Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Abigail Adams National Bancorp, Inc. (the "Company") is the parent of The Adams National Bank ("ANB"), a national bank with six full-service branches located in the greater metropolitan Washington, D.C. area and, Consolidated Bank and Trust ("CB&T"), a Virginia chartered commercial bank, with two branches in Richmond and one in Hampton, Virginia. The Company reports its financial results on a consolidated basis with ANB and CB&T.
The following analysis of financial condition and results of operations should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto for the year ended December 31, 2007. Results of Operations
Overview
The Company recorded a net loss of $3.5 million for the three months ended September 30, 2008 compared to net income of $653,000 in the third quarter of 2007. The decrease was primarily due to a charge of $6.4 million to the provision for loan losses in the third quarter of 2008 as compared to $75,000 in the third quarter of 2007. The increase in the provision is intended to address increased loan charge-offs during the three month period and the overall deterioration in the national and local economy. For a detailed discussion of our asset quality, see the "Asset Quality" section of the Management's Discussion and Analysis. Net interest income increased $76,000 or 1.9% which was more than offset by a $575,000 decrease in noninterest income and a $292,000 increase in noninterest expense. The 134.0% decrease in noninterest income was primarily due to a $517,000 other-than-temporary impairment charge taken in the third quarter resulting from a write-down of two corporate debt securities to fair value.
The Company recorded a net loss of $2.9 million for the first nine months of 2008 compared to net income of $2.0 million during the same period in 2007. The net loss reflects a $7.5 million provision for loan losses during the first nine months of 2008 compared to $235,000 for the same period last year. In addition, net interest income decreased $428,000 or 3.4%, noninterest income decreased $553,000 or 44.9% reflecting the other-than-temporary impairment charge and noninterest expense increased $177,000 or 1.7%. Book value per share decreased to $7.59 at September 30, 2008 from $8.95 at September 30, 2007. The key components of net income are discussed in the following paragraphs. Analysis of Net Interest Income
Net interest income, which is the sum of interest and certain fees generated by earning assets minus interest paid on deposits and other funding sources, is the principal source of the Company's earnings. Net interest income for the quarter ended September 30, 2008 increased 1.9% to $4.2 million from $4.1 million for the third quarter of 2007. The increase in net interest income was attributable, for the most part, to a 142 basis point decline in the cost of liabilities, partially offset by a 79 basis point decline in the yield on average earning assets. The average yield on loans decreased to 6.48% from 7.77% during the third quarter of 2008 compared to the same period last year reflecting a decline in the third quarter average Prime Rate from 8.18% to 5.00%, a key index to which a substantial portion of our loan rates are tied. Average loans increased 7.1% to $339.4 million compared to $316.9 million for the third quarter of 2007. Average total investments decreased 36.8% to $83.6 million compared to $132.3 million in the prior year period. The yield on average total investments decreased to 4.72%, compared to 4.90% in the third quarter of 2007, reflecting the $50.8 million decrease in federal funds and other short term investment average balances and a decrease in shorter and medium term interest rates in the third quarter of 2008 compared to the same period in 2007.
Average interest bearing liabilities decreased $15.5 million or 4.3% in the third quarter of 2008 compared to the same period last year, reflecting a $37.5 million decrease in deposits, partially offset by a $22.0 million increase in borrowings. During the third quarter of 2008, the cost of interest-bearing funds decreased to 2.73% from 4.15% in the third quarter of 2007. The decrease in the cost of interest-bearing liabilities reflects deposits and FHLB borrowings bearing lower interest rates as shorter and medium term interest rates in the third quarter of 2008 were significantly lower than during the same quarter in 2007.

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The net interest margin, which is net interest income as a percentage of average interest-earning assets, was 3.92% for the third quarter of 2008, an increase of 30 basis points from 3.62% for the third quarter of 2007. The net interest rate spread, which is the difference between the average interest rate earned on interest-earning assets and interest paid on interest-bearing liabilities, was 3.40% for the third quarter of 2008, reflecting an increase of 63 basis points from the 2.77% reported in the third quarter of 2007. The improvement in the net interest margin and spread reflects the decline in the cost of liabilities in a lower short-term interest rate environment.
The following table presents the average balances, net interest income and interest yields/rates for the third quarters of 2008 and 2007.
Distribution of Assets, Liabilities and Stockholders' Equity Yields and Rates For the Three Months Ended September 30, 2008 and 2007

(Dollars in thousands)