Edgar Filing: ALABAMA NATIONAL BANCORPORATION

Annual Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003, OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO .

Commission file number: 0-25160

ALABAMA NATIONAL BANCORPORATION

(Exact name of registrant as specified in its charter)


Delaware		63-1114426
(State of incorporation		(I.R.S. Employer
or organization)		Identification No.)

1927 First Avenue North, Birmingham, AL 35203-4009

(Address of principal executive offices) (Zip Code)

(205) 583-3600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $1.00 par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨

The aggregate market value of voting stock held by non-affiliates of the registrant at June 30, 2003 was $449,617,315.

As of March 9, 2004 the registrant had outstanding 15,351,340 shares of its common stock.

DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K:

The definitive Proxy Statement for the 2004 Annual Meeting of Alabama National BanCorporation’s Stockholders is incorporated by reference into Part III of this report.

TABLE OF CONTENTS


Item No.		Page No.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS		2

PART I
1.	Business	3
	Executive Officers of the Registrant	12
2.	Properties	13
3.	Legal Proceedings	13
4.	Submission of Matters to a Vote of Security Holders	13

PART II
5.	Market for Registrant’s Common Equity and Related Stockholder Matters	14
6.	Selected Financial Data	15
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
7A.	Quantitative and Qualitative Disclosures about Market Risk	53
8.	Financial Statements and Supplementary Data	54
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	55
9A.	Controls and Procedures	55

PART III
10.	Directors and Executive Officers of the Registrant	55
11.	Compensation of Executive Officers and Directors	56
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters	56
13.	Certain Relationships and Related Transactions	56
14.	Principal Accountant Fees and Services	56

PART IV
15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	56

SIGNATURES		57

Portions of the Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on May 5, 2004 are incorporated by reference in Part III of this Form 10-K.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K, other periodic reports filed by Alabama National BanCorporation (the “Company” or “Alabama National”) under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by or on behalf of Alabama National may include “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect Alabama National’s current views with respect to future events and financial performance. Such forward looking statements are based on general assumptions and are subject to various risks, uncertainties, and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to:

(1) Possible changes in economic and business conditions that may affect the prevailing interest rates, the prevailing rates of inflation, or the amount of growth, stagnation, or recession in the global, U.S., and southeastern U.S. economies, the value of investments, collectibility of loans and the profitability of business entities;

(2) Possible changes in monetary and fiscal policies, laws and regulations, and other activities of governments, agencies and similar organizations;

(3) The effects of easing of restrictions on participants in the financial services industry, such as banks, securities brokers and dealers, investment companies and finance companies, and changes evolving from the enactment of the Gramm-Leach-Bliley Act which became effective in 2000, and attendant changes in patterns and effects of competition in the financial services industry;

(4) The cost and other effects of legal and administrative cases and proceedings, claims, settlements and judgments;

(5) The impact of terrorist activities on the national economy and money markets, particularly in light of the September 11, 2001 terrorist attacks in New York City and Washington, D.C., and the impact of U.S. military operations in Iraq and elsewhere; and

(6) The ability of Alabama National to achieve the expected operating results related to the acquired operations of recently-completed and future acquisitions (if any), which depends on a variety of factors, including (i) the ability of Alabama National to achieve the anticipated cost savings and revenue enhancements with respect to the acquired operations, (ii) the assimilation of the acquired operations to Alabama National’s corporate culture, including the ability to instill Alabama National’s credit practices and efficient approach to the acquired operations, (iii) the continued growth of the markets in which Alabama National operates consistent with recent historical experience, (iv) the absence of material contingencies related to the acquired operations, including asset quality and litigation contingencies, and (v) Alabama National’s ability to expand into new markets and to maintain profit margins in the face of pricing pressures.

The words “believe,” “expect,” “anticipate,” “project” and similar expressions signify forward looking statements. Readers are cautioned not to place undue reliance on any forward looking statements made by or on behalf of Alabama National. Any such statement speaks only as of the date the statement was made. Alabama National undertakes no obligation to update or revise any forward looking statements.

PART I

ITEM 1.

BUSINESS

Alabama National BanCorporation (“Alabama National” or “ANB”) is a Delaware bank holding company with its principal place of business in Birmingham, Alabama, and its main office located at 1927 First Avenue North, Birmingham, Alabama 35203 (Telephone Number: (205) 583-3600). Alabama National is currently the parent of 14 banks (the “Banks”), summarized below.


Bank	Principal Markets	Total Assets at December 31, 2003
1. National Bank of Commerce of Birmingham (“NBC”)	Birmingham, Alabama Metropolitan Area	$	1,308,500,000
2. First American Bank	Decatur/Huntsville/Athens and Auburn/ Opelika, Alabama	$	870,800,000
3. Indian River National Bank	Indian River and Brevard Counties, Florida	$	541,600,000
4. Georgia State Bank	Metropolitan Atlanta, Georgia	$	292,100,000
5. First Gulf Bank	Baldwin County, Alabama	$	269,400,000
6. Community Bank of Naples, N.A.	Naples, Florida	$	238,400,000
7. Public Bank	Metropolitan Orlando and Vero Beach, Florida	$	189,700,000
8. Peoples State Bank of Groveland	Lake County, Florida	$	165,500,000
9. Millennium Bank	Gainesville, Florida	$	136,000,000
10. Citizens & Peoples Bank, N.A.	Pensacola, Florida	$	114,000,000
11. Cypress Bank	Palm Coast, Florida	$	113,700,000
12. First Citizens Bank	Talladega, Alabama	$	112,800,000
13. Alabama Exchange Bank	Tuskegee, Alabama	$	81,900,000
14. Bank of Dadeville	Dadeville, Alabama	$	80,400,000

In addition, Alabama National is currently the ultimate parent of one securities brokerage firm, NBC Securities, Inc. (Birmingham, Alabama); one receivables factoring company, Corporate Billing, Inc. (Decatur, Alabama); and one insurance agency, ANB Insurance Services, Inc. (headquartered in Birmingham, Alabama).

Recent Developments

Acquisition of Cypress Bankshares, Inc.

Effective February 20, 2004, Alabama National acquired Cypress Bankshares, Inc., (“Cypress Bankshares”), a bank holding company headquartered in Palm Coast, Florida, with approximately $113.7 million in total assets as of December 31, 2003. Pursuant to the terms of the Cypress Bankshares acquisition, (i) the stockholders of Cypress Bankshares received an aggregate of 455,449 shares of Alabama National common stock and an aggregate of $1,893,387 in cash consideration, (ii) Cypress Bankshares was merged with and into Alabama National, and (iii) Cypress Bankshares’ wholly-owned subsidiary, Cypress Bank, became a wholly-owned subsidiary of Alabama National. The Cypress Bankshares acquisition was accounted for as a purchase.

Acquisition of Indian River Banking Company

Effective February 27, 2004, Alabama National acquired Indian River Banking Company, (“Indian River”), a bank holding company headquartered in Vero Beach, Florida, with approximately $541.6 million in total assets as of December 31, 2003. Pursuant to the terms of the Indian River acquisition, (i) the stockholders of Indian River received an aggregate of approximately 2,017,000 shares of Alabama National common stock and an aggregate of approximately $5,090,000 in cash consideration, (ii) Indian River was merged with and into Alabama National, and (iii) Indian River’s wholly-owned national bank subsidiary, Indian River National Bank, became a wholly-owned subsidiary of Alabama National. The Indian River acquisition was accounted for as a purchase.

Subsidiary Banks

Alabama National operates through 14 subsidiary Banks which have a total of 78 banking offices and four insurance offices (where no banking is conducted) in the states of Alabama, Georgia and Florida. The Banks focus on traditional consumer, residential mortgage, commercial and real estate construction lending, and equipment leasing to customers in their market areas. The Banks also offer a variety of deposit programs to individuals and small businesses and other organizations at interest rates generally consistent with local market conditions. NBC offers trust services to corporations and individuals. Investment services and securities brokerage services are offered through NBC Securities, Inc. at a number of the locations of the Banks. In addition, the Banks offer individual retirement and KEOGH accounts, safe deposit and night depository facilities and additional services such as the sale of traveler’s checks, money orders and cashier’s checks.

Lending Activities

General

Through the Banks, Alabama National offers a range of lending services, including real estate, consumer and commercial loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in the Banks’ market areas. Alabama National’s total loans, net of unearned interest, at December 31, 2003, were approximately $2.7 billion, or approximately 75.7% of total earning assets. The interest rates charged on loans vary with the degree of risk, maturity and amount of the loan and are further subject to competitive pressures, money market rates, availability of funds and government regulations. Alabama National has no “foreign loans” or loans for “highly leveraged transactions,” as such terms are defined by applicable banking regulations.

Loan Portfolio

Real Estate Loans. Loans secured by real estate are the primary component of Alabama National’s loan portfolio, constituting approximately $2.0 billion, or 76.3% of total loans, net of unearned interest, at December 31, 2003. The Banks often take real estate as an additional source of collateral to secure commercial and industrial loans. Such loans are classified as real estate loans rather than commercial and industrial loans if the real estate collateral is considered significant as a secondary source of repayment for the loan. The Banks’ real estate loan portfolio is comprised of commercial and residential mortgages. Residential mortgages held in the Banks’ loan portfolio, both fixed and variable, are made based upon amortization schedules of up to 30 years but generally have maturity dates of five years or less. The Banks’ commercial mortgages accrue at either variable or fixed rates. The variable rates approximate current market rates. Construction loans are made on a variable rate basis. Origination fees are normally charged for most loans secured by real estate. The Banks’ primary type of residential mortgage loan is the single-family first mortgage, typically structured with fixed or adjustable interest rates, based on market conditions. These loans usually have fixed rates for up to five years, with maturities of 25 to 30 years.

The Banks originate residential loans for sale into the secondary market. Such loans are made in accordance with underwriting standards set by the purchaser of the loan, normally as to loan-to-value ratio, interest rate and documentation. Such loans are generally made under a commitment to purchase from a loan purchaser. The Banks generally collect from the borrower or purchaser a combination of the origination fee, discount points and/or service release fee. During 2003, the Banks sold approximately $840 million in loans to such purchasers.

The Banks’ nonresidential mortgage loans include commercial, industrial and unimproved real estate loans. The Banks generally require nonresidential mortgage loans to have an 80% loan-to-value ratio and usually underwrite their commercial loans on the basis of the borrower’s cash flow and ability to service the debt from earnings, rather than on the basis of the value of the collateral. Terms on construction loans are usually less than twelve months, and the Banks typically require real estate mortgages and personal guarantees supported by financial statements and a review of the guarantor’s personal finances.

Consumer Loans. Consumer lending includes installment lending to individuals in the Banks’ market areas and generally consists of loans to purchase automobiles and other consumer durable goods. Consumer loans constituted $74.1 million, or 2.8% of Alabama National’s loan portfolio at December 31, 2003. Consumer loans are underwritten based on the borrower’s income, current debt level, past credit history and collateral. Consumer rates are both variable and fixed, with terms negotiable. Terms generally range from one to five years depending on the nature and condition of the collateral. Periodic amortization, generally monthly, is typically required.

Commercial and Financial Loans. The Banks make loans for commercial purposes in various lines of business. These loans are typically made on terms up to five years at fixed or variable rates. The loans are secured by various types of collateral including accounts receivable, inventory or, in the case of equipment loans, the financed equipment. The Banks attempt to reduce their credit risk on commercial loans by underwriting the loan based on the borrower’s cash flow and its ability to service the debt from earnings, and by limiting the loan to value ratio. Historically, the Banks have typically loaned up to 80% on loans secured by accounts receivable, up to 50% on loans secured by inventory, and up to 100% on loans secured by equipment. The Banks also make some unsecured commercial loans and offer equipment leasing. Commercial and financial loans constituted $265.9 million, or 10.0% of Alabama National’s loan portfolio at December 31, 2003. Interest rates are negotiable based upon the borrower’s financial condition, credit history, management stability and collateral.

Credit Procedures and Review

Loan Approval. Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectibility.

Alabama National attempts to minimize loan losses through various means and uses standardized underwriting criteria. Alabama National has established a standardized loan policy for all of the Banks that may be modified based on local market conditions. In particular, on larger credits, Alabama National generally relies on the cash flow of a debtor as the source of repayment and secondarily on the value of the underlying collateral. In addition, Alabama National attempts to utilize shorter loan terms in order to reduce the risk of a decline in the value of such collateral.

Alabama National addresses repayment risks by adhering to internal credit policies and procedures which all of the Banks have adopted. These policies and procedures include officer and customer lending limits, a multi-layered loan approval process for larger loans, documentation examination and follow-up procedures for any exceptions to credit policies. The point in each Bank’s loan approval process at which a loan is approved depends on the size of the borrower’s credit relationship with such Bank. Each of the lending officers at each of the Banks has the authority to approve loans up to an approved loan authority amount as approved by each Bank’s Board of Directors. Loans in excess of the highest loan authority amount at each Bank must be approved by Alabama National’s President and Chief Operating Officer. In addition, loans in excess of a particular loan officer’s approval authority must be approved by a more senior officer at the particular Bank, the loan committee at such Bank, or both.

Loan Review. Alabama National maintains a continuous loan review system for each of NBC and First American Bank and a scheduled review system for the other Banks. Under this system, each loan officer is directly responsible for monitoring the risk in his portfolio and is required to maintain risk ratings for each credit assigned. The risk rating system incorporates the basic regulatory rating system as set forth in the applicable regulatory asset quality examination procedures.

Alabama National’s Loan Review Department (“LRD”), which is wholly independent of the lending function, serves as a validation of each loan officer’s risk monitoring and rating system. LRD’s primary function

is to provide the Board of Directors of each Bank with a thorough understanding of the credit quality of such Bank’s loan portfolio. Other review requirements are in place to provide management with early warning systems for problem credits as well as compliance with stated lending policies. LRD’s findings are reported, along with an asset quality review, to the Alabama National Board of Directors at each bi-monthly meeting.

Deposits

The principal sources of funds for the Banks are core deposits, consisting of demand deposits, interest-bearing transaction accounts, money market accounts, savings deposits and certificates of deposit. Transaction accounts include checking and negotiable order of withdrawal (NOW) accounts which customers use for cash management and which provide the Banks with a source of fee income and cross-marketing opportunities, as well as a low-cost source of funds. Time and savings accounts also provide a relatively stable and low-cost source of funding. The largest source of funds for the Banks are certificates of deposit. Certificates of deposit in excess of $100,000 are held primarily by customers in the Banks’ market areas. Alabama National does utilize brokered certificate of deposits to supplement in market funding sources when funding needs or pricing warrant the use of wholesale funding.

Deposit rates are reviewed weekly by senior management of each of the Banks. Management believes that the rates the Banks offer are competitive with those offered by other institutions in the Banks’ market areas. Alabama National focuses on customer service to attract and retain deposits.

Investment Services

NBC operates an investment department devoted primarily to handling correspondent banks’ investment needs. Services provided by the investment department include the sale of securities, asset/liability consulting, safekeeping and bond accounting.

Securities Brokerage and Trust Division

NBC’s wholly owned subsidiary, NBC Securities, Inc. (“NBC Securities”), is licensed as a broker-dealer. Started in 1995, NBC Securities provides investment services to individuals and institutions. These services include the sale of stocks, bonds, mutual funds, annuities, margin loans, other insurance products and financial advisory services. NBC Securities has a total of 68 investment representatives and advisors located in the following markets: Auburn/Opelika, Birmingham, Decatur, Fairhope, Foley, Gadsden, Gulf Shores, Huntsville, and Mobile, Alabama; Clermont, Naples, Pensacola, Sarasota and Tallahassee, Florida; Atlanta and Mableton, Georgia; Central City, Kentucky; and Franklin and Nashville, Tennessee. NBC also operates a trust division that manages the assets of both corporate and individual customers located primarily in the Birmingham, Alabama market. The division’s corporate trust services include managing and servicing retirement plan accounts such as pension, profit sharing and 401(k) plans.

Mortgage Lending Division

Substantially all of the Banks operate mortgage lending divisions that make home loans to individuals located in the markets served by the Banks. The majority of these loans are sold to corporate investors, who also service the loans.

Insurance Services Division

Alabama National’s First American Bank subsidiary purchased an existing insurance agency, Rankin Insurance Services, Inc., in 1999. Rankin Insurance, now operating under the name ANB Insurance Services, is a full service independent property and casualty insurance agency headquartered in Birmingham, Alabama. Agents are located at several of the Banks.

Competition

The Banks encounter strong competition in making loans, acquiring deposits and attracting customers for investment and trust services. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and scope of the services rendered, the convenience of banking facilities and, in the case of loans to commercial borrowers, relative lending limits. The Banks compete with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries operating in Alabama and elsewhere. Many of these competitors, some of which are affiliated with large bank holding companies, have substantially greater resources and lending limits, and may offer certain services that the Banks do not currently provide. In addition, many of Alabama National’s non-bank competitors are not subject to the same extensive federal regulations that govern bank or thrift holding companies and federally insured banks or thrifts.

The Gramm-Leach-Bliley Act, effective March 11, 2000, permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. See “Supervision and Regulation.” Under the Act, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act, which represented at the time of enactment the most sweeping reform of financial services regulation in over sixty years, may significantly change the competitive environment in which Alabama National and the Banks conduct business. At this time, however, it is not possible to predict the full effect that the Act will have on Alabama National. One consequence may be increased competition from large financial services companies that will be permitted to provide many types of financial services, including bank products, to their customers.

The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “IBBEA”) authorized bank holding companies to acquire banks and other bank holding companies without geographic limitations beginning September 30, 1995. In addition, beginning on June 1, 1997, the IBBEA authorized interstate mergers and consolidations of existing banks, provided that neither bank’s home state had opted out of interstate branching by May 31, 1997. The States of Alabama, Georgia and Florida have opted in to interstate branching. Interstate branching provides that once a bank has established branches in a state through an interstate merger, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches under applicable federal or state law.

Size gives the larger banks certain advantages in competing for business from large corporations. These advantages include higher lending limits and the ability to offer services in other areas of Alabama, Georgia, Florida and the southeast region. Some of Alabama National’s competitors still maintain substantially greater resources and lending limits than Alabama National. As a result, Alabama National has not generally attempted to compete for the banking relationships of large corporations, and generally concentrates its efforts on small to medium-sized businesses and individuals to which Alabama National believes it can compete effectively by offering quality, personal service. However, management believes it may be able to compete more effectively for the business of some large corporations, given its current growth pattern.

Management believes that the Banks’ commitment to their respective primary market areas, as well as their commitment to quality and personalized banking services, are factors that contribute to the Banks’ competitiveness. Management believes that Alabama National’s decentralized community banking strategy positions the Banks to compete successfully in their market areas.

Market Areas and Growth Strategy

Through NBC, Alabama National serves the metropolitan Birmingham market, which includes portions of Jefferson, Shelby and St. Clair Counties. Alabama National’s First American Bank subsidiary serves Morgan, Limestone and Madison Counties in north Alabama and Lee County in east central Alabama. First American’s largest market presence is in the Decatur-Huntsville, Alabama market, which has demonstrated a growing economic base in recent years. First American entered the Lee County market, which includes the communities of Auburn and Opelika, with the December 2001 acquisition of Farmers National Bancshares, Inc. Lee County is also one of Alabama’s higher growth counties. Through First Gulf Bank, Alabama National serves Baldwin County, Alabama. Located between Mobile, Alabama and Pensacola, Florida, Baldwin County has a broad base of economic activity in the retail and service, agriculture, seafood, tourism and manufacturing industries. Baldwin County includes the popular tourism and retirement resort communities of Gulf Shores, Orange Beach and Fairhope. Shelby, Baldwin, Lee and St. Clair Counties have been named in statistical surveys as four of the fastest growing counties in Alabama.

In 1997, Alabama National expanded outside of Alabama with the opening of Citizens & Peoples Bank, N.A. in Escambia County, Florida. In 1998, Alabama National further expanded its presence in markets outside of Alabama with two acquisitions in Florida and one in Georgia. Public Bank is located in the fast-growing greater Orlando area, with offices in Altamonte Springs, Kissimmee and St. Cloud, Florida. Public Bank also expanded to the Atlantic Coast in September 2001 with the opening of its first branch office in Vero Beach, Florida, followed by the opening of a second branch office in Vero Beach in late 2002. Community Bank of Naples, N.A., located in Collier County, Florida, and Georgia State Bank, located in the greater-Atlanta counties of Cobb, Douglas and Paulding, are located in markets that are among the fastest growing in their respective states. Effective January 31, 2001, Alabama National expanded its presence in the greater-Orlando area with the acquisition of Peoples State Bank of Groveland (“Peoples State Bank”). Peoples State Bank serves customers in the communities of Groveland, Leesburg and Clermont, Florida. Effective June 19, 2003, Alabama National further expanded in Florida with the acquisition of Millennium Bank in Gainesville. Home to the University of Florida, Gainesville has experienced solid economic activity and good population growth.

During 2003, Alabama National announced the signing of definitive agreements for the acquisition of two additional Florida bank holding companies: Cypress Bankshares, Inc. (“Cypress Bank”) in Palm Coast and Indian River Banking Company (“Indian River”) in Vero Beach. Palm Coast, located in Flagler County, has experienced strong growth in population and bank deposits. Indian River serves the coastal Atlantic counties of Indian River and Brevard through eight locations in Vero Beach, Sebastian, Melbourne, Palm Bay and Rockledge, Florida. Both the Indian River and Cypress Bank acquisitions were closed in February 2004. See “Recent Developments.”

The other Banks, First Citizens, Alabama Exchange Bank and Bank of Dadeville, are located in non-metropolitan areas. Each of these three Banks, while experiencing minimal growth due to market growth that has not been significant, typically operates at a high level of profitability. As a result, these Banks tend to produce capital for growth in many of the high growth markets served by the other Banks. Alabama National’s strategy is to focus on maximization of profitability for these non-metropolitan banks, since market growth has not been as significant.

Due to continuing consolidation within the banking industry, as well as in the Southeastern United States, Alabama National may in the future seek to combine with other banks or thrifts (or their holding companies) that may be of smaller, equal or greater size than Alabama National. Alabama National currently intends to concentrate on acquisitions of additional banks or thrifts (or their holding companies) which operate in attractive market areas in Alabama, Florida and Georgia. In addition to price and terms, the factors considered by Alabama National in determining the desirability of a business acquisition or combination are financial condition, asset quality, earnings potential, quality of management, market area and competitive environment.

In addition to expansion through combinations with other banks or thrifts, Alabama National intends to continue to expand where possible through growth of its existing banks in their respective market areas. During

1998, NBC formed a commercial leasing division which currently focuses on machinery and equipment leases to business customers. Also, Alabama National is exploring expansion into lines of business closely related to banking and will pursue such expansion if it believes such lines could be profitable without causing undue risk to Alabama National. During 1999, First American Bank acquired Rankin Insurance Services, Inc. (now known as ANB Insurance Services, Inc.), a full service independent property and casualty insurance agency headquartered in Decatur, Alabama. ANB Insurance Services completed the acquisition of two additional insurance agencies in 2002, one headquartered in Birmingham, Alabama, and one headquartered in Groveland, Florida. ANB Insurance Services has agents in most of the markets serviced by the Banks. Alabama National has also expanded its securities brokerage unit, NBC Securities, Inc., by locating investment representatives in offices of several Alabama National subsidiary banks as well as in offices of some correspondent banks. It has also added investment representatives in other non-bank locations when opportunities have arisen. While Alabama National plans to continue its growth as described above, there is no assurance that its efforts will be successful.

Employees

As of December 31, 2003, Alabama National and the Banks together had approximately 1,283 full-time equivalent employees. None of these employees is a party to a collective bargaining agreement. Alabama National considers its relations with its employees to be good.

Supervision and Regulation

Alabama National and the Banks are subject to state and federal banking laws and regulations which impose specific requirements and restrictions on, and provide for general regulatory oversight with respect to, virtually all aspects of operations. These laws and regulations are generally intended to protect depositors, not stockholders. To the extent that the following summary describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of Alabama National.

Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) and following in December 1991 with the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), numerous additional regulatory requirements have been placed on the banking industry and additional changes have been proposed. The operations of Alabama National and the Banks may be affected by legislative changes and the policies of various regulatory authorities. Alabama National is unable to predict the nature or the extent of the effect on its business and earnings that fiscal or monetary policies, economic control, or new federal or state legislation may have in the future.

As a bank holding company, Alabama National is subject to the regulation, examination and supervision of the Federal Reserve. The Banks are subject to supervision, examination and regulation by applicable state and federal banking agencies, including the Federal Reserve, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”). The Banks are also subject to various requirements and restrictions under federal and state law, including requirements to maintain allowances against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Banks. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve as it attempts to control the money supply and credit availability in order to influence the economy.

Pursuant to the IBBEA, bank holding companies from any state may acquire banks located in any other state, subject to certain conditions, including concentration limits. A bank may establish branches across state lines by merging with a bank in another state (unless applicable state law prohibits such interstate mergers), provided certain conditions are met. A bank may also establish a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits such interstate de novo branching and certain other conditions are met.

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance fund in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default.

The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized” as such terms are defined under regulations issued by each of the federal banking agencies. In general, the agencies measure capital adequacy within a framework that makes capital requirements sensitive to the risk profiles of individual banking companies. The guidelines define capital as either Tier 1 (primarily common shareholders’ equity) or Tier 2 (certain debt instruments and a portion of the allowance for loan losses). Alabama National and the Banks are subject to a minimum Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) of 4%, a total capital ratio (Tier 1 plus Tier 2 to risk-weighted assets) of 8% and a Tier 1 leverage ratio (Tier 1 to average quarterly assets) of 3%. To be considered a “well capitalized” institution, the Tier 1 capital ratio, the total capital ratio, and the Tier 1 leverage ratio must equal or exceed 6%, 10% and 5%, respectively.

The Federal Reserve has adopted rules to incorporate market and interest rate risk components into its risk-based capital standards. Amendments to the risk-based capital requirements, incorporating market risk, became effective January 1, 1998. Under these market risk requirements, capital will be allocated to support the amount of market risk related to a financial institution’s ongoing trading activities.

The Banks are subject to the provisions of Section 23A of the Federal Reserve Act, which place limits on the amount of loans or extensions of credit to, investments in or certain other transactions with affiliates, and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. In general, the Banks’ “affiliates” are Alabama National and Alabama National’s non-bank subsidiaries.

The Banks are also subject to the provisions of Section 23B of the Federal Reserve Act that, among other things, prohibit a bank from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with non-affiliated companies.

The Banks are also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal stockholders and their related interests. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the FDIC or the OCC shall evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its

particular community, consistent with the CRA. These factors are considered in evaluating mergers, acquisitions and applications to open a branch or facility. The CRA also requires all institutions to make public disclosure of their CRA ratings. Each of the Banks received at least a satisfactory rating in its most recent evaluation.

There are various legal and regulatory limits on the extent to which the Banks may pay dividends or otherwise supply funds to Alabama National. In addition, federal and state regulatory agencies also have the authority to prevent a bank or bank holding company from paying a dividend or engaging in any other activity that, in the opinion of the agency, would constitute an unsafe or unsound practice.

FDIC regulations require that management report on its responsibility for preparing its institution’s financial statements and for establishing and maintaining an internal control structure and procedures for financial reporting and compliance with designated laws and regulations concerning safety and soundness.

The FDIC currently uses a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The FDIC recently has proposed changes to its assessment system that are designed to require premium payments by a greater number of banks and other FDIC-insured depository institutions and that also would provide rebates to some institutions. If any of these changes were to take effect, the assessment obligations of the Banks could change.

The Gramm-Leach-Bliley Act, which became effective in 2000, permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company by filing a declaration if each of its subsidiary banks is well capitalized under the FDICIA prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the CRA. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. At this time, Alabama National has not registered to become a financial holding company.

The Gramm-Leach-Bliley Act broadly defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking; and activities that the Federal Reserve has determined to be closely related to banking. The Act also permits the Federal Reserve, in consultation with the Department of Treasury, to determine that other activities are “financial in nature” and therefore permissible for financial holding companies. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature (other than insurance underwriting, insurance company portfolio investment, merchant banking, real estate development and real estate investment) through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory CRA rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank at issue has a CRA rating of satisfactory or better. Bank holding companies that have not become financial holding companies are prohibited from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Act preserves the role of the Federal Reserve as the umbrella supervisor for holding companies while at the same time incorporating a system of functional regulation designed to take advantage of the strengths of the

various federal and state regulators. In particular, the Act replaces the broad exemption from Securities and Exchange Commission regulation that banks previously enjoyed with more limited exemptions, and it reaffirms that states are the regulators for the insurance activities of all persons, including federally-chartered banks.

The Gramm-Leach-Bliley Act also establishes a minimum federal standard of financial privacy. In general, the applicable regulations issued by the various federal regulatory agencies prohibit affected financial institutions (including banks, insurance agencies and broker/dealers) from sharing information about their customers with non-affiliated third parties unless (1) the financial institution has first provided a privacy notice to the customer; (2) the financial institution has given the customer an opportunity to opt out of the disclosure; and (3) the customer has not opted out after being given a reasonable opportunity to do so.

On October 26, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law. The USA Patriot Act broadened the application of anti-money laundering regulations to apply to additional types of financial institutions, such as broker-dealers, and strengthened the ability of the U.S. government to detect and prosecute international money laundering and the financing of terrorism. The principal provisions of Title III of the USA Patriot Act require that regulated financial institutions, including state member banks: (i) establish an anti-money laundering program that includes training and audit components; (ii) comply with regulations regarding the verification of the identity of any person seeking to open an account; (iii) take additional required precautions with non-U.S. owned accounts; and (iv) perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships. The USA Patriot Act also expanded the conditions under which funds in a U.S. interbank account may be subject to forfeiture and increased the penalties for violation of anti-money laundering regulations. Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institution. Alabama National has adopted policies, procedures and controls to address compliance with the requirements of the USA Patriot Act under the existing regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by the USA Patriot Act and implementing regulations.

NBC Securities is a broker-dealer registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc.

Executive Officers of the Registrant

The Executive Officers of Alabama National serve at the pleasure of the Board of Directors. Set forth below are the current Executive Officers of Alabama National and a brief explanation of their principal employment during the last five (5) years.

John H. Holcomb, III—Age 52—Chairman and Chief Executive Officer. Mr. Holcomb has served as Chairman and Chief Executive Officer of Alabama National since 1996. Mr. Holcomb has been Chief Executive Officer of NBC since 1990.

Victor E. Nichol, Jr.—Age 57—Vice Chairman. Mr. Nichol has served as Vice Chairman of Alabama National since 2000. Prior to such time, Mr. Nichol served as President and Chief Operating Officer of Alabama National beginning in 1996. Mr. Nichol has been Vice Chairman of NBC since 2000 and served as Executive Vice President of NBC from 1994 to 2000.

Dan M. David—Age 58—Vice Chairman. Mr. David has served as Vice Chairman of Alabama National since 1997 when First American Bancorp merged with and into Alabama National. Mr. David serves as Chairman and Chief Executive Officer of First American Bank, positions he has held since 1995. Mr. David served as Chairman and Chief Executive Officer of First American Bancorp from 1995 through 1997.

Richard Murray, IV—Age 41—President and Chief Operating Officer. Mr. Murray has served as President and Chief Operating Officer of Alabama National since 2000. Prior to such time, Mr. Murray served as

Executive Vice President of Alabama National beginning 1998. Mr. Murray has served as Executive Vice President of NBC since 1997.

William E. Matthews, V—Age 39—Executive Vice President and Chief Financial Officer. Mr. Matthews has served as Executive Vice President and Chief Financial Officer of Alabama National and NBC since 1998. Prior to that date, Mr. Matthews served as Senior Vice President of NBC beginning in 1996.

John R. Bragg—Age 42—Executive Vice President. Mr. Bragg has served as Executive Vice President of Alabama National since 1998 and Executive Vice President of NBC since 1997. Mr. Bragg served as Senior Vice President of NBC from 1992 until 1997.

Shelly S. Williams—Age 41—Senior Vice President and Controller. Ms. Williams has served as Senior Vice President and Controller of Alabama National and NBC since 2000. Prior to such time, Ms. Williams served as Vice President and Controller of NBC from 1997 through 2000, and as Assistant Vice President and Assistant Controller of NBC from 1996 to 1997.

Company Website

Alabama National’s website address is www.alabamanational.com. Alabama National makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material has been filed with or furnished to the Securities and Exchange Commission.

ITEM 2.

PROPERTIES

Alabama National, through the Banks, currently operates 78 banking offices and four insurance offices. Of these offices, Alabama National, through the Banks, owns 62 banking offices without encumbrance and leases an additional 16 banking offices and its four insurance offices. Alabama National, through NBC, leases its principal administrative offices, which are located at 1927 First Avenue North, Birmingham, Alabama. See Notes 7 and 10 to the Consolidated Financial Statements of Alabama National and Subsidiaries included in this Annual Report on Form 10-K beginning at page F-1 for additional information regarding Alabama National’s premises and equipment.

ITEM 3.

LEGAL PROCEEDINGS

Alabama National, in the normal course of business, is subject to various pending and threatened litigation. Although it is not possible to determine at this point in time, based on consultation with legal counsel, management does not anticipate that the ultimate liability, if any, resulting from such litigation will have a material effect on Alabama National’s financial condition and results of operations.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

None.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

At March 9, 2004 Alabama National had approximately 2,572 stockholders of record (including shares held in “street” names by nominees who are record holders) and 15,351,340 shares of Alabama National Common Stock outstanding. Alabama National Common Stock is traded in the over-the-counter market and prices are quoted on the NASDAQ/NMS under the symbol “ALAB.”

The reported sales price range for Alabama National Common Stock and the dividends declared during each calendar quarter of 2002 and 2003 are shown below:


	High		Low		Dividends Declared
2002
First Quarter	$	37.00	$	31.60	$	.25
Second Quarter		44.27		35.45		25
Third Quarter		46.46		35.52		25
Fourth Quarter		48.23		39.74		25

2003
First Quarter	$	46.00	$	40.75	$	.285
Second Quarter		50.50		40.88		.285
Third Quarter		53.69		47.12		.285
Fourth Quarter		55.39		47.56		.285

As a bank holding company, Alabama National, except under extraordinary circumstances, will not generate earnings of its own, but will rely solely on dividends paid to it by the Banks as the source of income to meet its expenses and pay dividends. Under normal circumstances, Alabama National’s ability to pay dividends will depend entirely on the ability of the Banks to pay dividends to Alabama National. The Banks are subject to state and federal banking regulations, and the payment of dividends by the Banks is governed by such regulations.

The last reported sales price of Alabama National Common Stock as reported on the NASDAQ/NMS on March 9, 2004 was $52.10. The prices shown do not reflect retail mark-ups and mark-downs.

ITEM 6.

SELECTED FINANCIAL DATA

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

(Amounts in thousands, except ratios and per share data)


	Year Ended December 31,
	2003			2002			2001(1)			2000(1)			1999(1)
Income Statement Data:
Interest income	$	178,631		$	178,147		$	179,537		$	171,222		$	133,106
Interest expense		57,668			65,313			90,393			90,987			62,307

Net interest income		120,963			112,834			89,144			80,235			70,799
Provision for loan and lease losses		5,931			7,956			3,946			2,506			2,107

Net interest income after provision for loan and lease losses		115,032			104,878			85,198			77,729			68,692
Net securities gains (losses)		46			35			246			(119	)		196
Noninterest income		78,258			61,129			48,461			33,466			31,120
Noninterest expense		131,864			113,577			92,233			74,111			65,860

Income before income taxes		61,472			52,465			41,672			36,965			34,148
Provision for income taxes		20,398			16,735			13,232			11,421			10,817

Income before minority interest in earnings of consolidated subsidiary		41,074			35,730			28,440			25,544			23,331
Minority interest in earnings of consolidated subsidiary		28			28			25			26			25

Net income	$	41,046		$	35,702		$	28,415		$	25,518		$	23,306


Balance Sheet Data:
Total assets	$	3,820,112		$	3,316,168		$	2,843,467		$	2,358,285		$	2,025,503
Earning assets		3,512,744			3,034,980			2,612,806			2,140,562			1,811,312
Securities		810,227			700,333			567,688			386,059			353,923
Loans held for sale		16,415			51,030			36,554			5,226			8,615
Loans and leases, net of unearned income		2,659,440			2,191,394			1,964,169			1,710,810			1,403,489
Allowance for loan and lease losses		36,562			32,704			28,519			22,368			19,111
Deposits		2,753,749			2,330,395			2,066,759			1,807,095			1,529,251
Short-term debt		41,150			152,100			68,350			91,439			24,389
Long-term debt		332,427			240,065			209,631			83,926			124,005
Stockholders’ equity		279,418			234,492			207,886			171,604			146,280
Weighted Average Shares Outstanding—Diluted (2)		12,957			12,683			12,141			11,973			12,008

Per Common Share Data:
Net income—diluted	$	3.17		$	2.81		$	2.34		$	2.13		$	1.94
Book value (period end)		21.76			18.95			16.84			14.56			12.40
Tangible book value (period end) (6)		18.99			17.28			15.31			13.34			11.49
Dividends declared		1.14			1.00			0.92			0.84			0.72
Dividend payout ratio—diluted		35.96	%		35.59	%		39.32	%		39.44	%		37.11	%

Performance Ratios:
Return on average assets		1.14	%		1.18	%		1.12	%		1.17	%		1.26	%
Return on average equity		15.89			16.01			15.40			16.29			16.11
Net interest margin (3)		3.65			4.07			3.83			4.03			4.23
Net interest margin (taxable equivalent) (3)		3.68			4.11			3.88			4.08			4.30

Asset Quality Ratios:
Allowance for loan and lease losses to period end loans (4)		1.37	%		1.49	%		1.45	%		1.31	%		1.36	%
Allowance for loan and lease losses to period end nonperforming loans (5)		372.44			318.07			377.09			614.17			431.11
Net charge-offs to average loans and leases (4)		0.12			0.18			0.09			0.04			0.04
Nonperforming assets to period end loans and leases and foreclosed property (4)(5)		0.40			0.59			0.47			0.30			0.38

Capital and Liquidity Ratios:
Average equity to average assets		7.17	%		7.36	%		7.28	%		7.16	%		7.80	%
Leverage (4.00% required minimum)		7.73			7.52			7.61			6.83			7.23
Risk-based capital
Tier 1 (4.00% required minumum)		10.47			10.00			9.92			8.86			9.46
Total (8.00% required minimum)		11.73			11.26			11.17			10.11			10.70
Average loans and leases to average deposits		94.38			96.44			97.74			94.04			89.00

(1)

On January 31, 2001, Peoples State Bank of Groveland (“PSB”) merged with a newly formed subsidiary of Alabama National, whereby PSB became a wholly owned subsidiary of Alabama National (“the PSB Merger”). Because the merger was accounted for as a pooling-of-interests, the historical Five-Year Summary of Selected Financial Data for all periods have been restated to include the results of operations of PSB from the earliest period presented, except for dividends per common share.

(2)

The weighted average common shares include those of PSB at the applicable exchange ratios.

(3)

Net interest income divided by average earning assets.

(4)

Does not include loans held for sale.

(5)

Nonperforming loans and nonperforming assets include loans past due 90 days or more that are still accruing interest. It is Alabama National’s policy to place all loans on nonaccrual status when over ninety days past due.

(6)

“Tangible book value per share” is computed by dividing tangible book value by the total number of common shares outstanding. “Tangible book value” equals book value less goodwill and other intangible assets. Management believes that this measure is useful because it provides book value exclusive of goodwill and other intangible assets and because it is a measure used by many investors as part of their analysis of Alabama National. The following table sets forth a reconciliation of book value per share to tangible book value per share:.


	Year Ended December 31,
	2003			2002			2001			2000			1999
Book value	$	279,418		$	234,492		$	207,886		$	171,604		$	146,280
Deduct: goodwill and other intangible assets		(35,587	)		(20,622	)		(18,875	)		(14,347	)		(10,730	)
Tangible book value		243,831			213,870			189,011			157,257			135,550

Book value per common share		21.76			18.95			16.84			14.56			12.40
Effect of goodwill and intangible assets per share		(2.77	)		(1.67	)		(1.53	)		(1.22	)		(0.91	)
Tangible book value per common share	$	18.99		$	17.28		$	15.31		$	13.34		$	11.49

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Basis of Presentation

The following is a discussion and analysis of the consolidated financial condition and results of operations of Alabama National as of the dates and for the periods indicated. All significant intercompany accounts and transactions have been eliminated. The accounting and reporting policies of Alabama National conform with accounting principles generally accepted in the United States of America and with general financial service industry practices.

The historical consolidated financial statements of Alabama National and the “FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA” derived from the historical consolidated financial statements of Alabama National are set forth elsewhere herein. This discussion should be read in conjunction with those consolidated financial statements and selected consolidated financial data and the other financial information included in this Annual Report.

Executive Overview

The purpose of this section is to provide a brief overview of 2003. Additional detail about the income statement and balance sheet is provided in the pages following this summary.

Income Statement

Alabama National reported a 15.0% increase in net income for 2003 over 2002 levels, with diluted earnings per share growing 12.5% from $2.81 to $3.17. The increase in net income is higher than the increase in diluted earnings per share because Alabama National issued additional shares of stock during 2003 to acquire Millennium Bank and through the exercise of stock options by option holders.

The two components of revenue for Alabama National—net interest income and noninterest income—both grew in 2003 over 2002 levels, with the growth in noninterest income being much greater.

Noninterest income includes mortgage banking, securities brokerage and trust services, investment services, insurance services, and service charges and other fees associated with traditional retail and commercial banking. Noninterest income grew $17.1 million, or 28.0% during 2003. The areas of largest growth included mortgage banking (up $5.4 million), investment services (up $5.1 million), and securities brokerage and trust revenue (up $2.3 million). Mortgage banking and investment services revenue both benefited in 2003 from the decline in interest rates. The rate decline led to strong demand by mortgage customers, including refinances of existing mortgages and mortgages originated to finance home purchases. In the investment services division, the rate decline led to rapid repayment and calls of many securities owned by Alabama National’s customers, leading to demand from those customers for the purchase of new securities to replace the ones that were repaid or called.

Net interest income grew $8.1 million, or 7.2%, in 2003 despite a reduction in the Company’s net interest spread and net interest margin. The Federal Reserve’s actions to reduce interest rates resulted in a decline in earning asset yields that exceeded the decline in liability costs. As a result, the spread between the rate earned on loans, investments, and other earning assets and the rate paid on deposits and other interest-bearing liabilities compressed during the year. Alabama National was able to grow net interest income during 2003 in spite of this reduced spread due to its growth in earning assets and liabilities.

On the expense side, Alabama National’s noninterest expenses grew $18.3 million, or 16.1%. Some of this growth in noninterest expenses was associated with the expansion of the number of branch offices and associated personnel and other operating expenses associated with that expansion, including the Millennium acquisition. A portion of the expense growth was also due to increased commission-based compensation expenses caused by increased revenue in the investment services division, the mortgage banking division, and the securities brokerage and trust division.

Balance Sheet

Alabama National’s balance sheet expanded during 2003, with total assets growing $504 million or 15.2% over December 31, 2002 levels. The largest categories of asset growth occurred in loans and leases (up $468 million) and securities (up $110 million). Deposits grew $423 million during the year. In June, 2003, Alabama National completed the acquisition of Millennium Bank of Gainesville, Florida. This acquisition increased total assets, loans, and deposits by approximately $124 million, $69 million, and $91 million, respectively.

Asset Quality

Alabama National reported 2003 net charge-offs of $3.1 million, or 0.12% of average loans and leases, down from 2002’s $3.8 million (0.18% of average loans and leases). Nonperforming assets at December 31, 2003 were $10.5 million (0.40% of period end loans and leases and foreclosed property), down from year end 2002’s $12.8 million (0.59% of period end loans and leases and foreclosed property). Potential problem loans fell to $46.4 million at December 31, 2003 from year end 2002’s $50.3 million. As a result of these factors and management’s assessment of the inherent risk in the loan and lease portfolio, Alabama National’s provision for loan and lease losses declined from $8.0 million in 2002 to $5.9 million in 2003.

Selected Bank Financial Data

Alabama National’s success is dependent upon the financial performance of its subsidiary banks (the “Banks”). Alabama National, with input from the management of each Bank, establishes operating goals for each Bank. The following tables summarize selected financial information for 2003 and 2002 for each of the Banks. Millennium Bank was acquired during June 2003 in a purchase business combination and accordingly only its operating activity since the date of acquisition is included in Alabama National’s results of operations.

SELECTED BANK FINANCIAL DATA

(Amounts in thousands, except ratios)


	December 31, 2003
	National Bank of Commerce			Alabama Exchange Bank			Bank of Dadeville			Citizens & Peoples Bank, N.A.			First American Bank			First Citizens Bank			First Gulf Bank			Peoples State Bank			Public Bank			Georgia State Bank			Community Bank of Naples, N.A.			Millennium Bank
Summary of Operations:
Interest income	$	54,632		$	4,113		$	4,092		$	5,672		$	47,551		$	5,369		$	11,677		$	8,665		$	8,889		$	13,689		$	11,943		$	3,034
Interest expense		18,641			820			1,039			1,588			14,877			1,600			3,217			2,986			3,023			4,728			3,126			901
Net interest income		35,991			3,293			3,053			4,084			32,674			3,769			8,460			5,679			5,866			8,961			8,817			2,133
Provision for loan and lease losses		2,975			120			—			223			675			25			592			395			225			240			427			34
Securities gains		—			—			4			2			27			4			—			—			—			6			—			3
Noninterest income		46,651			795			802			991			16,336			1,160			4,939			1,234			1,943			3,631			1,543			824
Noninterest expense		55,840			2,311			1,941			2,811			32,550			2,401			8,363			4,377			4,381			7,769			4,141			1,941
Net income		15,989			1,103			1,359			1,277			10,515			1,944			2,905			1,409			1,987			3,110			3,610			604
Balance Sheet Highlights:
At Period-End:
Total assets	$	1,308,452		$	81,862		$	80,389		$	114,002		$	870,778		$	112,767		$	269,393		$	165,456		$	189,720		$	292,101		$	238,355		$	135,970
Securities		281,691			35,170			30,610			19,729			108,791			57,282			41,917			38,893			51,275			92,583			19,538			32,669
Loans and leases, net of unearned income		875,785			40,025			43,441			85,221			677,395			47,714			201,541			109,795			123,249			172,909			202,483			79,078
Allowance for loan and lease losses		11,660			629			659			1,149			9,317			589			2,632			2,250			1,668			2,158			2,812			1,039
Deposits		761,377			67,605			63,608			91,414			687,502			83,731			208,191			141,008			159,644			222,363			173,223			100,449
Short-term debt		5,000			—			—			5,000			5,000			5,000			—			5,500			—			—			14,000			—
Long-term debt		131,034			5,000			5,000			3,000			58,000			11,000			22,000			4,000			8,000			23,000			16,000			—
Stockholders’ equity		96,115			6,334			5,682			7,771			80,093			7,495			17,855			11,471			13,041			20,329			18,666			25,996
Performance Ratios:
Return on average assets		1.22	%		1.37	%		1.97	%		1.21	%		1.27	%		1.89	%		1.23	%		0.90	%		1.16	%		1.27	%		1.60	%		0.86	%
Return on average equity		16.84			17.01			22.88			17.91			14.05			25.71			17.47			12.25			16.48			15.89			21.45			4.57
Net interest margin		2.93			4.50			4.37			4.18			4.35			3.98			3.81			3.85			3.67			3.66			4.34			3.66
Capital and Liquidity Ratios:
Average equity to average assets		7.22	%		8.05	%		7.84	%		6.75	%		9.04	%		7.31	%		7.01	%		7.30	%		7.05	%		7.39	%		7.45	%		18.77	%
Leverage (4.00% required minimum)		7.43			7.34			7.12			7.09			7.94			6.47			6.80			7.12			7.05			6.90			7.98			7.66
Risk-based capital
Tier 1 (4.00% required minimum)		10.02			13.69			12.73			9.16			9.89			13.28			9.19			10.24			9.25			10.65			10.00			11.15
Total (8.00% required minimum)		11.24			14.95			13.98			10.41			11.14			14.36			10.44			11.50			10.43			11.79			11.25			12.40
Average loans and leases to average deposits		109.08			56.09			70.04			93.56			98.09			52.64			93.90			76.46			76.54			78.96			115.76			73.79

SELECTED BANK FINANCIAL DATA

(Amounts in thousands, except ratios)


	December 31, 2002
	National Bank of Commerce			Alabama Exchange Bank			Bank of Dadeville			Citizens & Peoples Bank, N.A.			First American Bank			First Citizens Bank			First Gulf Bank			Peoples State Bank			Public Bank			Georgia State Bank			Community Bank of Naples, N.A.
Summary of Operations:
Interest income	$	56,945		$	4,794		$	4,605		$	5,129		$	46,662		$	6,008		$	11,965		$	9,437		$	7,861		$	14,708		$	10,858
Interest expense		21,387			1,193			1,465			1,733			17,387			2,055			4,083			3,366			2,891			5,412			3,717
Net interest income		35,558			3,601			3,140			3,396			29,275			3,953			7,882			6,071			4,970			9,296			7,141
Provision for loan and lease losse		3,763			133			40			270			400			20			630			789			700			490			721
Securities gains		—			—			—			—			6			—			29			—			—			—			—
Noninterest income		36,464			643			733			795			12,624			917			3,668			1,284			2,131			2,569			1,233
Noninterest expense		47,392			2,370			1,823			2,349			27,850			2,334			7,108			4,000			3,952			6,601			3,552
Net income		14,292			1,190			1,402			988			9,258			1,901			2,524			1,733			1,525			3,179			2,581

Balance Sheet Highlights:
At Period-End:
Total assets	$	1,283,862		$	78,193		$	73,029		$	92,564		$	769,660		$	103,371		$	218,568		$	151,804		$	141,564		$	228,543		$	206,947
Securities		340,013			26,300			20,715			13,180			96,168			45,817			28,240			35,412			21,830			52,420			20,158
Loans and leases, net of unearned income		746,271			39,564			45,008			69,189			571,066			42,366			161,793			100,255			102,750			142,404			169,808
Allowance for loan and lease losses		10,417			668			644			975			9,335			615			2,263			1,810			1,564			2,013			2,400
Deposits		691,675			66,157			59,839			75,037			618,990			84,418			171,784			134,088			120,922			176,295			143,897
Short-term debt		60,000			—			—			4,000			28,000			7,000			17,000			4,000			—			—			13,000
Long-term debt		111,056			5,000			5,000			3,000			37,009			4,000			11,000			—			8,000			15,000			16,000
Stockholders’ equity		88,270			6,396			5,765			6,578			70,200			7,297			15,927			11,225			11,254			18,412			15,081

Performance Ratios:
Return on average assets		1.28	%		1.51	%		1.93	%		1.17	%		1.28	%		1.95	%		1.21	%		1.20	%		1.22	%		1.39	%		1.41	%
Return on average equity		16.70			18.18			23.66			16.62			13.95			25.19			16.79			16.01			15.76			18.31			20.54
Net interest margin		3.44			5.05			4.75			4.39			4.46			4.41			4.13			4.51			4.30			4.41			4.48

Capital and Liquidity Ratios:
Average equity to average assets		7.69	%		8.33	%		8.17	%		7.02	%		9.19	%		7.72	%		7.23	%		7.52	%		7.73	%		7.57	%		6.86	%
Leverage (4.00% required minimum)		7.51			7.27			7.91			7.17			7.48			7.00			7.30			7.15			8.05			7.45			7.40
Risk-based capital
Tier 1 (4.00% required minimum)		9.96			13.35			12.54			9.74			9.14			13.50			10.06			11.00			9.88			11.59			9.60
Total (8.00% required minimum)		11.14			14.61			13.79			11.00			10.39			14.71			11.31			12.26			11.13			12.85			10.85
Average loans and leases to average deposits		119.67			59.27			75.73			88.42			92.72			52.22			96.14			81.81			86.16			75.56			112.07

Critical Accounting Policies and Estimates

Alabama National’s accounting policies are critical to understanding the results of operations and financial position as reported in the consolidated financial statements. Significant accounting policies utilized by Alabama National are discussed in more detail in the notes to the consolidated financial statements set forth beginning on page F-1 herein.

Some of the more complex technical accounting policies require management to make significant estimates and judgments that affect the valuation of reported assets and liabilities, including associated revenues, expenses, and disclosure. The following briefly describes the more complex policies involving a significant amount of judgments about valuation and the application of complex accounting standards and interpretations.

Allowance for Loan and Lease Losses

Alabama National records estimated probable inherent credit losses in the loan and lease portfolios as an allowance for loan and lease losses. The methodologies and assumptions for determining the adequacy of the overall allowance for loan and lease losses involve significant judgments to be made by management. Some of the more critical judgments supporting the amount of Alabama National’s allowance for loan and lease losses include judgments about: credit worthiness of borrowers, estimated value of underlying collateral, assumptions about cash flow, determination of loss factors for estimating credit losses, and the impact of current events, conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses ultimately confirmed by Alabama National may be different than management’s estimates provided in the consolidated financial statements.

For a more complete discussion of the methodology employed to calculate the allowance for loan and lease losses, see Note 1 to Alabama National’s consolidated financial statements included in this Annual Report and “Provision and Allowance for Loan and Lease Losses.”

Mergers and Acquisitions

Alabama National’s growth in business and profitability over the past several years has been enhanced significantly by mergers and acquisitions. Prior to July 2001, certain of Alabama National’s acquisitions were accounted for using the pooling-of-interests business combination method of accounting. Effective July 1, 2001, Alabama National adopted SFAS No. 141, “Business Combinations,” which allows only the use of the purchase method of accounting. For purchase acquisitions, Alabama National is required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective as is the appropriate amortization period for such intangible assets. These estimates also include the establishment of various accruals and allowances based on planned facilities dispositions and employee severance considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in recording goodwill, which is subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to the carrying value of goodwill.

Income Taxes

The calculation of Alabama National’s income tax provision is complex and requires the use of estimates and judgments in its determination. As part of Alabama National’s overall business strategy, management must consider tax laws and regulations that apply to the specific facts and circumstances under consideration. This analysis includes evaluating the amount and timing of the realization of income tax liabilities or benefits. Management closely monitors tax developments in order to evaluate the effect they may have on Alabama National’s overall tax position.

Pension and Other Postretirement Benefits

Alabama National is the sponsor of two defined benefit pension plans that have been frozen with regard to future benefit accruals and also offers postretirement benefit plans to employees. The calculation of obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions. Actuarial valuations and the determination of future market values of plan assets are subject to management judgment and may differ significantly if different assumptions are used. Please refer to Note 12 to Alabama National’s consolidated financial statements included in this annual report for disclosures related to Alabama National’s benefit plans.

Stock-based Compensation

Alabama National uses a fair value based method of accounting for stock based compensation costs. Compensation costs for stock-based compensation arrangements are measured at the grant date based on the fair value of the award and are recognized over the related service period. Accounting for stock-based compensation requires the use of an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. Please refer to Note 12 to Alabama National’s consolidated financial statements included in this annual report for disclosures related to Alabama National’s stock-based compensation awards.

Other

There are other complex accounting standards that require Alabama National to employ significant judgment in interpreting and applying certain of the principles proscribed by those standards. These judgments include, but are not limited to, determination of whether a financial instrument or other contract meets the definition of a derivative in accordance with SFAS No. 133, the accounting for a transfer of financial assets and extinguishments of liabilities in accordance with SFAS No. 140, and the determination of asset impairment, including when such impairment is other-than-temporary. For a more complete discussion of the accounting policies, see Note 1 to Alabama National’s consolidated financial statements included in this annual report.

Results of Operations

Year ended December 31, 2003, compared with year ended December 31, 2002

Alabama National’s net income increased by $5.3 million, or 15.0%, to $41.0 million in the year ended December 31, 2003, from $35.7 million for the year ended December 31, 2002. Net income per diluted share increased to $3.17 for the year ended December 31, 2003, as compared to $2.81 recorded for the year ended December 31, 2002. Return on average assets during 2003 was 1.14%, compared with 1.18% during 2002, and return on average equity was 15.89% during 2003, compared with 16.01% during 2002.

Net interest income increased $8.1 million, or 7.2%, to $121.0 million in 2003, from $112.8 million in 2002, as interest income increased slightly by $0.5 million and interest expense decreased $7.6 million. The increase in net interest income is attributable to a decrease in the interest rate paid on deposits and other interest bearing liabilities and a $335.5 million increase in average loans to $2.46 billion during 2003, from $2.12 billion in 2002. During 2003, Alabama National was able to continue to decrease the rates paid on deposits as time deposits originated in higher interest rate environments matured and repriced at the current lower rates. Alabama National was able to absorb the effects of falling rates on its earning assets by continued robust growth in its earning assets, particularly loans. The increase in average loans is a result of continued strength in many of the economies in the markets served by Alabama National. In general, loans are Alabama National’s highest yielding earning asset and management continues to emphasize steady loan growth. During 2003, Alabama National also experienced substantial growth in its securities portfolio. Average securities totaled $791.6 million in 2003, compared to $589.3 in 2002. Average interest bearing liabilities increased $471.2 million, to $2.91 billion in 2003. Despite the increase in average interest bearing liabilities, interest expense decreased $7.6 million during

2003. All categories of average interest-bearing liabilities increased during 2003. The largest increase was in average time deposits. During 2003, the average balance of time deposits increased $154.2 million, to $1.24 billion in 2003, compared to $1.09 billion in 2002. Interest-bearing transaction accounts also increased by $104.8 million during 2003.

Alabama National’s net interest spread and net interest margin were 3.44% and 3.65%, respectively, in 2003, compared to 3.79% and 4.07%, respectively, in 2002. The net interest margin for 2003 was negatively impacted by Federal Reserve Bank rate reductions of 50 basis points in the fourth quarter of 2002 and also by the additional 25 basis point reduction during the second quarter of 2003. Alabama National was able to immediately pass along much of the rate reductions to interest bearing transaction accounts, but time deposits can only reprice to current rates at maturity. In addition, the spread above noninterest bearing deposits declines with any rate reduction because the cost of this liability category does not change but the yield on earning assets reduces with such a rate reduction. See “Net Interest Income.”

Alabama National recorded a provision for loan and lease losses of $5.9 million during 2003, compared to $8.0 million in 2002. Management believes that both loan loss experience and asset quality indicate that the allowance for loan losses is maintained at an adequate level, although there can be no assurance that economic or regulatory factors will not require further increases in the allowance. Alabama National’s allowance for loan and lease losses as a percentage of period-end loans and leases (excluding loans held for sale) was 1.37% at December 31, 2003, compared with 1.49% at December 31, 2002. The allowance for loan and lease losses as a percentage of period-end nonperforming assets was 347.68% at December 31, 2003, compared with 254.49% at December 31, 2002. Alabama National experienced net charge-offs of $3.1 million in 2003, equating to a ratio of net charge-offs to average loans and leases of 0.12%, compared with net charge-offs of $3.8 million in 2002, equating to a ratio of net charge-offs to average loans and leases of 0.18%. See “Provision and Allowance for Loan and Lease Losses.”

Noninterest income, including net securities gains and losses, increased $17.1 million, or 28.0%, to a record $78.3 million in 2003, compared with $61.2 million in 2002. The revenue recorded by the investment services division, securities brokerage and trust division and mortgage division were all record amounts for Alabama National. Total revenue for the investment services division increased $5.1 million, or 37.8%, to $18.7 million in 2003, from $13.6 million in 2002. Total revenue earned from the mortgage division increased $5.4 million, or 50.0%, to $16.3 million in 2003, from $10.9 million in 2002. The securities brokerage and trust division experienced a revenue increase of $2.3 million, or 16.8%, to $15.9 million in 2003, from $13.6 million in 2002. The commissions generated by the insurance division totaled $3.5 million in 2003, compared with $2.8 million recorded in 2002. Service charges on deposit accounts increased by $2.0 million, or 16.6%, to $14.1 million in 2003, from $12.1 million in 2002. Earnings on bank owned life insurance totaled $2.7 million in 2003, compared with $3.0 million in 2002. Noninterest expense increased $18.3 million, or 16.1%, to $131.9 million in 2003, compared with $113.6 million during 2002. For a detailed discussion of these income and expense categories, see “Noninterest Income and Expense.”

Because of an increase in pre-tax income, income tax expense was $20.4 million in 2003, compared to $16.7 million for 2002. The effective tax rate for 2003 was 33.2%, compared to 31.9% for 2002. These effective tax rates are impacted by items of income and expense that are not subject to federal or state taxation. The effective rate in 2003 is higher than 2002 due to higher pre-tax income without a corresponding increase in income items not subject to federal or state taxation.

Year ended December 31, 2002, compared with year ended December 31, 2001

Alabama National’s net income increased by $7.3 million, or 25.6%, to $35.7 million in the year ended December 31, 2002, from $28.4 million for the year ended December 31, 2001. Return on average assets during 2002 was 1.18%, compared with 1.12% during 2001, and return on average equity was 16.01% during 2002, compared with 15.40% during 2001.

Net interest income increased $23.7 million, or 26.6%, to $112.8 million in 2002, from $89.1 million in 2001, as interest income decreased by $1.4 million and interest expense decreased $25.1 million. The increase in net interest income is attributable to a decrease in the interest rate paid on deposits and a $311.1 million increase in average loans to $2.12 billion during 2002, from $1.81 billion in 2001. The increase in average loans is a result of continued management emphasis on loan growth and continued strength in some of the economies in the markets served by Alabama National. In general, loans are Alabama National’s highest yielding earning asset. Alabama National also experienced growth in its securities portfolio that contributed to the increase in net interest income in 2002. Average securities totaled $589.3 million in 2002, compared to $449.9 in 2001. Average interest bearing liabilities increased $394.1 million, to $2.44 billion in 2002. Despite the increase in average interest bearing liabilities, interest expense decreased $25.1 million during 2002. All categories of average interest-bearing liabilities increased during 2002. Average time deposits increased $140.0 million, to $1.09 billion in 2002, compared to $948.2 million in 2001. The interest rate paid on time deposits decreased 209 basis points to 3.59% in 2002. Also, average interest-bearing transaction accounts and savings and money market deposits increased a combined $153.1 million while the rate paid on these types of accounts decreased 139 basis points.

Alabama National’s net interest spread and net interest margin were 3.79% and 4.07%, respectively, in 2002, compared to 3.33% and 3.83%, respectively, in 2001. The increased net interest margin during 2002 is due to Alabama National’s ability to reprice most of its time deposits at lower rates during 2002. The Federal Reserve Bank reduced rates repeatedly during 2001, causing the rates paid on time deposits originated in higher interest rate environments to be significantly above current rates. As those time deposits matured, the funds either moved into transaction type deposit accounts or into other time deposit accounts at the lower current rates. The result is that the rate paid on interest-bearing liabilities decreased 175 basis points while the rate earned on earning assets decreased by only 129 basis points. See “Net Interest Income.”

Alabama National recorded a provision for loan and lease losses of $8.0 million during 2002, compared to $3.9 million in 2001. Management believes that both loan loss experience and asset quality indicate that the allowance for loan losses is maintained at an adequate level, although there can be no assurance that economic or regulatory factors will not require further increases in the allowance. Alabama National’s allowance for loan and lease losses as a percentage of period-end loans and leases (excluding loans held for sale) was 1.49% at December 31, 2002, compared with 1.45% at December 31, 2001. The allowance for loan and lease losses as a percentage of period-end nonperforming assets was 254.49% at December 31, 2002, compared with 308.55% at December 31, 2001. Alabama National experienced net charge-offs of $3.8 million in 2002, equating to a ratio of net charge-offs to average loans and leases of 0.18%, compared with net charge-offs of $1.7 million in 2001, equating to a ratio of net charge-offs to average loans and leases of 0.09%. See “Provision and Allowance for Loan and Lease Losses.”

Noninterest income, including net securities gains and losses, increased $12.5 million, or 25.6%, to $61.2 million in 2002, compared with $48.7 million in 2001. Each component of noninterest income experienced increases during 2002, except for investment services income which had a slight decrease. The most significant increases were recorded in service charge income, the securities and trust division, and the mortgage division. Total revenue earned from the mortgage division increased $3.4 million, or 46.1%, to $10.9 million in 2002, from $7.4 million in 2001. The securities brokerage and trust division experienced a revenue increase of $4.8 million, or 54.4%, to $13.6 million in 2002, from $8.8 million in 2001. The commissions generated by the insurance division totaled $2.8 million in 2002, compared with $2.1 million recorded in 2001. Service charges on deposit accounts increased by $2.6 million, or 27.2%, to $12.1 million in 2002, from $9.5 million in 2001. Earnings on bank owned life insurance totaled $3.0 million in 2002, compared with $2.4 million in 2001. Noninterest expense increased $21.3 million, or 23.1%, to $113.6 million in 2002, compared with $92.3 million during 2001. For a detailed discussion of these income and expense categories, see “Noninterest Income and Expense.”

Alabama National, through two of its subsidiary banks, sponsors two defined benefit pension plans. Each of these plans has been frozen with regard to future benefit accruals and participation by new employees. During 2002, due to the current interest rate environment and poor performance of the equity markets, the discount rate and expected return on plan assets were lowered by management. The discount rate and expected return on plan assets were 6.00% and 7.00%, respectively, for 2002, compared to 6.50% and 9.00%, respectively for 2001. Due to these changes, the pension plans’ obligations exceeded the fair value of the plan assets and Alabama National chose to fully fund the obligations and contributed $1.4 million to the plans. As of December 31, 2002, the fair value of plan assets exceeds the projected and accumulated benefit obligation for each pension plan. See Note 12 to the Consolidated Financial Statements beginning on page F-1 included in this Annual Report on Form 10-K.

Income before the provision for income taxes increased $10.8 million, or 25.9%, to $52.4 million in 2002, from $41.6 million in 2001. Net income totaled $35.7 million in 2002, an increase of $7.3 million, or 25.6%, compared to $28.4 million during 2001.

Net Interest Income

The largest component of Alabama National’s net income is its net interest income—the difference between the income earned on assets and interest paid on deposits and borrowed funds used to support its assets. Net interest income is determined by the yield earned on Alabama National’s earning assets and rates paid on its interest-bearing liabilities, the relative amounts of earning assets and interest-bearing liabilities and the maturity and repricing characteristics of its earning assets and interest-bearing liabilities. Net interest income divided by average earning assets represents Alabama National’s net interest margin.

Average Balances, Income, Expenses and Rates

The following table depicts, on a taxable equivalent basis for the periods indicated, certain information related to Alabama National’s average balance sheet and its average yields on assets and average costs of liabilities. Such yields or costs are derived by dividing income or expense by the average daily balances of the associated assets or liabilities.

AVERAGE BALANCES, INCOME AND EXPENSES AND RATES

(Amounts in thousands, except yields and rates)


	Year ended December 31,
	2003							2002							2001
	Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate

A S S E T S :

Earning assets:
Loans and leases (1)(2)(3)	$	2,459,250		$	146,223	5.95	%	$	2,123,778		$	143,770	6.77	%	$	1,812,715		$	148,239	8.18	%
Securities:
Taxable		758,506			30,359	4.00			558,052			32,116	5.76			420,582			27,593	6.56
Tax exempt (2)		33,104			2,260	6.83			31,216			2,339	7.49			29,340			2,215	7.55
Cash balances in other banks		10,024			98	0.98			9,607			165	1.72			15,137			510	3.37
Funds sold		49,338			635	1.29			45,348			743	1.64			46,630			1,931	4.14
Trading account securities		2,536			94	3.71			2,059			81	3.93			2,021			119	5.89

Total earning assets(2)		3,312,758			179,669	5.42			2,770,060			179,214	6.47			2,326,425			180,607	7.76

Cash and due from banks		95,686							89,935							81,705
Premises and equipment		75,319							66,802							53,716
Other assets		155,386							134,192							97,829
Allowance for loan losses		(35,302	)						(31,183	)						(23,284	)

Total assets	$	3,603,847						$	3,029,806						$	2,536,391


L I A B I L I T I E S :

Interest-bearing liabilities:
Interest-bearing transaction accounts	$	509,343		$	4,376	0.86	%	$	404,587		$	5,228	1.29	%	$	316,004		$	8,166	2.58	%
Savings and money market deposits		471,725			4,359	0.92			391,008			5,457	1.40			326,474			9,355	2.87
Time deposits		1,242,100			33,496	2.70			1,087,937			39,087	3.59			948,242			53,891	5.68
Funds purchased		317,811			3,278	1.03			272,689			4,187	1.54			239,293			8,696	3.63
Other short-term borrowings		80,586			1,431	1.78			78,958			2,246	2.84			42,850			1,842	4.30
Long-term debt		285,456			10,728	3.76			200,686			9,108	4.54			168,857			8,443	5.00

Total interest-bearing liabilities		2,907,021			57,668	1.98			2,435,865			65,313	2.68			2,041,720			90,393	4.43

Demand deposits		382,498							318,724							263,876
Accrued interest and other liabilities		55,980							52,170							46,244
Stockholders' equity		258,348							223,047							184,551

Total liabilities and stockholders' equity	$	3,603,847						$	3,029,806						$	2,536,391

Net interest spread						3.44	%						3.79	%						3.33	%

Net interest income/margin on a taxable equivalent basis				$	122,001	3.68	%				$	113,901	4.11	%				$	90,214	3.88	%

Tax equivalent adjustment (2)					1,038							1,067							1,070

Net interest income/margin				$	120,963	3.65	%				$	112,834	4.07	%				$	89,144	3.83	%

(1)

Average loans include nonaccrual loans. All loans and deposits are domestic.

(2)

Tax equivalent adjustments are based on the assumed rate of 34%, and do not give effect to the disallowance for Federal income tax purposes of interest expense related to certain tax-exempt assets.

(3)

Fees in the amount of $6.1 million, $5.3 million and $4.4 million are included in interest and fees on loans for 2003, 2002, and 2001, respectively.

During 2003, Alabama National experienced an increase in net interest income of $8.1 million, or 7.2%, to $121.0 million, compared with $112.8 million in 2002. Net interest income increased primarily due to a decrease in the rates paid on interest bearing liabilities and an increase in the volume of average earning assets outstanding. During 2003, as time deposits originated in higher interest rate environments matured, Alabama National was able to reprice these time deposits at current market rates, which were lower due to the Federal Reserve Bank’s rate reductions during the fourth quarter of 2002 and second quarter of 2003. As a result, during 2003 the average rate paid on time deposits was 2.70%, as compared to 2002’s average rate of 3.59%. Each category of interest bearing liabilities experienced a decrease in the average rate during 2003 as compared to 2002, resulting in an overall decrease of 70 basis points in the rate paid on interest bearing liabilities from 2003 to 2002. The Federal Reserve Bank’s rate reductions also impacted the yield earned on interest earning assets. The average yield earned on earning assets decreased 105 basis points to 5.42% during 2003, compared to 6.47% during 2002. The average yield earned on loans decreased 82 basis points to 5.95%, but this decrease in yield was offset by an increase in average volume such that interest income from loans increased $2.5 million, despite the decreased yield. The net interest margin for 2003 was negatively impacted by accelerated repayment on securities owned by Alabama National, as the securities being repaid were at higher interest rates than the rates earned on Federal funds sold and new securities purchased. The average yield earned on securities owned by Alabama National decreased by 173 basis points to 4.12% in 2003, from 5.85% in 2002. During the fourth quarter of 2003, the net interest margin was 3.70%, which was an increase over the second and third quarters of 2003. Management anticipates the net interest margin to remain near current levels absent any rate changes by the Federal Reserve or significant changes in the general interest rate environment.

Analysis of Changes in Net Interest Income

The following table sets forth, on a taxable equivalent basis, the effect which varying levels of earning assets and interest-bearing liabilities and the applicable rates had on changes in net interest income for 2003 and 2002. For purposes of this table, changes that are not solely attributable to volume or rate are allocated to volume and rate on a pro rata basis.

ANALYSIS OF CHANGES IN NET INTEREST INCOME

(Amounts in thousands)


	December 31,
	2003 Compared to 2002 Variance Due to								2002 Compared to 2001 Variance Due to
	Volume		Yield/Rate			Total			Volume			Yield/Rate			Total
Earning assets:
Loans and leases	$	21,102	$	(18,649	)	$	2,453		$	23,272		$	(27,741	)	$	(4,469	)
Securities:
Taxable		9,665		(11,422	)		(1,757	)		8,195			(3,672	)		4,523
Tax exempt		136		(215	)		(79	)		142			(18	)		124
Cash balances in other banks		7		(74	)		(67	)		(147	)		(198	)		(345	)
Funds sold		61		(169	)		(108	)		(52	)		(1,136	)		(1,188	)
Trading account securities		18		(5	)		13			2			(40	)		(38	)

Total interest income		30,989		(30,534	)		455			31,412			(32,805	)		(1,393	)

Interest-bearing liabilities:
Interest-bearing transaction accounts		1,149		(2,001	)		(852	)		1,873			(4,811	)		(2,938	)
Savings and money market deposits		998		(2,096	)		(1,098	)		1,587			(5,485	)		(3,898	)
Time deposits		5,010		(10,601	)		(5,591	)		7,100			(21,904	)		(14,804	)
Funds purchased		624		(1,533	)		(909	)		1,072			(5,581	)		(4,509	)
Other short-term borrowings		45		(860	)		(815	)		1,180			(776	)		404
Long-term debt		3,377		(1,757	)		1,620			1,491			(826	)		665

Total interest expense		11,203		(18,848	)		(7,645	)		14,303			(39,383	)		(25,080	)

Net interest income on a taxable equivalent basis	$	19,786	$	(11,686	)		8,100		$	17,109		$	6,578			23,687

Taxable equivalent adjustment							29									3

Net interest income						$	8,129								$	23,690

Interest Sensitivity and Market Risk

Interest Sensitivity

Alabama National monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The principal monitoring technique employed by Alabama National is simulation analysis, which technique is augmented by “gap” analysis.

In simulation analysis, Alabama National reviews each individual asset and liability category and their projected behavior in various different interest rate environments. These projected behaviors are based upon management’s past experiences and upon current competitive environments, including the various environments in the different markets in which Alabama National competes. Using this projected behavior and differing rate scenarios as inputs, the simulation analysis generates as output projections of net interest income. Alabama National also periodically verifies the validity of this approach by comparing actual results with those that were projected in previous models. See “—Market Risk.”

Another technique used by Alabama National in interest rate management is the measurement of the interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets and liabilities, selling securities available for sale or trading securities, replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability.

Alabama National evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, and sources and prices of off-balance sheet commitments in order to decrease interest sensitivity risk. Alabama National uses computer simulations to measure the net income effect of various interest rate scenarios. The modeling reflects interest rate changes and the related impact on net income over specified periods of time.

The following table illustrates Alabama National’s interest rate sensitivity at December 31, 2003, assuming the relevant assets and liabilities are collected and paid, respectively, based upon historical experience rather than their stated maturities.

INTEREST SENSITIVITY ANALYSIS

(Amounts in thousands, except ratios)


	December 31, 2003
	Within One Month			After One Through Three Months			After Three Through Twelve Months			Within One Year			One Through Three Years			Greater Than Three Years			Total
A S S E T S :

Earning assets:
Loans and leases(1)	$	1,425,933		$	221,007		$	394,743		$	2,041,683		$	378,716		$	245,639		$	2,666,038
Securities(2)		58,600			123,695			128,969			311,264			184,147			296,596			792,007
Trading securities		109			—			—			109			—			—			109
Interest-bearing deposits in other banks		10,019			—			—			10,019			—			—			10,019
Funds sold		16,534			—			—			16,534			—			—			16,534

Total interest-earning assets	$	1,511,195		$	344,702		$	523,712		$	2,379,609		$	562,863		$	542,235		$	3,484,707

L I A B I L I T I E S :

Interest-bearing liabilities:
Interest-bearing deposits:
Demand deposits	$	244,432		$	—		$	—		$	244,432		$	—		$	284,334		$	528,766
Savings and money market deposits		277,069			—			—			277,069			—			244,371			521,440
Time deposits(3)		156,331			202,291			627,788			986,410			215,626			96,752			1,298,788
Funds purchased		358,393			—			—			358,393			—			—			358,393
Short-term borrowings(4)		37,581			—			5,000			42,581			—			—			42,581
Long-term debt		160,427			88,000			28,000			276,427			21,000			35,000			332,427

Total interest-bearing liabilities	$	1,234,233		$	290,291		$	660,788		$	2,185,312		$	236,626		$	660,457		$	3,082,395

Period gap	$	276,962		$	54,411		$	(137,076	)	$	194,297		$	326,237		$	(118,222	)

Cumulative gap	$	276,962		$	331,373		$	194,297		$	194,297		$	520,534		$	402,312		$	402,312

Ratio of cumulative gap to total interest-earning assets		7.95	%		9.51	%		5.58	%		5.58	%		14.94	%		11.55	%

(1)

Excludes nonaccrual loans of $9.8 million

(2)

Excludes investment in equity securities with a fair market value of $18.2 million

(3)

Excludes matured certificates which have not been redeemed by the customer and on which no interest is accruing.

(4)

Includes treasury, tax and loan accounts of $1.4 million

Alabama National generally benefits from increasing market rates of interest when it has an asset-sensitive gap (a positive number) and generally benefits from decreasing market interest rates when it is liability sensitive (a negative number). As shown in the table above, Alabama National is asset sensitive on a cumulative basis throughout the one year time frame, although it is liability sensitive during the three through twelve month period. Alabama National is also asset sensitive during the one through three year time frame and liability sensitive in the greater than three years period, although it remains asset sensitive on a cumulative basis throughout all periods. The current asset sensitive position is similar to the 2002 year-end interest sensitivity analysis. The analysis presents only a static view of the timing and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those are viewed by management as significantly less interest sensitive than market-based rates such as those paid on non-core deposits. For this and other reasons, management relies more upon the simulation analysis (as noted above) in managing interest rate risk. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities.

Market Risk

Alabama National’s earnings are dependent, to a large degree, on its net interest income which is the difference between interest income earned on all earning assets, primarily loans and securities, and interest paid on all interest bearing liabilities, primarily deposits. Market risk is the risk of loss from adverse changes in market prices and rates. Alabama National’s market risk arises primarily from inherent interest rate risk in its lending, investing and deposit gathering activities. Alabama National seeks to reduce its exposure to market risk through actively monitoring and managing its interest rate risk. Management relies upon static “gap” analysis to determine the degree of mismatch in the maturity and repricing distribution of interest earning assets and interest bearing liabilities which quantifies, to a large extent, the degree of market risk inherent in Alabama National’s balance sheet. Gap analysis is further augmented by simulation analysis to evaluate the impact of varying levels of prevailing interest rates and the sensitivity of specific earning assets and interest bearing liabilities to changes in those prevailing rates. Simulation analysis consists of evaluating the impact on net interest income given changes from 200 basis points below (adjusted in the current period due to historically low interest rates) to 200 basis points above the current prevailing rates. Management makes certain assumptions as to the effect varying levels of interest rates have on certain earning assets and interest bearing liabilities, which assumptions consider both historical experience and consensus estimates of outside sources.

With respect to the primary earning assets, loans and securities, certain features of individual types of loans and specific securities introduce uncertainty as to their expected performance at varying levels of interest rates. In some cases, prepayment options exist whereby the borrower may elect to repay the obligation at any time. These prepayment options make anticipating the performance of those instruments difficult given changes in prevailing rates. At December 31, 2003, mortgage backed securities with a carrying value of $406.2 million, or 10.6% of total assets, and essentially every loan and lease, net of unearned income, (totaling $2.66 billion, or 69.6% of total assets), carried such prepayment options. Management believes that assumptions used in its simulation analysis about the performance of financial instruments with such prepayment options are appropriate. However, the actual performance of these financial instruments may differ from management’s estimates due to several factors, including the diversity and financial sophistication of the customer base, the general level of prevailing interest rates and the relationship to their historical levels, and general economic conditions. The difference between those assumptions and actual results, if significant, could cause the actual results to differ from those indicated by the simulation analysis.

Deposits totaled $2.75 billion, or 72.1%, of total assets at December 31, 2003. Since deposits are the primary funding source for earning assets, the associated market risk is considered by management in its simulation analysis. Generally, it is anticipated that deposits will be sufficient to support funding requirements. However, the rates paid for deposits at varying levels of prevailing interest rates have a significant impact on net

interest income and therefore, must be quantified by Alabama National in its simulation analysis. Specifically, Alabama National’s spread, the difference between the rates earned on earning assets and rates paid on interest bearing liabilities, is generally higher when prevailing rates are higher. As prevailing rates reduce, the spread tends to compress, with severe compression at very low prevailing interest rates. This characteristic is called “spread compression” and adversely affects net interest income in the simulation analysis when anticipated prevailing rates are reduced from current rates. Management relies upon historical experience to estimate the degree of spread compression in its simulation analysis. Management believes that such estimates of possible spread compression are reasonable. However, if the degree of spread compression varies from that expected, the actual results could differ from those indicated by the simulation analysis.

The following tables illustrate the results of simulation analysis used by Alabama National to determine the extent to which market risk would affect net interest margin for the next twelve months if prevailing interest rates increased or decreased the specified amounts from current rates. Due to the current low interest rate environment, Alabama National has elected to model interest rate decreases of 25 and 50 basis points. (This would equate to federal funds rates of 0.75% and 0.50%, respectively.) As of year-end 2002, management did not prepare a scenario that decreased current rates by 50 basis points so the comparable scenario is not available for 2002. The current rates paid on interest-bearing accounts cannot decrease below zero, yet rates earned on loans can experience a decrease in the falling rate scenarios, and the interest rate spread would therefore compress. As noted above, however, management does not anticipate having the ability to reduce liability costs as successfully as if it were to experience a rate cut of a greater magnitude. As also noted above, this model uses estimates and assumptions in both balance sheet growth and asset and liability account rate reactions to changes in prevailing interest rates. Because of the inherent use of these estimates and assumptions in the simulation model used to derive this market risk information, the actual results of the future impact of market risk on Alabama National’s net interest margin may differ from that found in the tables.

MARKET RISK

(Amounts in thousands)


Change in Prevailing Interest Rates(1)	Year ended December 31, 2003
Change in Prevailing Interest Rates(1)	Net Interest Income Amount		Change from Income Amount
+200 basis points	$	150,671	8.72	%
+100 basis points		144,794	4.48
0 basis points		138,592	—
-25 basis points		137,755	(0.60	)
-50 basis points		136,300	(1.65	)

Change in Prevailing Interest Rates(1)	Year ended December 31, 2002
Change in Prevailing Interest Rates(1)	Net Interest Income Amount		Change from Income Amount
+200 basis points	$	132,477	9.85	%
+100 basis points		126,884	5.21
0 basis points		120,599	—
-25 basis points		119,609	(0.82	)
-100 basis points		107,155	(11.15	)
-200 basis points		100,608	(16.58	)

(1)

Assumes an immediate and parallel rate change of this magnitude.

Provision and Allowance for Loan and Lease Losses

Alabama National has policies and procedures for evaluating the overall credit quality of its loan and lease portfolio including timely identification of potential problem credits. On a monthly basis, management reviews the appropriate level for the allowance for loan and lease losses. This review and analysis is based on the results of the internal monitoring and reporting system, analysis of economic conditions in its markets and a review of historical statistical data, current trends regarding the volume and severity of past due and problem loans and leases, the existence and effect of concentrations of credit, and changes in national and local economic conditions for both Alabama National and other financial institutions. Management also considers in its evaluation of the adequacy of the allowance for loan and lease losses the results of regulatory examinations conducted for each Bank, including evaluation of Alabama National’s policies and procedures and findings from Alabama National’s independent loan review department.

The provision for loan and lease losses decreased by $2.0 million, or 25.5%, to $5.9 million in 2003, from $8.0 million in 2002. The decreased provision expense during 2003 is attributable to a reduction in net charge-offs during 2003 and also a reduction in total nonperforming assets. During 2003, net charge-offs decreased $0.7 million, or 18.6% to $3.1 million, compared to $3.8 million in 2002. As of December 31, 2003, nonperforming assets totaled $10.5 million, a $2.3 million decrease from year-end 2002 levels.

Management’s periodic evaluation of the adequacy of the allowance for loan and lease losses is based on Alabama National’s past loan and lease loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, estimated value of any underlying collateral, and an analysis of current economic conditions. Management believes the allowance for loan and lease losses, at its current level, adequately covers Alabama National’s exposure to loan and lease losses. While management believes that it has established the allowance in accordance with accounting principles generally accepted in the United States of America and has taken into account the views of its regulators and the current economic environment, there can be no assurance that in the future Alabama National’s regulators or its economic environment will not require further increases in the allowance.

A loan is impaired when, based on current information and events, it is probable that Alabama National will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. When the fair value of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a specific reserve allocation which is a component of the allowance for loan and lease losses.

Additions to the allowance for loan and lease losses, which are expensed as the provision for loan and lease losses on Alabama National’s income statement, are made periodically to maintain the allowance for loan and lease losses at an appropriate level as determined by management. Loan and lease losses and recoveries are charged or credited directly to the allowance for loan and lease losses.

The following table presents the information associated with Alabama National’s allowance and provision for loan and lease losses for the dates indicated.

ALLOWANCE FOR LOAN AND LEASE LOSSES

(Amounts in thousands, except percentages)


	Year ended December 31,
	2003			2002			2001			2000			1999
Total loans and leases outstanding at end of period, net of unearned income(1)	$	2,659,440		$	2,191,394		$	1,964,169		$	1,710,810		$	1,403,489

Average amount of loans and leases outstanding, net of unearned income(1)	$	2,459,250		$	2,092,829		$	1,790,083		$	1,571,760		$	1,264,689

Allowance for loan and lease losses at beginning of period	$	32,704		$	28,519		$	22,368		$	19,111		$	17,465
Charge-offs:
Commercial, financial and agricultural		3,535			1,573			1,875			397			215
Real estate—mortgage		1,426			1,463			730			145			403
Consumer		858			3,200			754			884			694

Total charge-offs		5,819			6,236			3,359			1,426			1,312

Recoveries:
Commercial, financial and agricultural		821			991			949			167			188
Real estate—mortgage		478			754			226			228			348
Consumer		1,452			720			517			382			315

Total recoveries		2,751			2,465			1,692			777			851

Net charge-offs		3,068			3,771			1,667			649			461
Provision for loan and lease losses		5,931			7,956			3,946			2,506			2,107
Additions to allowance through acquisition		995			—			3,872			1,400			—

Allowance for loan and lease losses at period-end	$	36,562		$	32,704		$	28,519		$	22,368		$	19,111

Allowance for loan and lease losses to period-end loans(1)		1.37	%		1.49	%		1.45	%		1.31	%		1.36	%
Net charge-offs to average loans and leases(1)		0.12			0.18			0.09			0.04			0.04

(1)

Does not include loans held for sale.

Allocation of Allowance for Loan and Lease Losses

While no portion of the allowance is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb losses from any and all loans, the following table represents management’s allocation of the allowance for loan and lease losses to the specific loan categories.


	2003		2002
Commercial and financial	$	3,233	$	4,039
Real estate construction		5,715		4,421
Real estate residential mortgage		6,727		6,311
Real estate commercial mortgage		10,476		7,418
Consumer		993		1,341
Lease financing receivables		2,764		1,318
Other		1,345		1,398
Unallocated		5,309		6,458

Total allowance for loan and lease losses	$	36,562	$	32,704

Nonperforming Assets

The following table presents Alabama National’s nonperforming assets for the dates indicated.

NONPERFORMING ASSETS

(Amounts in thousands, except percentages)


	At December 31,
	2003			2002			2001			2000			1999
Nonaccrual loans	$	9,817		$	10,282		$	7,563		$	3,642		$	4,428
Restructured loans		—			—			—			—			5
Loans past due 90 days or more and still accruing		—			—			—			—			—

Total nonperforming loans		9,817			10,282			7,563			3,642			4,433
Other real estate owned		699			2,569			1,680			1,468			867

Total nonperforming assets	$	10,516		$	12,851		$	9,243		$	5,110		$	5,300

Allowance for loan and lease losses to period-end loans(1)		1.37	%		1.49	%		1.45	%		1.31	%		1.36	%
Allowance for loan and lease losses to period-end nonperforming loans		372.44			318.07			377.09			614.17			431.11
Allowance for loan and lease losses to period-end nonperforming assets.		347.68			254.49			308.55			437.73			360.58
Net charge-offs to average loans and leases(1)		0.12			0.18			0.09			0.04			0.04
Nonperforming assets to period-end loans and leases and foreclosed property(1)		0.40			0.59			0.47			0.30			0.38
Nonperforming loans and leases to period-end loans(1)		0.37			0.47			0.39			0.21			0.32

(1)

Does not include loans held for sale.

Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. In addition to consideration of these factors, Alabama National has a consistent and continuing policy of placing all loans on nonaccrual status if they become 90 days or more past due. When a loan is placed on nonaccrual status, all interest which is accrued on the loan is reversed and deducted from earnings as a reduction of reported interest. No additional interest is accrued on the loan balance until collection of both

principal and interest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be an actual writedown or charge-off of the principal balance of the loan which would necessitate additional charges to the allowance for loan and lease losses. During the years ending December 31, 2003, 2002 and 2001, approximately $474,000, $540,000 and $406,000, respectively, in additional interest income would have been recognized in earnings if Alabama National’s nonaccrual loans had been current in accordance with their original terms.

Total nonperforming assets decreased $2.3 million, to $10.5 million at December 31, 2003, from $12.9 million at December 31, 2002. Other real estate owned decreased $1.9 million due to the sale of a substantial piece of other real estate during 2003. The allowance for loan and lease losses to period-end nonperforming assets was 347.68% at December 31, 2003, compared with 254.49% at December 31, 2002. This ratio will generally fluctuate from period to period depending upon nonperforming asset levels at period end.

Potential Problem Loans

A potential problem loan is one that management has concerns regarding the borrower’s future performance under terms of the loan contract. These loans are current as to principal and interest, and accordingly, they are not included in the nonperforming asset categories. Management monitors these loans closely in order to ensure that Alabama National’s interests are protected. At December 31, 2003, Alabama National had certain loans considered by management to be potential problem loans totaling $46.4 million, as compared with $50.3 million at December 31, 2002. Alabama National believes early identification of potential problem loans is an important factor in its ability to successfully collect such loans. As such, it encourages early identification of potential problem loans both with its loan officers and loan review staff. The level of potential problem loans is factored into the determination of the adequacy of the allowance for loan and lease losses.

Noninterest Income and Expense

Noninterest income

Alabama National relies on five distinct product lines for the production of recurring noninterest income: (1) traditional retail and commercial banking, (2) mortgage banking, (3) securities brokerage and trust services, (4) investment services, and (5) insurance services. Combined revenue associated with Alabama National’s five product lines totaled $68.4 million in 2003, compared with $52.9 million in 2002, an increase of $15.5 million, or 29.3%. An analysis of this increase is provided below.

The following table sets forth, for the periods indicated, the principal components of noninterest income.

NONINTEREST INCOME

(Amounts in thousands)


	Year ended December 31,
	2003		2002		2001
Service charges on deposit accounts	$	14,091	$	12,081	$	9,497
Investment services income		18,710		13,576		13,717
Securities brokerage and trust income		15,867		13,590		8,800
Origination and sale of mortgage loans		16,289		10,860		7,431
Insurance commissions		3,477		2,837		2,126
Bank owned life insurance		2,747		3,018		2,412
Securities gains		46		35		246
Other		7,077		5,167		4,478

Total noninterest income	$	78,304	$	61,164	$	48,707

Service charges on deposit accounts increased $2.0 million to $14.1 million during 2003, a 16.6% increase over 2002’s total of $12.1 million. The increase for 2003 is attributable to an increased number of transaction accounts due to recent branch expansions, new accounts at existing branches, and increased fee-generating activity by customers. Also impacting 2003 totals is the June 2003 acquisition of Millennium Bank, which recorded service charge income of $279,000 during 2003. During the 2003 third quarter, other noninterest income includes $799,000 of income resulting from the liquidation and sale of a mutual insurance company in which Alabama National had been a policy holder. The other components of noninterest income will be discussed in more detail in “Segment Information.”

Noninterest Expense

The following table sets forth, for the periods indicated, the principal components of noninterest expense.

NONINTEREST EXPENSE

(Amounts in thousands)


	Year ended December 31,
	2003		2002		2000
Salaries and employee benefits	$	64,826	$	57,687	$	45,329
Commission based compensation		22,182		16,498		12,868
Occupancy and equipment expense, net		12,886		11,603		9,722
Amortization of goodwill		—		—		518
Amortization of other intangibles		1,041		832		627
Advertising		1,628		1,637		1,254
Banking assessments		943		785		771
Data processing expenses		1,759		1,596		1,562
Legal and professional fees		3,701		3,602		3,331
Postage and courier services		2,333		2,140		1,776
Supplies and printing		2,527		2,329		1,926
Telephone		1,754		1,435		1,224
Penalty on long-term debt repayment		822		—		—
Other		15,462		13,433		11,325

Total noninterest expense	$	131,864	$	113,577	$	92,233

Noninterest expense increased $18.3 million, or 16.1%, to $131.9 million in 2003, from $113.6 million in 2002. Salaries and employee benefits increased $7.1 million, or 12.4%, in 2003. The 2003 amount includes the salaries and employee benefit expense for Millennium Bank, totaling $1.2 million, which was acquired during the second quarter of 2003 and accounted for as a purchase transaction. Also contributing to the increase in salaries and employee benefits were general staffing increases concurrent with expansion of offices and business lines, increases in health insurance costs, and increases in 401(k) matching expenses. Performance based (or bonus) compensation increases in the salaries and employee benefits category were also higher in the 2003 due to the achievement of higher performance levels at virtually all of the Alabama National’s operating units. Commission based compensation increased $5.7 million, or 34.5%, in 2003. The increase in commission based compensation during 2003 is attributable to increased production in the mortgage division, securities brokerage and trust divisions and the investment services division, as a significant portion of the compensation in these divisions is production based. Net occupancy expense increased $1.3 million, or 11.1%, in 2003. The increase in 2003 is attributable to six full service branches and one limited service branch opened by Alabama National’s Banks during the latter part of 2002, expanded space needs for certain other operations, plus the effects of the purchase of Millennium Bank in June 2003. During the 2003 third quarter, Alabama National elected to prepay certain borrowings that carried relatively high interest rates from the Federal Home Loan Bank of Atlanta and incur the associated prepayment penalty in the pre-tax amount of $822,000.

Segment Information

In addition to traditional commercial and consumer retail banking products, Alabama National offers investment services, securities brokerage and trust services, mortgage lending services and insurance services to its customers. Please refer to Note 19 to Alabama National’s consolidated financial statements included in this annual report for disclosures related to Alabama National’s operating segments. The results of the operating segments include certain income and expense items that are allocated by management to the operating segments. Further, the results of each operating segment are not necessarily the same as would be expected if these activities were conducted by a stand-alone entity because certain corporate overhead expenses are not allocated directly to each operating segment.

Investment Services

The following table sets forth, for the periods indicated, the summary of operations for the investment services division of Alabama National:

INVESTMENT SERVICES DIVISION

(Amounts in thousands)


	Year ended December 31,
	2003		2002		2001
Investment services revenue	$	18,710	$	13,576	$	13,717
Expenses and allocated charges		12,645		9,828		10,334

Net investment services income	$	6,065	$	3,748	$	3,383

National Bank of Commerce of Birmingham operates an investment department devoted primarily to handling correspondent banks’ investment needs. Investment services revenue consists primarily of commission income from the sale of fixed income securities to correspondent banks. A small portion of investment services revenue is generated from fee based services including asset/liability consulting, bond accounting and security safekeeping. Investment services revenue increased substantially to $18.7 million during 2003, from $13.6 million in 2002. The revenue recorded by the investment division during 2003 represents the highest revenue recorded for this division, exceeding the previous record year 2001 by $5.0 million. The revenue generated by the investment division is dependent upon the demand for fixed income securities by its customers, which are primarily correspondent community banks. Demand for these securities during 2003 was high due to increased liquidity of community banks resulting from decreased loan demand and increased cash flow from their existing securities portfolio. Alabama National has also expanded the number of correspondent banks using the services of the investment division. Investment services revenue remained relatively stable during 2002. During 2002, revenue totaled $13.6 million compared to $13.7 million earned during 2001.

Revenue from the investment division is subject to fluctuation caused by a number of factors, including perhaps most prominently the interest rate environment. The environment for this division has been extremely favorable during 2003. However, increases in interest rates from the current level or continued low interest rates will likely cause mortgage refinancing volumes to fall and mortgage-related security prepayments and calls to drop, reducing revenue in the investment division.

Securities Brokerage and Trust Division

The following table sets forth, for the periods indicated, the summary of operations for the securities brokerage and trust division of Alabama National:

SECURITIES BROKERAGE AND TRUST DIVISION

(Amounts in thousands)


	Year ended December 31,
	2003		2002		2001
Securities brokerage and trust revenue	$	15,867	$	13,590	$	8,800
Interest income		978		1,132		1,858

Total securities brokerage and trust revenue		16,845		14,722		10,658
Interest expense		118		133		407
Expenses and allocated charges		14,983		13,036		8,836

Net securities brokerage and trust income	$	1,744	$	1,553	$	1,415

National Bank of Commerce of Birmingham has a wholly owned subsidiary, NBC Securities, Inc. (“NBC Securities”), that is a full service licensed broker-dealer. The trust department of NBC and NBC Securities manage the assets of both corporate and individual customers located primarily in the markets served by Alabama National. The revenue generated by this division consists primarily of commission income generated from the sale of equity securities and other investment products to individual and corporate customers, from fees paid for assets under management or custody and from fees related to investment consulting work performed for clients. NBC Securities also recognizes interest income from margin loans. Revenue for this division increased $2.3 million, or 16.8%, to $15.9 million in 2003. Revenue for this division increased $4.8 million, or 54.4%, to $13.6 million in 2002. The increase in revenue during both 2003 and 2002 is attributable to continued expansion in the number of customers and total customer assets under management by these departments, as well as an increase in the number of registered representatives. NBC Securities expanded its retail investment platform in 2002 with the addition of several registered representatives and the opening of several new offices during the year and 2003’s continued revenue increase reflected this expansion. Asset management fees recorded by the trust department of NBC and NBC Securities also increased during 2003 as a result of an increase in the total assets managed by these divisions. NBC Securities also benefited from increased customer demand for fixed rate annuity products during 2003 and 2002. The decrease in interest income in both 2003 and 2002 is due to decreased margin loan activity during each year. Consistent with the securities industry in general, NBC Securities had fewer customers using margin loans in 2003 than in 2002 and 2001. The additional registered representatives and new offices opened and variable overhead combined with higher commission expense on the higher revenue base led to an increase in the expenses and allocated charges for this division in 2003.

Mortgage Lending Division

The following table sets forth, for the periods indicated, the summary of operations for the mortgage lending division of Alabama National:

MORTGAGE LENDING DIVISION

(Amounts in thousands)


	Year ended December 31,
	2003		2002		2001
Origination and sale of mortgage loans(1)	$	17,061	$	11,334	$	7,660
Interest income		2,462		1,631		1,117

Total revenue		19,523		12,965		8,777
Expenses and allocated charges		10,929		7,845		5,548

Net mortgage lending division income	$	8,594	$	5,120	$	3,229

(1)

Includes intercompany income allocated to mortgage lending division totaling $772,000, $474,000 and $229,000 at December 31, 2003, 2002 and 2001, respectively.

Fees earned in connection with the origination and resale of mortgages increased $5.7 million, or 50.5%, to $17.1 million, from $11.3 million in 2002. During 2002, fees earned in connection with the origination and resale of mortgages increased $3.7 million, or 48.0%, to $11.3 million, from $7.7 million in 2001. The increased revenue for both 2003 and 2002 is primarily a result of historically low interest rates and the impact that the interest rate environment has on mortgage origination and refinancing activity. Expenses and allocated charges totaled $10.9 million and $7.8 million during 2003 and 2002, respectively. The increase is due to higher commission compensation and other expenses associated with a greater volume of origination activity.

Revenue from the mortgage lending division is subject to fluctuation caused by a number of factors, including perhaps most prominently the interest rate environment. The environment for this division has been extremely favorable during 2003. Increases in interest rates from the current level or continued low interest rates will likely cause mortgage refinancing volumes to decrease from 2002 and 2003 record levels, reducing revenue from the mortgage lending division.

Insurance Services Division

The following table sets forth, for the periods indicated, a summary of operations for the insurance services division of Alabama National:

INSURANCE SERVICES DIVISION

(Amounts in thousands)


	Year ended December 31,
	2003		2002			2001
Commission income	$	3,477	$	2,837		$	2,126
Other income		—		—			5

Total revenue		3,477		2,837			2,131
Expenses and allocated charges		3,298		2,870			2,113

Net insurance division income	$	179	$	(33	)	$	18

Commission income earned from the sale of insurance products increased $0.7 million, or 22.6 %, to $3.5 million, from $2.8 million during 2002. During the 2002 third quarter, Alabama National purchased two small insurance agencies and 2003’s results benefited from these acquisitions in addition to the continued expansion of the network of salesmen in many of the markets served by Alabama National. This expansion has resulted in increased expenses as new employees are hired and trained and as distribution networks are established. In

addition, amortization of the intangible assets created in these acquisitions totaled $291,000 in 2003. During 2003, the insurance division began to see some of the results of recent expansions through increased revenue and a modest pre-tax income for 2003.

Earning Assets

Loans and Leases

Loans and leases are the largest category of earning assets and typically provide higher yields than the other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks which management attempts to control and counterbalance. Total loans and leases averaged $2.46 billion in 2003, compared to $2.12 billion in 2002, an increase of $335.5 million, or 15.8%. At December 31, 2003, total loans and leases, net of unearned income, were $2.66 billion, compared to $2.19 billion at the end of 2002, an increase of $468.0 million, or 21.4%. Excluding the loans acquired in the Millennium acquisition, which totaled $70.2 million, loans increased 18.2%.

The growth in Alabama National’s loan and lease portfolio is attributable to Alabama National’s ability to attract new customers while maintaining consistent underwriting standards. Loan growth is also impacted by general economic conditions that may result in increased loan demand from existing customers. The following table details the composition of the loan portfolio by category at the dates indicated.

COMPOSITION OF LOAN AND LEASE PORTFOLIO

(Amounts in thousands, except percentages)


	December 31,
	2003					2002					2001					2000					1999
	Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total
Commercial and financial	$	265,923		9.99	%	$	253,569		11.56	%	$	247,613		12.59	%	$	275,107		16.07	%	$	268,829		19.14	%
Real estate:
Construction		530,024		19.91			311,259		14.19			231,369		11.76			185,814		10.85			154,023		10.96
Mortgage—residential		676,658		25.42			616,651		28.11			546,730		27.80			490,152		28.63			392,986		27.98
Mortgage—commercial		814,904		30.61			699,403		31.88			637,575		32.42			498,858		29.14			396,312		28.21
Mortgage—other		9,412		.35			5,672		.26			5,645		.29			4,238		.25			4,284		.30
Consumer		74,137		2.78			78,342		3.57			82,909		4.22			79,458		4.64			76,150		5.42
Lease financing receivables		77,857		2.92			80,113		3.65			73,924		3.76			58,668		3.43			22,046		1.57
Securities brokerage margin loans		15,407		.58			14,502		.66			16,302		.83			29,901		1.75			22,551		1.61
Other		198,036		7.44			134,191		6.12			124,564		6.33			89,700		5.24			67,517		4.81

Total gross loans and leases		2,662,358		100.00	%		2,193,702		100.00	%		1,966,631		100.00	%		1,711,896		100.00	%		1,404,698		100.00	%

Unearned income		(2,918	)				(2,308	)				(2,462	)				(1,086	)				(1,209	)

Total loans and leases, net of unearned income(1)		2,659,440					2,191,394					1,964,169					1,710,810					1,403,489
Allowance for loan and lease losses		(36,562	)				(32,704	)				(28,519	)				(22,368	)				(19,111	)

Total net loans and leases(1)	$	2,622,878				$	2,158,690				$	1,935,650				$	1,688,442				$	1,384,378

(1)

Does not include loans held for sale.

In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. It is common practice for financial institutions in Alabama National’s market areas, and for Alabama National in particular, to obtain a security interest or lien in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component.

The principal component of Alabama National’s loan portfolio is real estate mortgage loans. At year-end 2003, this category totaled $1.50 billion and represented 56.4% of the total loan portfolio, compared to $1.32 billion, or 60.3% of the total loan portfolio at year-end 2002.

Residential mortgage loans increased $60.0 million, or 9.7%, to $676.7 million at December 31, 2003, compared with $616.7 million at December 31, 2002. Commercial mortgage loans increased $115.5 million, or 16.5%, to $814.9 million at December 31, 2003. Increases in both of these categories of loans are primarily the result of Alabama National’s expertise in and appetite for these commercial and residential real estate loans. In addition, the general economic conditions in Alabama National’s markets, which generate such lending opportunities, are partially responsible for this growth.

Real estate construction loans increased $218.8 million, or 70.3%, to $530.0 million at December 31, 2003, compared with $311.3 million at December 31, 2002. Alabama National’s focus on the home construction market and strong commercial construction activity in markets it serves led to this increase.

Consumer loans, lease financing receivables and margin loan balances were relatively flat from December 31, 2003 as compared with 2002 year-end totals.

The repayment of loans is a source of additional liquidity for Alabama National. The following table sets forth Alabama National’s loans maturing within specific intervals at December 31, 2003.

LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES

(Amounts in thousands)


	December 31, 2003
	One year or less		Over one year Through five Years		Over five years		Total
Commercial, financial and agricultural	$	158,648	$	94,824	$	12,451	$	265,923
Real estate—construction		337,582		162,492		29,950		530,024
Real estate—residential		96,930		183,721		396,007		676,658
Real estate—commercial		96,267		513,579		205,058		814,904
Consumer		26,348		45,424		2,365		74,137


	Predetermined Rates		Floating Rates
Maturing after one year but within five years	$	531,940	$	468,102
Maturing after five years		110,333		535,496

	$	642,273	$	1,003,598

The information presented in the above table is based upon the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, management believes this treatment presents fairly the maturity and repricing structure of the loan portfolio.

Securities

Securities, including securities classified as held to maturity (or investment securities) and available for sale, represent a significant portion of Alabama National’s earning assets. Securities averaged $791.6 million during 2003, compared with $589.3 million during 2002, an increase of $202.3 million, or 34.3%. Growth in the securities portfolio is generally a function of growth in funding sources net of lending opportunities. During 2003, as loan demand experienced a relative decrease as compared with recent years, Alabama National had excess liquidity with which to purchase securities. Management attempts to maintain earning asset growth commensurate with its funding growth and with its overall growth plans. During 2003, Alabama National experienced increasing liquidity and a reduction in its rate of loan growth and increased the size of the securities portfolio through purchases. At December 31, 2003, the securities portfolio totaled $810.2 million, including securities held to maturity with an amortized cost of $271.0 million and securities available for sale with a market value of $539.2 million.

The following tables set forth the carrying value of securities held by Alabama National at the dates indicated.

INVESTMENT SECURITIES

(Amounts in thousands)


	December 31,
	2003				2002				2001
	Cost		Market		Cost		Market		Cost		Market
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
U.S. Government corporations and agencies.		23,962		24,012		42,211		42,225		2,252		2,327
State and political subdivisions		1,553		1,603		3,704		3,836		6,460		6,604
Mortgage backed securities		245,520		245,921		309,530		311,751		226,054		225,877

Total	$	271,035	$	271,536	$	355,445	$	357,812	$	234,766	$	234,808

AVAILABLE FOR SALE SECURITIES

(Amounts in thousands)


	December 31,
	2003				2002				2001
	Cost		Market		Cost		Market		Cost		Market
U.S. Treasury securities	$	350	$	351	$	350	$	356	$	599	$	618
U.S. Government corporations and agencies		318,536		317,552		99,861		100,793		25,852		26,687
State and political subdivisions		40,922		42,385		30,754		32,035		28,606		29,003
Mortgage backed securities		160,871		160,684		190,169		192,157		259,761		260,214
Equity		18,220		18,220		19,547		19,547		16,477		16,400

Total	$	538,899	$	539,192	$	340,681	$	344,888	$	331,295	$	332,922

The following tables show the scheduled maturity and average yields of securities owned by Alabama National at December 31, 2003.

INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS

(Amounts in thousands, except yields)


	December 31, 2003
	Within one year				After one but Within five years				After five but Within ten years				After ten years			Other securities
	Amount		Yield(1)		Amount		Yield(1)		Amount		Yield(1)		Amount		Yield(1)	Amount		Yield(1)
U.S. Treasury securities	$	—			$	—			$	—			$	—		$	—
U.S. Government corporations and agencies						18,962	3.49	%		5,000	4.38	%
State and political subdivisions		340	8.39	%		632	8.33	%		581	7.40	%
Mortgage backed securities		—				—				—				—		$	245,520	4.12	%

Total	$	340	8.39	%	$	19,594	3.65	%	$	5,581	4.69	%	$	—		$	245,520	4.12	%

(1)

Computed on a tax-equivalent basis utilizing a 34% tax rate, without giving effect to the disallowance for Federal income tax purposes of interest related to certain tax-exempt assets.

SECURITIES AVAILABLE FOR SALE MATURITY DISTRIBUTION AND YIELDS

(Amounts in thousands, except yields)


	December 31, 2003
	Within one year					After one but Within five years				After five but Within ten years				After ten years				Other securities
	Amount			Yield(1)		Amount		Yield(1)		Amount		Yield(1)		Amount		Yield(1)		Amount		Yield(1)
U.S. Treasury securities	$	—				$	351	1.60	%	$	—			$	—			$	—
U.S. Government corporations and agencies		6,134		4.17	%		189,690	3.56	%		121,728	4.14	%
State and political subdivisions		1,465		7.34	%		7,964	6.76	%		15,898	6.05	%		17,058	5.75	%
Mortgage backed securities		—					—												160,684	4.32	%
Equity securities		—					—				—				—				18,220	3.50	%

Total	$	7,599	<