increase in legal fees. Occupancy and equipment increased 11.8% to $674,000, due to the addition of a new branch office in the third quarter of 2003 and an increase in service maintenance charges. Data processing expense increased 18.9% to $264,000, as a result of increases in software and maintenance costs. All other operating expenses increased 11.5% to $727,000, as compared to $652,000 reported for the same period in 2003. Income Tax Expense Income tax expense totaled $550,000 for the second quarter ended June 30, 2004, an increase of 32.9% from the income tax expense reported for the second quarter of 2003. The increase in income tax expense was a result of the 32.3% increase in the Company's pretax income, as compared to the second quarter of 2003. The effective tax rate for the second quarter of 2004 was 39.8%, compared to 39.6% for the second quarter of 2003. Income tax expense for the first six months ended June 30, 2004 increased $71,000 or 7.0% to a total of $1,091,000, compared to the same period in 2003, as a result of an increase in pretax net income. The Company's effective tax rate was 39.8%, as compared to 40.0% for the same period in 2003. Financial Condition Overview Total assets were $238,664,000 at June 30, 2004, compared to $231,906,000 at December 31, 2003, an increase of $6,758,000 or 2.9%. The increase in total assets was primarily attributable to a 4.6% increase in loans. Total liabilities increased 3.2% or $6,585,000 to $215,616,000, primarily due to an increase in deposits. Total stockholders' equity increased 0.8% to $23,049,000, as compared to December 31, 2003. The book value per share of common stock issued andoutstanding at June 30, 2004 was $7.65, compared to $7.59 at December 31, 2003. Loans Total loans outstanding at June 30, 2004 increased 4.6% or $7,244,000 from December 31, 2003 to a balance of $163,278,000. Commercial real estate loans grew 12.7% from the previous year-end, while commercial loan balances declined by 11.7%. Loan growth for the first half of 2004 showed signs of improvement as compared to 2003; however, the Company faces increased competition from the large regional banks for the small to medium size commercial loan business. .. Investments securities Investment securities available-for-sale are carried at estimated fair value and totaled $32,180,000 at June 30, 2004, an increase of 1,724,000 or 5.7% from the balance at December 31, 2003. Investment securities classified as held-to-maturity were $11,339,000 at June 30, 2004, a decrease of $2,622,000 or 18.8% from the December 31, 2003 balance totaling $13,961,000. Short-term investments Short-term investments consisting of federal funds and interest bearing deposits in banks totaled $19,543,000, an increase of 3.8%, as compared to December 31, 2003. Deposits Deposits are the Company's primary source of funds. Total deposits increased 4.6% or $8,850,000 to $201,606,000 at June 30, 2004, as compared to December 31, 2003. Noninterest-bearing deposits totaled $65,427,000, an increase of $8,598,000 or 15.1% from the previous year-end. Interest-bearing deposits were $136,179,000, a slight increase from the balance of $135,928,000 at December 31, 2003. Money market accounts displayed the largest decrease, 9.6%, compared to December 31, 2003, due to the seasonal withdrawals of some of the Company's large corporate customers. All other deposit categories increased, compared to the previous year end. Short-term borrowings Short-term borrowings consisting of repurchase agreements decreased $1,885,000 or 35.0% to a balance of $3,505,000 at June 30, 2004, compared to December 31, 2003. Long-term debt Long-term debt consisted of term loans from the Federal Home Loan Bank of Atlanta ("FHLB") and totaled $9,580,000 at June 30, 2004, a decrease of $450,000 from the previous year-end, as a result of scheduled payments. Stockholders' Equity Stockholders' equity at June 30, 2004 was $23,049,000, an increase of $174,000 or 0.8% from December 31, 2003. The increase was primarily due to earnings of $1,649,000, less the dividends paid on the Company's common stock totaling 754,000, combined with the change in the unrealized loss on available-for-sale investment securities totaling $722,000. Asset Quality Loan Portfolio and Adequacy of the Allowance for Loan Losses Management believes the allowance for loan losses accounting 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. The Company manages the risk characteristics of its entire loan portfolio in an effort to maintain an adequate allowance for loans losses and identify problem loans so that the risks in the portfolio can be identified on a timely basis. Management performs a periodic analysis of risk factors that includes the primary sources of repayment on individual loans, liquidity and financial condition of borrowers and guarantors, and the adequacy of collateral. Loans subject to individual reviews are analyzed and segregated by risk according to the Company's internal risk rating scale. Management also considers the character of the loan portfolio, changes in nonperforming and past-due loans, historical loss experience, concentrations of loans to specific borrowers and industries, and general and regional economic conditions, as well as other factors existing at the determination date. This review takes into account the judgment of the individual loan officers, the credit risk manager, senior management and the Board of Directors. The Company also has an independent loan review performed by an outside consultant periodically throughout the year. 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 allowance for loan losses is established through provisions for loan losses as a charge to earnings based upon management's ongoing evaluation. The provision for loan losses decreased for the first half of 2004 to a total of $210,000, compared to $381,000 for the same period in 2003. The balance of the allowance for loan losses was $2,307,000 or 1.41% of total loans at June 30, 2004, compared to $2,119,000 or 1.36% of loans at December 31, 2003. Net loan charge-offs were $22,000 in 2004. During 2003, the weaken economic environment had adversely impacted the cash flows of some of our small commercial and commercial real estate borrowers, and as a result the Company experienced an increase in nonperforming loans that carried over into the first half of 2004. The increase in the provision is intended to address known and inherent losses that are both probable and estimable at June 30, 2004. While historical losses have been modest in years prior to 2003, the current economic conditions of the market area and the concentration of loans in the higher risk classifications (e.g. commercial and industrial, and commercial real estate mortgages) warrant maintenance of the allowance for loan losses at its current level. Management believes that the allowance for loan losses at June 30, 2004 is adequate given past experience and the underlying assessment of the Company's loan portfolio. The following table presents an analysis of the allowance for loan losses at June 30, 2004 and December 31, 2003. 2004 2003 ---------- ---------- (Dollars in thousands) ------------------------- Balance at beginning of period $2,119 $2,297 Loans charged off: Commercial 46 829 Real estate - commercial -- -- Real estate - residential -- -- Construction and development -- -- Installment - individuals 28 4 ------ ------ Total charge-offs 74 833 ------ ------ Recoveries: Commercial 51 23 Real estate - commercial -- -- Real estate - residential -- -- Construction and development -- -- Installment - individuals 1 41 ------ ------ Total recoveries 52 64 ------ ------ Net charge-offs 22 769 ------ ------ Provision for loan losses 210 591 ------ ------ Balance at end of period $2,307 $2,119 ====== ====== Ratio of net charge-offs to average loans 0.01% 0.51% 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 no loans past-due and still accruing interest at June 30, 2004 or December 31, 2003. Total nonperforming loans increased slightly at June 30, 2004 to $3,170,000, with balances of $1,776,000 guaranteed by the SBA. Nonperforming loans represented 1.33% of total assets. In comparison, nonperforming loans at December 31, 2003 were 1.24% of total assets and totaled $2,873,000, with balances of $1,665,000 guaranteed by the SBA. The largest nonperforming loans are a commercial SBA loan with a balance of $678,000 and a commercial real estate loan with a balance of $360,000. The following table presents nonperforming assets by category at June 30, 2004 and December 31, 2003. 2004 2003 ---------- ---------- (Dollars in thousands) ------------------------- Nonaccrual loans: Commercial $2,096 $2,133 Real Estate 1,074 740 Installment - individuals -- -- ------ ------ ------ ------ Total nonaccrual loans 3,170 2,873 ------ ------ ------ ------ Past-due loans: Commercial -- -- ------ ------ ------ ------ Total nonperforming assets $3,170 $2,873 ====== ====== Nonperforming assets exclusive of SBA guarantee $1,394 $1,208 Ratio of nonperforming assets to gross loans 1.94% 1.84% Ratio of nonperforming assets to total assets 1.33% 1.24% Allowance for loan losses to nonperforming assets 73% 74% Loans totaling $5,838,000 and $7,290,000 at June 30, 2004 and December 31, 2003, respectively, were classified as monitored credits subject to management's attention and are not reported in the preceding table. The classifications of the monitored credits are reviewed on a quarterly basis. The balances of the monitored credits guaranteed by the SBA totaled $1,990,000 and $1,552,000 as of June 30, 2003 and December 31, 2003, respectively. 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 slightly for the period ended June 30, 2004 to a balance of $18,634,000, as compared to the balance of $18,437,000 at December 31, 2003. Liquid assets represented 7.81% of total assets at June 30, 2004, as compared to 7.95% of total assets at December 31, 2003. The Company has additional sources of liquidity available through unpledged investment securities available-for-sale totaling $20,895,000, and unsecured lines of credit available from correspondent banks, which can provide up to $16,000,000, as well as a credit facility through its membership in the FHLB of Atlanta. 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 Bank continue to maintain a strong capital position. The following table presents the Company's and the Bank's capital position relative to their various minimum statutory and regulatory capital requirements at June 30, 2004. The Company and the Bank are considered "well-capitalized" under regulatory guidelines. Company Bank Minimal Capital ------------------------- ------------------------- Amount Ratio Amount Ratio Requirements ---------- ----------- ----------- ---------- --------------------- (Dollars in thousands) Leverage ratio $23,647 10.58% $23,307 10.43% 4.00% Tier 1 risk-based ratio 23,647 12.30% 23,307 12.14% 4.00% Total risk-based ratio 26,048 13.50% 25,864 13.47% 8.00% 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. PART II. Item 1 - Legal Proceedings None Item 2- Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities None Item 3- Defaults Upon Senior Securities None Item 4 - Submission of Matters to Vote of Security Holders On May 18, 2004, Abigail Adams National Bancorp, Inc. (the Company) held its Annual Meeting of Shareholders. At the meeting, the following persons were elected to the Board of Directors to hold office until the next Annual Meeting of Shareholders or until their respective successors have been elected and qualified. The votes cast and withheld for each such director was as follows: FOR WITHHELD -------------------- ------------------- -------------------- ------------------- Kathleen Walsh Carr 2,595,589 3,298 A. George Cook 2,595,583 3,304 Jeanne D. Hubbard 2,595,589 3,298 Marshall T. Reynolds 2,595,633 3,254 Robert L. Shell 2,595,633 3,254 Marianne Steiner 2,595,589 3,298 Joseph L. Williams 2,595,633 3,254 Bonita A. Wilson 2,595,614 3,273 Douglas V. Reynolds 2,595,583 3,304 Patricia G. Shannon 2,595,589 3,298 In addition, the Company's stockholders approved the ratification of the appointment of McGladrey & Pullen, LLP as the Company's independent certified public accountants for the year ending December 31, 2004, as follows: FOR 2,583,447 AGAINST 3,417 ABSTAIN 12,023 --------- ----- ------ Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (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 (b) Reports on Form 8-K The Company filed a Form 8-K on July 23, 2004 to report that the Company had issued a press release announcing earnings for the three month period ending June 30, 2004. The Company filed a Form 8-K on May 3, 2004 to report that the Company had issued a press release announcing earnings for the three month period ending March 31, 2004. 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: August 13, 2004 /s/ Jeanne D. Hubbard ------------------------- --------------------- Jeanne D. Hubbard Chairwoman of the Board, President and Director (Principal Executive Officer) Exhibit 31.1 I, Jeanne D. Hubbard, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Abigail Adams National Bancorp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosures and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made know to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any changes in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 /s/ Jeanne D. Hubbard ------------------------- ---------------------- Jeanne D. Hubbard President and Chief Executive Officer Exhibit 31.2 I, Karen E. Troutman, Sr. Vice President and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Abigail Adams National Bancorp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosures and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made know to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any changes in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 /s/ Karen E. Troutman ------------------------- ----------------------- Karen E. Troutman Sr. Vice President and Chief Financial Officer Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer Jeanne D. Hubbard, President and Chief Executive Officer, and Karen E. Troutman, Senior Vice President and Chief Financial Officer of Abigail Adams National Bancorp, Inc. (the "Company") each certify in her capacity as an officer of the Company that she has reviewed the quarterly report on Form 10-Q for the quarter ended June 30, 2004 and that to the best of her knowledge: (1) the report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002. Date: August 13, 2004 /s/ Jeanne D. Hubbard ------------------------- ---------------------- Jeanne D. Hubbard Chief Executive Officer Date: August 13, 2004 /s/ Karen E. Troutman ------------------------- --------------------- Karen E. Troutman Chief Financial Officer