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. ANB is currently subject to a Written Agreement with the OCC under which it is subject to certain operating instructions. To management's knowledge, at March 31, 2009 ANB has operated in compliance with the requirements of the Written Agreement except for meeting the Tier I capital to average assets ratio (see capital resources section of this management' discussion and analysis).
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, 2008. Results of Operations
Overview
The Company recorded a $1.3 million net loss before taxes for the first quarter of 2009 compared to net income before taxes of $919,000 in the first quarter of 2008. The loss during the first three months of 2009 compared to earnings for the same period in 2008 was due to a combination of an $860,000 increase in the provision for loan losses, a $569,000 decrease in net interest income and a $795,000 increase in noninterest expense. The increase in the provision is intended to address increased loan charge-offs during the three month period and the declining portfolio performance reflective of 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. Book value per share was $6.57 at March 31, 2009, as compared to $9.24 at March 31, 2008. The return (loss) on average assets was -0.79% and the return
(loss) on average equity was -13.75% for the first quarter of 2009, compared to a return on average assets of 0.52% and a return on average equity of 7.06% for the same period last year. Basic and diluted loss per share was $0.23 for the first quarter of 2009 compared to basic and diluted earnings per share of $0.16 for the first quarter of 2008. Analysis of Net Interest Income
Net interest income, which is the sum of interest and certain fees generated by interest-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, 2009 decreased $569,000 or 14.8% to $3.3 million from $3.8 million in the first quarter of 2008. The decrease in net interest income was attributable, for the most part, to the decline in the average yield on loans and, to a lesser extent, the decrease in the average investment balances, partially offset by a decline in the cost of liabilities. Loans, the highest yielding component of earning assets, represented 80.9% of average earning assets at March 31, 2009 compared to 75.1% at March 31, 2008. The average yield on loans declined 172 basis points to 5.44% in the first quarter of 2009 from 7.16% in first quarter of 2008, primarily as a result of a decrease in Prime Rate, a key index to which a substantial portion of our loan rates are tied. During the first quarter of 2009, average Prime Rate was 3.25% compared to 6.22% during the same time last year. The increase in nonaccrual loans has had a negative impact on the average loan yield.
During the first quarter of 2009, average investments, consisting of investment securities, federal funds and other short-term investments, decreased $28.4 million to $74.7 million from $103.1 million in the same period of 2008. Investments were used to fund loan growth and deposit outflow. The 2009 first quarter yield on average investments was 4.38%, a decrease of 19 basis points from the 2008 first quarter yield of 4.57% reflecting the decrease in short and medium term interest rates during the first quarter of 2009 compared to generally higher market rates during the first quarter of 2008.

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The percentage of average interest-earning assets funded by average interest-bearing liabilities increased to 84.0% during the first quarter of 2009, compared to 80.7% for the same period in 2008. Deposits, which represented 83.1% of average interest bearing liabilities at March 31, 2009, decreased $37.7 million or 12.2% to $272.2 million from $309.9 million at March 31, 2008. Average borrowings increased $31.6 million in the first quarter of 2009 to $55.5 million from $23.9 million in the first quarter of 2008. The cost of interest-bearing funds for the quarter ended March 31, 2009, decreased 127 basis points to 2.18% from 3.45% during the same period last year. The decrease in the cost of interest-bearing liabilities reflects deposits and short-term borrowings bearing lower interest rates as shorter and medium term interest rates in the first quarter of 2009 were significantly lower than during the same quarter in 2008.
The net interest margin, which is net interest income as a percentage of average interest-earning assets, decreased 33 basis points to 3.40% in the first quarter of 2009 from 3.73% in the first quarter of 2008. The compression in the net interest margin reflects the decline in the average earning asset yield, the decrease in the average investment balance and the increase in nonaccrual loans. 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 3.05% for 2009, reflecting a decrease of two basis points from the 3.07% reported in the first quarter of 2008.
The following table presents the average balances, net interest income and interest yields/rates for the first three months of 2009 and 2008.
Distribution of Assets, Liabilities and Stockholders' Equity Yields and Rates For the Three Months Ended March 31, 2009 and 2008

(Dollars in thousands)