Edgar Filing: ALABAMA NATIONAL BANCORPORATION

Form 10-K

UNITED STATES

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, 2004 OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .

Commission file number: 0-25160

ALABAMA NATIONAL BANCORPORATION

(Exact name of registrant as specified in its charter)


Delaware		63-1114426
(State of incorporation)		(IRS employer identification number)

1927 First Avenue North, Birmingham, Alabama 35203-4009
(Address of principal executive offices) (Zip Code)

205-583-3600

(Registrant’s Telephone Number)

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, 2004 was $665,110,761.

As of March 11, 2005 the registrant had outstanding 17,012,904 shares of its common stock.

DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K:

Portions of the definitive Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated by reference into Part II and Part III of this report.

TABLE OF CONTENTS


Item No.		Page No.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS		1

PART I
1.	Business	3
	Executive Officers of the Registrant	12
2.	Properties	14
3.	Legal Proceedings	14
4.	Submission of Matters to a Vote of Security Holders	14

PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15	*
6.	Selected Financial Data	16
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
7A.	Quantitative and Qualitative Disclosures about Market Risk	55
8.	Financial Statements and Supplementary Data	56
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	57
9A.	Controls and Procedures	57
9B.	Other Information	58

PART III
10.	Directors and Executive Officers of the Registrant	58	*
11.	Compensation of Executive Officers and Directors	58	*
12.	Security Ownership of Certain Beneficial Owners and Management	58	*
13.	Certain Relationships and Related Transactions	58	*
14.	Principal Accountant Fees and Services	58	*

PART IV
15.	Exhibits, Financial Statement Schedules	59

SIGNATURES		60

Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on May 4, 2005 are incorporated by reference in Part II and 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 those described below:

Some factors are specific to Alabama National, including:

•

Alabama National’s ability to expand into new markets and to maintain profit margins in the face of pricing pressures.

•

Alabama National’s ability to keep pace with technological changes.

•

Alabama National’s ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by Alabama National’s customers and potential customers.

•

Alabama National’s ability to effectively manage interest rate risk and other market risk, credit risk and operational risk.

•

Alabama National’s ability to manage fluctuations in the value of assets and liabilities so as to maintain sufficient capital and liquidity to support Alabama National’s business.

•

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, and (iv) the absence of material contingencies related to the acquired operations, including asset quality and litigation contingencies.

•

The cost and other effects of legal and administrative cases and proceedings, claims, settlements and judgments.

Other factors which may affect Alabama National apply to the financial services industry more generally, including:

•

Further easing of restrictions on participants in the financial services industry, such as banks, securities brokers and dealers, investment companies and finance companies, may increase competitive pressures.

•

Possible changes in interest rates may increase funding costs and reduce earning asset yields, thus reducing margins.

•

The threat or occurrence of war or acts of terrorism and the existence or exacerbation of general geopolitical instability and uncertainty.

•

Possible changes in consumer and business spending and saving habits could affect Alabama National’s ability to increase assets and to attract deposits.

•

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.

•

Possible changes in monetary and fiscal policies, laws and regulations, and other activities of governments, agencies and similar organizations.

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 the “Company”) 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 12 banks (the “Banks”), summarized below.


Bank	Principal Markets	Total Assets at December 31, 2004
1. First American Bank¹	Birmingham Metropolitan Area, Decatur/Huntsville/Athens and Auburn/ Opelika, Alabama	$	2,456,916,000
2. Indian River National Bank	Indian River and Brevard Counties, Florida	$	694,241,000
3. First Gulf Bank	Baldwin County, Alabama	$	356,748,000
4. Georgia State Bank	Metropolitan Atlanta, Georgia	$	337,180,000
5. Public Bank	Metropolitan Orlando and Lake County, Florida	$	337,013,000
6. Community Bank of Naples, N.A.	Naples, Florida	$	293,359,000
7. CypressCoquina Bank	Ormond Beach, Florida	$	277,489,000
8. Millennium Bank	Gainesville, Florida	$	155,223,000
9. Citizens & Peoples Bank, N.A.	Pensacola, Florida	$	134,105,000
10. First Citizens Bank	Talladega, Alabama	$	106,917,000
11. Alabama Exchange Bank	Tuskegee, Alabama	$	80,786,000
12. Bank of Dadeville	Dadeville, Alabama	$	78,472,000

For purposes of this table, the assets as of December 31, 2004 of National Bank of Commerce of Birmingham and First American Bank, which were merged on February 18, 2005, have been combined. See discussion of this merger below under “Recent Developments—Merger of National Bank of Commerce and First American Bank.”

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

Merger of National Bank of Commerce and First American Bank

Effective February 18, 2005, two of Alabama National’s wholly-owned subsidiary banks, National Bank of Commerce of Birmingham and First American Bank, merged. The combined bank operates under the name First American Bank, with 33 locations in north and central Alabama. Since the entities were under common control, there were no purchase accounting adjustments. The combination recognizes the market overlap that the two banks began to experience and allowed Alabama National to better utilize the management talent found within the Company.

Subsidiary Banks

Alabama National operates through 12 subsidiary Banks which have a total of 82 banking offices and seven loan/mortgage origination offices 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. First American Bank 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, 2004, were approximately $3.5 billion, or approximately 72.2% 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” (other than approximately $1.45 million of factored receivables) 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 $2.8 billion, or 79.9% of total loans, net of unearned interest, at December 31, 2004. 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 typically 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, borrower qualification 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 2004, the Banks sold approximately $652 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 $88.7 million, or 2.5% of Alabama National’s loan portfolio at December 31, 2004. 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 $282.2 million, or 8.1% of Alabama National’s loan portfolio at December 31, 2004. 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 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 at Alabama National 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

First American Bank 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

First American Bank’s wholly owned subsidiary, NBC Securities, Inc. (“NBC Securities”), is a broker-dealer registered with the National Association of Securities Dealers and the Securities Investors Protection Corporation. 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 78 investment representatives and advisors located in 44 offices in Alabama, Florida, Georgia and Tennessee. First American Bank 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

Alabama National encounters strong competition in all of its businesses. 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, Florida, Georgia 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 holding companies and federally insured banks.

Customers for banking services are generally influenced by convenience, quality of service, personal contacts, prices of services and availability of products. Alabama National believes that its affiliates effectively compete with others banks and financial institutions in their relevant market areas.

Market Areas and Growth Strategy

Alabama National currently conducts business through 42 banking locations in Alabama, 32 banking locations in Florida and 8 banking locations in Georgia. Approximately 99% of our Banks’ deposits are in metropolitan statistical areas.

In Alabama, we focus our operations in three principal market areas: north Alabama (Decatur-Huntsville market); the metropolitan Birmingham area and east central Alabama; and Baldwin County (located on the Gulf Coast between Mobile, Alabama and Pensacola, Florida). In Florida, we focus our operations in six principal market areas: Pensacola (located in the Florida panhandle); the Gainesville metropolitan area; the Orlando metropolitan area; the coastal Atlantic counties of Indian River and Brevard (including the Port St. Lucie metropolitan area); the Palm Coast / Ormond Beach region; and the Naples metropolitan area. In Georgia, we focus our operations in the greater-Atlanta counties of Cobb, Douglas and Paulding.

Alabama National intends to pursue expansion into attractive, high growth markets in Florida, Georgia and Alabama through acquisitions of community banks and branch locations and through bank expansions. Since December 1995, Alabama National has successfully integrated eleven bank acquisitions and two separate branch acquisitions. Alabama National focuses its acquisition strategy on high quality community banks with proven management teams that view Alabama National as a partner, rather than as an exit strategy. Alabama National’s strategy is to maintain the management team of each acquired bank, allowing it to retain its local entrepreneurial identity and decision making, while simultaneously creating efficiencies in the administrative and back office operations of the bank.

Through First American Bank, Alabama National serves the metropolitan Birmingham market, which includes portions of Jefferson, Shelby and St. Clair Counties. First American Bank also serves Morgan, Limestone and Madison Counties in north Alabama and Lee County in east central Alabama. The Decatur-Huntsville, Alabama market 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 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. 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. Public Bank is located in the fast-growing greater Orlando area, with offices in Altamonte Springs, Kissimmee and St. Cloud, Florida. In January 2001, Alabama National expanded its presence in the greater-Orlando area with the acquisition of Peoples State Bank of Groveland (“Peoples State Bank”), serving customers in the communities of Groveland, Leesburg and Clermont, Florida. Peoples State Bank merged with Public Bank in June 2004. In June 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.

In February 2004, Alabama National completed the acquisitions 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. In July 2004, Alabama National acquired Coquina Bank of Ormond Beach, Florida. Coquina Bank subsequently merged with Cypress Bank in August 2004 to form CypressCoquina Bank.

The other subsidiary Banks, First Citizens Bank, Alabama Exchange Bank and Bank of Dadeville, are located in non-metropolitan areas. Each of these three Banks, while experiencing lower growth due to limited market growth, 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, particularly 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 Florida, Georgia and Alabama. 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 its strategy of expansion through combinations with other banks or thrifts, Alabama National intends to continue to expand organically where possible by growing its existing banks in their respective market areas and nearby attractive markets.

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 and has sought to expand its footprint through internal growth and acquisitions. Alabama National has also expanded its securities brokerage unit, NBC Securities, Inc., by locating investment representatives in offices of several of Alabama National’s 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, 2004, Alabama National and the Banks together had approximately 1,492 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 extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies. State and federal banking laws have as their principal objective either the maintenance of the safety and soundness of financial institutions and the federal deposit insurance system or the protection of consumers or classes of consumers, and depositors in particular, rather than the specific protection of stockholders of a bank or its parent company.

Set forth below is a brief description of certain laws and regulations that relate to the regulation of Alabama National, the Banks and our broker-dealer and insurance company subsidiaries. To the extent that the following material 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.

As a registered bank holding company, Alabama National is subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHCA”), and to inspection, examination and supervision by 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.

Under the BHCA, Alabama National may not generally engage in activities, or acquire more than 5% of any class of voting securities of any company engaged in activities, other than banking or activities that are closely related to banking. However, a bank holding company that has elected to be treated as a financial holding company may engage in activities that are financial in nature or incidental or complementary to such financial activities, as determined by the Federal Reserve alone, or together with the Secretary of the Department of Treasury. Alabama National has not elected financial holding company status. See “Gramm-Leach Bliley Act” below.

Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”)

Riegle-Neal permits adequately capitalized and adequately managed bank holding companies, as determined by the Federal Reserve, to acquire banks in any state subject to concentration limits and other conditions. Riegle-Neal also generally authorizes the interstate merger of banks. In addition, Riegle-Neal permits banks to establish new branches on an interstate basis, provided that the law of the host state specifically authorizes such action.

Dividends

The Federal Reserve has authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. The Federal Reserve has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless the bank holding company’s net income over the preceding year is sufficient to fund the dividends, and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition.

In addition to the limitations placed on the payment of dividends at the holding company level, there are various legal and regulatory limits on the extent to which the Banks may pay dividends or otherwise supply funds to Alabama National. Under Alabama law, a bank may not pay a dividend in excess of 90 percent of its net earnings until the bank’s surplus is equal to at least 20 percent of capital. Also, under Alabama law, a bank is required to obtain approval of the Superintendent of Banking prior to the payment of dividends if the total of all dividends declared by the bank in any calendar year will exceed the total of (a) the bank’s net earnings (as defined by statute) for the year, plus (b) its retained net earnings for the preceding two years, less any required transfers to surplus. Also, no dividends may be paid from the bank’s surplus without the prior written approval of the Superintendent of Banking. All of the Banks that are chartered under Alabama law are subject to these dividends restrictions. The Banks located and chartered in Florida and Georgia are subject to the laws and regulations of those states which also place certain restrictions on the payment of dividends.

In addition, federal and state regulatory agencies 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. The inability of the Banks to pay dividends may have an adverse effect on Alabama National.

FDIC Regulation

The Banks pay deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Bank Insurance Fund-member institutions. The FDIC 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 and assesses higher rates on those institutions that pose greater risks to the federal deposit insurance funds.

Bank Holding Company Support of Subsidiary Banks

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 to 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. All of the Banks are FDIC-insured depository institutions. Any capital loans by a bank holding company to its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Regulatory Capital Requirements

Alabama National is required to comply with the capital adequacy standards established by the Federal Reserve, and the Banks must comply with similar capital adequacy standards established by the OCC, FDIC and the Federal Reserve, as applicable. Failure to meet capital adequacy standards could subject Alabama National or the Banks to a variety of enforcement remedies, including the issuance of a capital directive, the termination of deposit insurance by the FDIC, and certain other restrictions on its business. 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.

Affiliate Transactions

The Banks are subject to Regulation W, which comprehensively implemented statutory restrictions on transactions between a bank and its affiliates. Regulation W combines the Federal Reserve’s interpretations and

exemptions relating to Section 23A and 23B of the Federal Reserve Act. Regulation W and Section 23A of the Federal Reserve Act 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.

Regulation W and Section 23B of the Federal Reserve Act prohibit, among other things, 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.

Gramm-Leach Bliley Act

The Gramm Leach Bliley Act of 1999 (“GLB Act”) permits bank holding companies that meet certain management, capital and community reinvestment standards to engage in a substantially broader range of non-banking activities than were permitted previously, including insurance underwriting and merchant banking activities. Under the GLB Act, a bank holding company that elects to become a financial holding company may engage in any activity that the Federal Reserve, in consultation with the Secretary of the Department of the Treasury, determines by regulation or order is: (i) financial in nature; (ii) incidental to any such financial activity; or (iii) complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Alabama National has not elected to become a financial holding company.

The GLB 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.

Privacy

The GLB Act and the applicable regulations issued by the various federal regulatory agencies require financial institutions (including banks, insurance agencies and broker/dealers) to implement policies and procedures regarding the disclosure of nonpublic personal information about their customers with non-affiliated third parties. In general, financial institutions are required to explain to consumers their policies and procedures regarding the disclosure of such nonpublic personal information, and, unless otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided in their policies and procedures. Specifically, the Information Security Guidelines established by the GLB Act require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against anticipated threats or hazards to the security or integrity of such information; and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

Bank Secrecy Act/USA Patriot Act

The Bank Secrecy Act is the centerpiece of the federal government’s efforts to prevent banks and other financial institutions from being used to facilitate the transfer or deposit of money derived from criminal activity.

Under the Bank Secrecy Act, financial institutions are obligated to file Suspicious Activity Reports, or SARs, on suspicious activities involving the institution, including certain attempted or actual violations of law as well as certain transactions that do not appear to have a lawful purpose or are not the sort of transaction in which the particular customer would normally be expected to engage.

The Bank Secrecy Act was amended by the USA Patriot Act of 2001, expanding the important role the government expects banks to play in detecting and reporting suspicious activity. 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 Bank Secrecy Act, as amended by the USA Patriot Act, could have serious legal and reputational consequences for the institution. Alabama National has adopted policies, procedures and controls to address compliance with the these regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by the USA Patriot Act and all applicable implementing regulations.

The Community Reinvestment Act

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.

Other

As a registered broker-dealer and investment advisor, NBC Securities is subject to regulation by the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., and other self-regulatory organizations, which may affect its manner of operation and profitability.

ANB Insurance Services, Inc., a subsidiary of First American Bank, is subject to regulation in the various states and jurisdictions in which it transacts business.

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 53—Chairman and Chief Executive Officer. Mr. Holcomb has served as Chairman and Chief Executive Officer of Alabama National since 1996. Mr. Holcomb served as Chief Executive Officer of NBC from 1990 through February 2005. Effective February 2005, Mr. Holcomb began serving as Chairman of the Board of First American Bank.

Dan M. David—Age 59—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 also serves as Vice Chairman of First American Bank, a position he has held since February 2005. From 1995 to February 2005, Mr. David served as Chairman and Chief Executive Officer of First American Bank. Mr. David served as Chairman and Chief Executive Officer of First American Bancorp from 1995 through 1997.

Richard Murray, IV—Age 42—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 in 1998. Mr. Murray also serves as Vice Chairman of First American Bank, a position he has held since February 2005. Mr. Murray served as Executive Vice President of NBC from 1997 to February 2005.

William E. Matthews, V—Age 40—Executive Vice President and Chief Financial Officer. Mr. Matthews has served as Executive Vice President and Chief Financial Officer of Alabama National since 1998. Mr. Matthews also serves as Executive Vice President and Chief Financial Officer of First American Bank, positions he has held since February 2005. Mr. Matthews served as Executive Vice President and Chief Financial Officer of NBC from 1998 to February 2005. Prior to that date, Mr. Matthews served as Senior Vice President of NBC beginning in 1996.

John R. Bragg—Age 43—Executive Vice President. Mr. Bragg has served as Executive Vice President of Alabama National since 1998. Mr. Bragg also serves as Executive Vice President of First American Bank, a position he has held since February 2005. Mr. Bragg served as Executive Vice President of NBC from 1997 to February 2005. Mr. Bragg served as Senior Vice President of NBC from 1992 until 1997.

James R. Thompson, III—Age 45. Mr. Thompson has served as President and Chief Executive Officer of First American Bank, the largest subsidiary of Alabama National, since February 2005. Prior to that date, Mr. Thompson served as President and Chief Operating Officer of First American Bank beginning in 1994.

Shelly S. Williams—Age 42—Senior Vice President and Controller. Ms. Williams has served as Senior Vice President and Controller of Alabama National since 2000. Ms. Williams also serves as Senior Vice President and Chief Accounting Officer of First American Bank, positions she has held since February 2005. Ms. Williams served as Senior Vice President and Controller of NBC from 2000 to February 2005. 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 82 banking offices, seven loan/mortgage origination offices, five operations offices and two insurance offices. Of these offices, Alabama National, through the Banks, owns 65 banking offices without encumbrance and leases an additional 17 banking offices and its seven loan/mortgage origination offices. Of its five operations offices, three are owned without encumbrance and two are leased. ANB Insurance owns one of its offices without encumbrance, and leases its other office. Alabama National, through First American Bank, 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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

At March 11, 2005 Alabama National had approximately 2,166 stockholders of record (including shares held in “street” names by nominees who are record holders) and 17,012,904 shares of common stock outstanding. Alabama National’s common stock is traded in the over-the-counter market and prices are quoted on the NASDAQ/NMS under the symbol “ALAB.”

The following table sets forth, for the calendar quarters indicated, the high and low sales prices per share for Alabama National’s common stock on the Nasdaq National Market, and the cash dividends declared per share in each such quarter:


	High		Low		Dividends Declared Per Share
2003
First Quarter	$	46.00	$	40.75	$	0.2850
Second Quarter		50.50		40.88		0.2850
Third Quarter		53.69		47.12		0.2850
Fourth Quarter		55.39		47.56		0.2850

2004
First Quarter	$	55.52	$	50.14	$	0.3125
Second Quarter		56.98		50.18		0.3125
Third Quarter		61.89		53.02		0.3125
Fourth Quarter		65.74		58.45		0.3125

Dividends are paid at the discretion of Alabama National’s Board of Directors, based on Alabama National’s operating performance and financial position, including earnings, capital and liquidity. Dividends from the subsidiary Banks are Alabama National’s primary source of funds for the payment of dividends to its stockholders, and there are various legal and regulatory limits on the extent to which the subsidiary Banks may pay dividends or otherwise supply funds to Alabama National. In addition, federal and state regulatory agencies have the authority to prevent Alabama National from paying a dividend to its stockholders. Thus, while Alabama National intends to continue paying dividends, it can make no assurances that it will be able to or be permitted to do so in the future.

The last reported sales price of Alabama National’s common stock as reported on the NASDAQ/NMS on March 11, 2005 was $62.28. The prices shown do not reflect retail mark-ups and mark-downs.

During the third quarter of 2004, Alabama National completed an underwritten public offering of 977,500 shares of common stock (including 127,500 shares issued pursuant to an over-allotment option) and received net proceeds of approximately $49.7 million after deducting underwriting discounts and offering expenses. The net proceeds were used to pay off a credit facility with a third party bank and make capital injections in the subsidiary Banks. In addition, a portion of the net proceeds was retained for general corporate liquidity needs at the holding company.

With respect to information regarding our securities authorized for issuance under equity incentive plans, the information contained in the section entitled “Equity Compensation Plan Information” of our definitive Proxy Statement for the 2005 Annual Meeting of Stockholders is incorporated herein by reference.

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,
	2004			2003			2002			2001(1)			2000(1)
Income Statement Data:
Interest income	$	229,186		$	178,631		$	178,147		$	179,537		$	171,222
Interest expense		65,934			57,668			65,313			90,393			90,987

Net interest income		163,252			120,963			112,834			89,144			80,235
Provision for loan and lease losses		4,949			5,931			7,956			3,946			2,506

Net interest income after provision for loan and lease losses		158,303			115,032			104,878			85,198			77,729
Net securities gains (losses)		—			46			35			246			(119	)
Noninterest income		72,785			78,258			61,129			48,461			33,466
Noninterest expense		148,293			131,864			113,577			92,233			74,111

Income before income taxes		82,795			61,472			52,465			41,672			36,965
Provision for income taxes		28,122			20,398			16,735			13,232			11,421

Income before minority interest in earnings of consolidated subsidiary		54,673			41,074			35,730			28,440			25,544
Minority interest in earnings of consolidated subsidiary		29			28			28			25			26

Net income	$	54,644		$	41,046		$	35,702		$	28,415		$	25,518


Balance Sheet Data:
Total assets	$	5,315,869		$	3,820,112		$	3,316,168		$	2,843,497		$	2,358,285
Earning assets		4,841,255			3,512,744			3,034,980			2,612,806			2,140,562
Securities		1,200,407			810,227			700,333			567,688			386,059
Loans held for sale		22,313			16,415			51,030			36,554			5,226
Loans and leases, net of unearned income		3,495,701			2,659,440			2,191,394			1,964,169			1,710,810
Allowance for loan and lease losses		46,584			36,562			32,704			28,519			22,368
Deposits		3,934,723			2,753,749			2,330,395			2,066,759			1,807,095
Short-term debt		30,500			41,150			152,100			68,350			91,439
Long-term debt		393,688			332,393			240,065			209,631			83,926
Stockholders’ equity		529,543			279,418			234,492			207,886			171,604
Weighted Average Shares Outstanding—Diluted (2)		16,100			12,957			12,683			12,141			11,973

Per Common Share Data:
Net income—diluted	$	3.39		$	3.17		$	2.81		$	2.34		$	2.13
Book value (period end)		31.15			21.76			18.95			16.84			14.56
Tangible book value (period end) (6)		21.99			18.99			17.28			15.31			13.34
Dividends declared		1.25			1.14			1.00			0.92			0.84
Dividend payout ratio—diluted		36.87	%		35.96	%		35.59	%		39.32	%		39.44	%

Performance Ratios:
Return on average assets		1.13	%		1.14	%		1.18	%		1.12	%		1.17	%
Return on average equity		12.15			15.89			16.01			15.40			16.29
Net interest margin (3)		3.71			3.65			4.07			3.83			4.03
Net interest margin (taxable equivalent) (3)		3.74			3.68			4.11			3.88			4.08

Asset Quality Ratios:
Allowance for loan and lease losses to period end loans (4)		1.33	%		1.37	%		1.49	%		1.45	%		1.31	%
Allowance for loan and lease losses to period end
nonperforming loans (5)		575.75			372.44			318.07			377.09			614.17
Net charge-offs to average loans and leases (4)		0.06			0.13			0.18			0.09			0.04
Nonperforming assets to period end loans and leases
and foreclosed property (4)(5)		0.28			0.40			0.59			0.47			0.30

Capital and Liquidity Ratios:
Average equity to average assets		9.29	%		7.17	%		7.36	%		7.28	%		7.16	%
Leverage (4.00% required minimum)		8.44			7.73			7.52			7.61			6.83
Risk-based capital
Tier 1 (4.00% required minumum)		11.49			10.47			10.00			9.92			8.86
Total (8.00% required minimum)		12.74			11.73			11.26			11.17			10.11
Average loans and leases to average deposits		92.30			94.38			96.44			97.74			94.04

(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 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,
	2004			2003			2002			2001			2000
Book value (stockholders’ equity)	$	529,543		$	279,418		$	234,492		$	207,886		$	171,604
Deduct: goodwill and other intangible assets		(155,682	)		(35,587	)		(20,622	)		(18,875	)		(14,347	)
Tangible book value		373,861			243,831			213,870			189,011			157,257

Book value per common share		31.15			21.76			18.95			16.84			14.56
Effect of goodwill and intangible assets per share		(9.16	)		(2.77	)		(1.67	)		(1.53	)		(1.22	)
Tangible book value per common share	$	21.99		$	18.99		$	17.28		$	15.31		$	13.34

ITEM 7.

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

Management’s Discussion and Analysis contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding forward-looking statements, see the section titled “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS” on page 2 of this Annual Report.

Basis of Presentation

The following is a discussion and analysis of the consolidated financial condition of Alabama National and results of operations 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.

Many of the comparisons of financial data from period to period presented in the following discussion have been rounded from actual values reported in the financial statements. The percentage changes presented herein are based on a comparison of the actual values recorded in the financial statements, not the rounded values.

Executive Summary

The purpose of this section is to provide a brief summary overview of 2004. Additional detail about the income statement and balance sheet is provided in the pages following this summary.

Income Statement

Alabama National reported $54.6 million in 2004 net income, a 33.1% increase for 2004 over 2003 levels, with diluted earnings per share growing 7.1% from $3.17 in 2003 to $3.39 in 2004. During 2004, Alabama National acquired three banks. Indian River Banking Company and Cypress Bankshares, Inc. were acquired in February, 2004, and Coquina Bank was acquired in July, 2004. The increase in net income is higher than the increase in diluted earnings per share because Alabama National issued additional shares of stock during 2004 to acquire these banks and also issued shares of common stock in an underwritten public offering in the third quarter of the year. In addition, outstanding shares also increased through the exercise of stock options by option holders. For the year, average diluted shares outstanding grew 24.3% to 16.1 million shares.

Alabama National has two components of revenue—net interest income and noninterest income. Both revenue components were positively impacted by the three 2004 acquisitions, with the greater impact being on the net interest income.

Net interest income grew 35.0% to $163.3 million in 2004. The Company experienced a growth in its net interest spread and in its net interest margin, with the improvement occurring in the latter half of the year. The Federal Reserve began taking actions to increase interest rates in June, resulting in an increase in earning asset yields that exceeded the increase 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 expanded during the year. Alabama National was further able to grow net interest income during 2004 due to its growth in earning assets and liabilities.

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 declined $5.5 million, or 7.0% during 2004 from 2003’s record levels, in spite of the aforementioned acquisition of three banks. The decline was centered in the investment services area (down $7.1 million, or 37.7%) and in the mortgage banking area (down $4.7 million, or 29.0%). Both of these business lines faced a more difficult interest rate environment in 2004 than in 2003. In the investment services area, securities called and prepaid were reduced from 2003’s levels, leading to reduced demand by customers for securities to replace their called and prepaid investments. Similarly, mortgage refinancing activity was reduced in 2004 from 2003 levels, leading to reduced revenue in that area. Other areas of noninterest income experienced increases in 2004, including service charges on deposit accounts (up $3.0 million, or 21.5%) and securities brokerage and trust revenue (up $1.0 million, or 6.3%).

On the expense side, Alabama National’s noninterest expenses grew $16.4 million, or 12.5%. Most of this growth in noninterest expenses was associated with the three banks acquired during 2004 and the associated expansion of the number of branch offices and associated personnel and other operating expenses. Commission-based compensation expenses declined with the decline in commission based revenue.

Balance Sheet

Alabama National’s balance sheet expanded significantly during 2004, with total assets growing $1.5 billion, or 39.2%, over December 31, 2003 levels. The 2004 acquisitions of Indian River Banking Company,

Cypress Bankshares, Inc., and Coquina Bank all contributed to the balance sheet growth. In addition, Alabama National’s other banks experienced asset growth. The largest categories of asset growth occurred in loans and leases (up $836 million) and securities (up $390 million). Deposits grew $1.18 billion during the year.

Asset Quality

Alabama National reported 2004 net charge-offs of $1.8 million, or 0.06% of average loans and leases, down from 2003’s $3.1 million (0.13% of average loans and leases). Nonperforming assets at December 31, 2004 were $9.6 million (0.28% of period end loans and leases and foreclosed property), down from year end 2003’s $10.5 million (0.40% of period end loans and leases and foreclosed property). Potential problem loans fell to $30.8 million at December 31, 2004 from year end 2003’s $46.4 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 $5.9 million in 2003 to $4.9 million in 2004.

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 2004 and 2003 for each of the Banks. During February 2004, Indian River National Bank and Cypress Bankshares, Inc. were acquired, and Coquina Bank was acquired in July 2004. Coquina Bank and Cypress bank were merged together in August 2004 and operate as CypressCoquina Bank. Millennium Bank was acquired during June 2003. Only the operating activity since the date of acquisition of each of these acquired banks is included in Alabama National’s results of operations. In addition to the 2004 acquisitions, in June 2004 Alabama National merged together two wholly owned subsidiaries, Peoples State Bank of Groveland and Public Bank. The combined bank now operates as Public Bank.

SELECTED BANK FINANCIAL DATA

(Amounts in thousands, except ratios)


	December 31, 2004
	National Bank of Commerce (1)			Alabama Exchange Bank			Bank of Dadeville			Citizens & Peoples Bank, N.A.			First American Bank (1)			First Citizens Bank			First Gulf Bank			Indian River			Public Bank			Georgia State Bank			Community Bank of Naples, N.A.			Millennium Bank			Cypress Coquina Bank
Summary of Operations:
Interest income	$	57,586		$	4,082		$	4,142		$	6,213		$	51,751		$	5,505		$	13,935		$	25,578		$	17,431		$	16,008		$	13,412		$	6,436		$	8,095
Interest expense		19,347			656			906			1,509			14,172			1,296			3,502			6,324			4,621			5,502			3,155			1,790			1,368
Net interest income		38,239			3,426			3,236			4,704			37,579			4,209			10,433			19,254			12,810			10,506			10,257			4,646			6,727
Provision for loan and lease losses		1,095			150			—			140			1,180			25			605			225			30			676			432			353			38
Noninterest income		38,884			813			836			791			16,911			936			3,833			3,595			2,820			3,455			1,342			1,185			611
Noninterest expense		53,836			2,331			1,734			2,904			31,784			2,366			8,393			12,571			8,310			8,181			4,537			3,902			4,022
Net income		15,032			1,179			1,689			1,525			14,094			2,013			3,417			6,438			4,587			3,584			4,124			970			2,061
Balance Sheet Highlights:
At Period-End:
Total assets	$	1,469,314		$	80,786		$	78,472		$	134,105		$	986,602		$	106,917		$	356,748		$	694,241		$	337,013		$	337,180		$	293,359		$	155,223		$	277,489
Securities		320,011			33,983			28,878			18,011			143,010			45,890			48,590			296,480			71,877			100,251			26,537			31,861			34,939
Loans and leases, net of unearned income		957,207			38,145			43,955			106,354			754,213			49,477			241,075			340,892			239,848			205,947			246,212			96,342			175,344
Allowance for loan and lease losses		12,142			770			657			1,295			10,120			624			3,160			4,752			3,475			2,655			3,172			1,199			2,563
Deposits		853,642			68,822			65,790			102,194			781,381			87,109			305,425			585,782			283,860			255,697			207,173			116,509			229,640
Short-term debt		—			—			—			5,000			—			—			—			—			5,000			10,000			10,000			—			—
Long-term debt		131,000			5,000			5,000			8,000			77,000			11,000			22,000			40,078			12,000			13,000			16,000			—			—
Stockholders’ equity		116,623			6,357			5,867			10,127			94,180			8,147			24,374			56,130			27,922			25,777			23,466			26,864			43,974
Performance Ratios:
Return on average assets		1.08	%		1.45	%		2.12	%		1.26	%		1.51	%		1.84	%		1.12	%		1.21	%		1.38	%		1.10	%		1.54	%		0.65	%		1.16	%
Return on average equity		14.15			18.11			28.70			17.07			16.18			25.40			16.28			15.78			17.51			15.77			19.46			3.67			8.40
Net interest margin		2.91			4.56			4.40			4.15			4.38			4.14			3.72			3.77			4.13			3.49			4.28			3.71			4.64
Capital and Liquidity Ratios:
Average equity to average assets		7.60	%		7.98	%		7.39	%		7.36	%		9.33	%		7.26	%		6.87	%		7.68	%		7.89	%		6.98	%		7.94	%		17.76	%		13.84	%
Leverage (4.00% required minimum)		8.16			7.48			7.46			8.02			8.72			7.48			7.26			7.67			8.31			7.46			8.39			7.44			7.90
Risk-based capital
Tier 1 (4.00% required minimum)		10.88			15.30			13.13			9.62			10.84			14.84			10.40			12.68			11.07			11.56			9.63			10.38			10.25
Total (8.00% required minimum)		12.01			16.56			14.38			10.84			12.09			16.00			11.65			13.87			12.32			12.75			10.89			11.58			11.50
Average loans and leases to average deposits to average deposits		115.84			56.85			64.47			97.92			99.30			56.68			90.60			65.52			81.92			78.78			114.78			78.10			74.89

(1)

National Bank of Commerce merged with and into First American Bank effective February 18, 2005.

SELECTED BANK FINANCIAL DATA

(Amounts in thousands, except ratios)


	December 31, 2003
	National Bank of Commerce (1)			Alabama Exchange Bank			Bank of Dadeville			Citizens & Peoples Bank, N.A.			First American Bank (1)			First Citizens Bank			First Gulf Bank			Peoples State Bank (2)			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 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

(1)

National Bank of Commerce merged with and into First American Bank effective February 18, 2005.

(2)

In June 2004 Peoples State Bank was merged with and into Public Bank.

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” below.

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 offers various pension plans and 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, 2004, compared with year ended December 31, 2003

Alabama National’s net income increased by $13.6 million, or 33.1%, to $54.6 million in the year ended December 31, 2004, from $41.0 million for the year ended December 31, 2003. Net income per diluted share increased to $3.39 for the year ended December 31, 2004, as compared to $3.17 recorded for the year ended December 31, 2003. Return on average assets during 2004 was 1.13%, compared with 1.14% during 2003, and return on average equity was 12.15% during 2004, compared with 15.89% during 2003.

Net interest income increased $42.3 million, or 35.0%, to $163.3 million in 2004, from $121.0 million in 2003, as interest income increased $50.6 million and interest expense increased $8.3 million. Acquisitions during 2004 accounted for $26.0 million of the increase in net interest income. Also contributing to the increase in net interest income is a decrease in the interest rate paid on deposits and other interest bearing liabilities. During 2004, Alabama National was able to continue to decrease the rates paid on deposits as time deposits that were originated in higher interest rate environments matured and repriced at the current lower rates. As the Federal Reserve Bank started increasing rates during the later half of 2004, Alabama National was able to control the increase on rates paid on interest bearing transaction accounts and money market accounts, thereby controlling deposit costs and increasing net interest income. Alabama National continues to experience strong growth in its earning assets. During 2004, average earning assets grew $1.09 billion, or 32.9%, to $4.40 billion for the year ended December 31, 2004. Average loans and leases and average securities each had significant growth during 2004. Average loans and leases increased $764.7 million and average securities increased $310.4 million. The 2004 acquisitions contributed $383.3 million and $259.9 million of the increase in average loans and leases and

average securities for 2004, respectively. Alabama National continues to have strong organic growth in loans due to 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. Average interest bearing liabilities increased $865.0 million, to $3.77 billion in 2004. Acquisitions during 2004 accounted for $526.9 million of this increase. Despite the 29.8% increase in average interest bearing liabilities, interest expense increased only $8.3 million, or 14.3%. All categories of average interest-bearing liabilities increased during 2004, except for other short-term borrowings.

Alabama National’s net interest spread and net interest margin were 3.49% and 3.71%, respectively, in 2004, compared to 3.44% and 3.65%, respectively, in 2003. The net interest margin for 2004 was slightly higher than 2003 due in part to lower rates paid on time deposits. Many of the time deposits in Alabama National’s portfolio originated in lower interest rate environments and these deposits can only reprice at maturity. The average yield on loans and leases during 2004 was 21 basis points lower than 2003. The impact of the Federal Reserve rate increases in the latter half of 2004 was not able to entirely offset the lower rates in the first half of 2004. See “Net Interest Income.”

Alabama National recorded a provision for loan and lease losses of $4.9 million during 2004, compared to $5.9 million in 2003. 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 factors will not require future adjustments to 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 1.33% at December 31, 2004, compared with 1.37% at December 31, 2003. The allowance for loan and lease losses as a percentage of period-end nonperforming assets was 484.14% at December 31, 2004, compared with 347.68% at December 31, 2003. Alabama National experienced net charge-offs of $1.8 million in 2004, equating to a ratio of net charge-offs to average loans and leases of 0.06%, compared with net charge-offs of $3.1 million in 2003, equating to a ratio of net charge-offs to average loans and leases of 0.13%. See “Provision and Allowance for Loan and Lease Losses.”

Noninterest income, including net securities gains and losses, decreased $5.5 million, or 7.0%, to $72.8 million in 2004, compared with the record amount of $78.3 million in 2003. Total revenue for the investment services division decreased $7.1 million, or 37.7%, to $11.7 million in 2004, from $18.7 million in 2003. Total revenue earned from the mortgage division decreased $4.7 million, or 29.0%, to $11.6 million in 2004, from $16.3 million in 2003. The securities brokerage and trust division experienced a revenue increase of $1.0 million, or 6.3%, to $16.9 million in 2004, from $15.9 million in 2003. The commissions generated by the insurance division totaled $3.6 million in 2004, compared with $3.5 million recorded in 2003. The revenue recorded by the investment services division and the mortgage division during 2003 were record amounts for Alabama National. Service charges on deposit accounts increased by $3.0 million, or 21.5%, to $17.1 million in 2004, from $14.1 million in 2003. Earnings on bank owned life insurance totaled $2.7 million in 2004 and 2003, and other noninterest income increased $2.2 million to $9.3 million in 2004. Noninterest expense increased $16.4 million, or 12.5%, to $148.3 million in 2004, compared with $131.9 million during 2003. 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 $28.1 million for 2004, compared to $20.4 million for 2003. The effective tax rate for 2004 was 34.0%, compared to 33.2% for 2003. 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 2004 is higher than 2003 due to higher pre-tax income without a corresponding increase in income items not subject to federal or state taxation.

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 $758.5 million in 2003, compared to $558.1 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. 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 2002, 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 for 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.

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,
	2004							2003							2002
	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)	$	3,223,989		$	184,935	5.74	%	$	2,459,250		$	146,223	5.95	%	$	2,123,778		$	143,770	6.77	%
Securities:
Taxable		1,049,274			41,468	3.95			758,506			30,359	4.00			558,052			32,116	5.76
Tax exempt (2)		52,717			3,247	6.16			33,104			2,260	6.83			31,216			2,339	7.49
Cash balances in other banks		6,225			65	1.04			10,024			98	0.98			9,607			165	1.72
Funds sold		68,651			991	1.44			49,338			635	1.29			45,348			743	1.64
Trading account securities		1,244			55	4.42			2,536			94	3.71			2,059			81	3.93

Total earning assets (2)		4,402,100			230,761	5.24			3,312,758			179,669	5.42			2,770,060			179,214	6.47

Cash and due from banks		143,433							95,686							89,935
Premises and equipment		90,388							75,319							66,802
Other assets		246,108							155,386							134,192
Allowance for loan losses		(43,535	)						(35,302	)						(31,183	)

Total assets	$	4,838,494						$	3,603,847						$	3,029,806


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

Interest-bearing liabilities:
Interest-bearing transaction accounts	$	722,774		$	5,738	0.79	%	$	509,343		$	4,376	0.86	%	$	404,587		$	5,228	1.29	%
Savings and money market deposits		771,993			7,234	0.94			471,725			4,359	0.92			391,008			5,457	1.40
Time deposits		1,434,798			33,376	2.33			1,242,100			33,496	2.70			1,087,937			39,087	3.59
Funds purchased		402,991			5,345	1.33			317,811			3,278	1.03			272,689			4,187	1.54
Other short-term borrowings		53,027			1,027	1.94			80,586			1,431	1.78			78,958			2,246	2.84
Long-term debt		386,477			13,214	3.42			285,456			10,728	3.76			200,686			9,108	4.54

Total interest-bearing liabilities		3,772,060			65,934	1.75			2,907,021			57,668	1.98			2,435,865			65,313	2.68

Demand deposits		563,349							382,498							318,724
Accrued interest and other liabilities		53,502							55,980							52,170
Stockholders’ equity		449,583							258,348							223,047

Total liabilities and stockholders’ equity	$	4,838,494						$	3,603,847						$	3,029,806

Net interest spread						3.49	%						3.44	%						3.79	%

Net interest income/margin on a taxable equivalent basis				$	164,827	3.74	%				$	122,001	3.68	%				$	113,901	4.11	%

Tax equivalent adjustment (2)					1,575							1,038							1,067

Net interest income/margin				$	163,252	3.71	%				$	120,963	3.65	%				$	112,834	4.07	%

(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 $7.6 million, $6.1 million and $5.3 million are included in interest and fees on loans for 2004, 2003, and 2002, respectively.

During 2004, Alabama National experienced an increase in net interest income of $42.3 million, or 35.0%, to $163.3 million, compared with $121.0 million in 2003. 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. A majority of the increase in average earning asset volume was due to the acquisitions during the year. The 2004 acquisitions contributed $26.0 million to net interest income and accounted for $655.5 million of the increase in average earning assets. In 2004 the average taxable equivalent yield of earning assets was 5.24% compared with 5.42% for 2003. Despite the 18 basis point reduction, total interest income increased $50.6 million, or 28.3%, to $229.2 million in 2004. This increase is a result of an increase in the volume of earning assets due to acquisitions and organic growth. The rate paid on interest bearing liabilities decreased 23 basis points to 1.75% in 2004. The average rate paid on time deposits had the most significant impact on the decline in average rate paid on interest bearing liabilities. The average rate paid on time deposits decreased from 2.70% in 2003 to 2.33% in 2004. Alabama National continued to benefit from repricing of time deposits opened in higher interest rate environments to current market rates. Alabama National’s taxable equivalent net interest margin for the fourth quarter of 2004 was 3.84%, which was slightly higher than the 3.81% recorded in the third quarter of 2004 and approximately 20 basis points higher than the first and second quarters of 2004. Alabama National has benefited from the Federal Reserve Bank’s five separate fed funds rate increases beginning June 2004. Alabama National’s variable rate loans have repriced at the higher rates but deposit costs have not repriced as quickly.

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 2004 and 2003. 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,
	2004 Compared to 2003 Variance Due to									2003 Compared to 2002 Variance Due to
	Volume			Yield/Rate			Total			Volume		Yield/Rate			Total
Earning assets:
Loans and leases	$	44,042		$	(5,330	)	$	38,712		$	21,102	$	(18,649	)	$	2,453
Securities:
Taxable		11,493			(384	)		11,109			9,665		(11,422	)		(1,757	)
Tax exempt		1,227			(240	)		987			136		(215	)		(79	)
Cash balances in other banks		(39	)		6			(33	)		7		(74	)		(67	)
Funds sold		274			82			356			61		(169	)		(108	)
Trading account securities		(55	)		16			(39	)		18		(5	)		13

Total interest income		56,943			(5,851	)		51,092			30,989		(30,534	)		455

Interest-bearing liabilities:
Interest-bearing transaction accounts		1,738			(376	)		1,362			1,149		(2,001	)		(852	)
Savings and money market deposits		2,780			95			2,875			998		(2,096	)
Time deposits		4,817			(4,937	)		(120	)		5,010		(10,601	)		(5,591	)
Funds purchased		991			1,076			2,067			624		(1,533	)		(909	)
Other short-term borrowings		(524	)		120			(404	)		45		(860	)		(815	)
Long-term debt		3,526			(1,040	)		2,486			3,377		(1,757	)		1,620

Total interest expense		13,327			(5,061	)		8,266			11,203		(18,848	)		(7,645	)

Net interest income on a taxable equivalent basis	$	43,616		$	(790	)		42,826		$	19,786	$	(11,686	)		8,100

Taxable equivalent adjustment								(537	)							29

Net interest income							$	42,289							$	8,129

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 rate 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, 2004, 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, 2004
	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)	$	1,822,163		$	306,642		$	455,485		$	2,584,290		$	522,092		$	403,541		$	3,509,923
Securities (2)		42,864			44,407			176,469			263,740			452,242			453,535			1,169,517
Trading securities		590			—			—			590			—			—			590
Interest-bearing deposits in other banks .		21,274			—			—			21,274			—			—			21,274
Funds sold		100,970			—			—			100,970			—			—			100,970

Total interest-earning assets	$	1,987,861		$	351,049		$	631,954		$	2,970,864		$	974,334		$	857,076		$	4,802,274

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

Interest-bearing liabilities:
Interest-bearing deposits:
Demand deposits	$	441,432		$	—		$	—		$	441,432		$	—		$	464,967		$	906,399
Savings and money market deposits		439,487			—			—			439,487			—			447,944			887,431
Time deposits (3) .		173,266			191,438			633,292			997,996			312,857			146,795			1,457,648
Funds purchased		379,114			—			—			379,114			—			—			379,114
Short-term borrowings (4)		32,717			—			—			32,717			—			—			32,717
Long-term debt .		124,000			228,610			22,000			374,610			15,000			4,078			393,688

Total interest-bearing liabilities	$	1,590,016		$	420,048		$	655,292		$	2,665,356		$	327,857		$	1,063,784		$	4,056,997

Period gap	$	397,845		$	(68,999	)	$	(23,338	)	$	305,508		$	646,477		$	(206,708	)

Cumulative gap	$	397,845		$	328,846		$	305,508		$	305,508		$	951,985		$	745,277		$	745,277

Ratio of cumulative gap to total interest-earning assets		8.28	%		6.85	%		6.36	%		6.36	%		19.82	%		15.52	%

(1)

Excludes nonaccrual loans of $8.1 million

(2)

Excludes investment in equity securities with a fair market value of $30.9 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 $2.2 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 slightly liability sensitive during one through three months and the three through twelve month periods. 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 2003 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 interest 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 prior to maturity. These prepayment options make anticipating the performance of those instruments difficult given changes in prevailing interest rates. At December 31, 2004, mortgage backed securities with a carrying value of $864.4 million, or 16.3% of total assets and essentially every loan and lease, net of unearned income, (totaling $3.50 billion, or 65.8% 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 $3.93 billion, or 74.0%, of total assets at December 31, 2004. 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. Since interest rates have remained relatively low, Alabama National has elected to model interest rate decreases of 50 and 100 basis points. As of year-end 2003, management did not prepare a scenario that decreased current rates by 100 basis points so the comparable scenario is not available for 2003. As 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, 2004 % Change in Net Interest Income
+200 basis points	5.12	%
+100 basis points	1.98
0 basis points	—
-50 basis points	0.13
-100 basis points	(2.74	)

Change in Prevailing Interest Rates (1)	Year Ended December 31, 2003 % Change in Net Interest Income
+200 basis points	8.72	%
+100 basis points	4.48
0 basis points	—
-25 basis points	(0.60	)
-50 basis points	(1.65	)

(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 $1.0 million, or 16.6%, to $4.9 million in 2003, from $5.9 million in 2003. The decreased provision expense during 2004 is attributable to a reduction in net charge-offs during 2004 and also a reduction in total nonperforming assets and potential problem loans. During 2004, net charge-offs decreased $1.2 million, or 40.1% to $1.8 million, compared to $3.1 million in 2003. As of December 31, 2004, nonperforming assets totaled $9.6 million, a $0.9 million decrease from year-end 2003 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,
	2004			2003			2002			2001			2000
Total loans and leases outstanding at end of period, net of unearned income(1)	$	3,495,701		$	2,659,440		$	2,191,394		$	1,964,169		$	1,710,810

Average amount of loans and leases outstanding, net of unearned income(1)	$	3,205,306		$	2,410,782		$	2,092,829		$	1,790,083		$	1,571,760

Allowance for loan and lease losses at beginning of period	$	36,562		$	32,704		$	28,519		$	22,368		$	19,111
Charge-offs:
Commercial, financial and agricultural		3,430			3,535			1,573			1,875			397
Real estate—mortgage		200			1,426			1,463			730			145
Consumer		953			858			3,200			754			884

Total charge-offs		4,583			5,819			6,236			3,359			1,426

Recoveries:
Commercial, financial and agricultural		784			821			991			949			167
Real estate—mortgage		434			478			754			226			228
Consumer		1,528			1,452			720			517			382

Total recoveries		2,746			2,751			2,465			1,692			777

Net charge-offs		1,837			3,068			3,771			1,667			649
Provision for loan and lease losses		4,949			5,931			7,956			3,946			2,506
Additions to allowance from acquisitions		6,910			995			—			3,872			1,400

Allowance for loan and lease losses at period-end	$	46,584		$	36,562		$	32,704		$	28,519		$	22,368

Allowance for loan and lease losses to period-end loans(1)		1.33	%		1.37	%		1.49	%		1.45	%		1.31	%
Net charge-offs to average loans and leases(1)		0.06			0.13			0.18			0.09			0.04

(1)

Does not include loans held for sale.

Allocation of Allowance

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 specific loan categories.


	2004		2003		2002
	(Amounts in thousands)
Commercial and financial	$	3,884	$	5,210	$	4,039
Real estate construction		7,527		4,540		4,421
Real estate residential mortgage		8,595		6,497		6,311
Real estate commercial mortgage		11,949		10,229		7,418
Consumer		1,540		970		1,341
Lease financing receivables		511		1,014		1,318
Other		4,058		2,795		1,398
Unallocated		8,520		5,307		6,458

Total allowance for loan and lease losses	$	46,584	$	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,
	2004			2003			2002			2001			2000
Nonaccrual loans	$	8,091		$	9,817		$	10,282		$	7,563		$	3,642
Restructured loans		—			—			—			—			—
Loans past due 90 days or more and still accruing		—			—			—			—			—

Total nonperforming loans		8,091			9,817			10,282			7,563			3,642
Other real estate owned		1,531			699			2,569			1,680			1,468

Total nonperforming assets	$	9,622		$	10,516		$	12,851		$	9,243		$	5,110

Allowance for loan and lease losses to period-end loans(1)		1.33	%		1.37	%		1.49	%		1.45	%		1.31	%
Allowance for loan and lease losses to period-end nonperforming loans		575.75			372.44			318.07			377.09			614.17
Allowance for loan and lease losses to period-end nonperforming assets		484.14			347.68			254.49			308.55			437.73
Net charge-offs to average loans and leases(1)		0.06			0.13			0.18			0.09			0.04
Nonperforming assets to period-end loans and leases and foreclosed property(1)		0.28			0.40			0.59			0.47			0.30
Nonperforming loans and leases to period-end loans(1)		0.23			0.37			0.47			0.39			0.21

(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, 2004, 2003 and 2002, approximately $489,000, $474,000 and $540,000, 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 $0.9 million, to $9.6 million at December 3l, 2004, from $10.5 million at December 31, 2003. Other real estate owned increased $0.8 million to $1.5 million at December 31, 2004. Included in the year-end 2004 other real estate balance is a former bank branch which is for sale and has a carrying value of $0.8 million. The allowance for loan and lease losses to period-end nonperforming loans was 575.75% at December 31, 2004, compared with 372.44% at December 31, 2003. This ratio will generally fluctuate from period to period depending upon nonperforming loan levels at period end.

Potential Problem Loans

A potential problem loan is one that management has concerns as to 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, 2004, Alabama National had certain loans considered by management to be potential problem loans totaling $30.8 million, as compared with $46.4 million at December 31, 2003. 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 $72.8 million in 2004, compared with $78.3 million in 2003, a decrease of $5.5 million, or 7.0%. An analysis of this decrease 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,
	2004		2003		2002
Service charges on deposit accounts	$	17,126	$	14,091	$	12,081
Investment services income		11,652		18,710		13,576
Securities brokerage and trust income		16,863		15,867		13,590
Gain on sale of mortgages		11,566		16,289		10,860
Insurance commissions		3,604		3,477		2,837
Bank owned life insurance		2,690		2,747		3,018
Securities gains		—		46		35
Other		9,284		7,077		5,167

Total noninterest income	$	72,785	$	78,304	$	61,164

Service charges on deposit accounts increased $3.0 million to $17.1 million during 2004, a 21.5% increase over 2003’s total of $14.1 million. The increase for 2004 is attributable primarily to the 2004 acquisitions, which account for $2.5 million of this increase. Other noninterest income increased $3.0 million to $9.3 million during 2004, a 48.2% increase over 2003’s total of $6.3 million. The 2004 acquisitions increased this balance by $0.8 million. Also contributing to the increase in other noninterest income is increased revenue from merchant credit card activity, ATM card revenue and debit card income. 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,
	2004		2003		2002
Salaries and employee benefits	$	74,983	$	64,826	$	57,687
Commission based compensation		17,500		22,182		16,498
Occupancy and equipment expense, net		15,488		12,886		11,603
Amortization of other intangibles		3,034		1,041		832
Travel and entertainment		1,915		1,648		1,412
Advertising		2,436		1,969		1,994
Banking assessments		1,241		943		785
Data processing expenses		2,615		1,759		1,596
Legal and professional fees		5,235		3,701		3,602
Noncredit losses		940		908		355
Postage and courier services		2,893		2,333		2,140
Supplies and printing		2,813		2,527		2,329
Telephone		2,183		1,754		1,435
Penalty on long-term debt repayment		—		822		—
Other		15,017		12,565		11,309

Total noninterest expense	$	148,293	$	131,864	$	113,577

Noninterest expense increased $16.4 million, or 12.5%, to $148.3 million in 2004, from $131.9 million in 2003. Salaries and employee benefits increased $10.2 million, or 15.7%, in 2004. The 2004 amount includes the salaries and employee benefit expense of the 2004 acquisitions, which totaled $8.4 million. 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 merit salary increases. Commission based compensation decreased $4.7 million, or 21.1%, in 2004. The decrease in commission based compensation during 2004 is attributable to decreased production in the commission based businesses. Net occupancy expense increased $2.6 million, or 20.2%, in 2004. The 2004 acquisitions contributed $2.0 million of additional occupancy expense for 2004. The amortization of intangibles for 2004 increased $2.0 million to $3.0 million due to the amortization of core deposit intangibles recorded in the 2004 acquisitions and a full year for the 2003 acquisition. Legal and professional fees increased $1.5 million, or 41.4%, to $5.2 million in 2004, due primarily to increased internal and external accounting fees associated with the implementation of Section 404 of the Sarbanes-Oxley Act.

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,
	2004		2003		2002
Investment services revenue	$	11,652	$	18,710	$	13,576
Expenses and allocated charges		8,998		12,645		9,828

Net investment services income	$	2,654	$	6,065	$	3,748

First American Bank 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 decreased substantially to $11.7 million during 2004, from $18.7 million in 2003. The revenue recorded by the investment division during 2003 represents the highest revenue ever recorded for this division. 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. During 2004 the cash flow from the securities portfolio of correspondent banks slowed which negatively impacted the revenue for the investment services division.

Revenue from the investment division is subject to fluctuation caused by a number of factors, including perhaps most prominently the interest rate environment. The interest rate environment for this division was extremely favorable during 2003. The revenue production for 2004 was significantly lower than 2003 but similar to revenue production of prior years.

In the fourth quarter of 2004 a group of salespeople and support staff resigned and relocated to a competing bank. The group that left represented approximately 68% of the revenue of the investment division for the first nine months of 2004. Alabama National moved to retain the remaining salespeople and support staff and to hire additional experienced fixed income salespeople. Despite the added salespeople, the revenue production levels of the current sales group is expected to be lower than it otherwise would have been absent the departure of the former salespeople.

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,
	2004		2003		2002
Securities brokerage and trust revenue	$	16,863	$	15,867	$	13,590
Interest income		1,109		978		1,132

Total securities brokerage and trust revenue		17,972		16,845		14,722
Interest expense		105		118		133
Expenses and allocated charges		15,907		14,983		13,036

Net securities brokerage and trust income	$	1,960	$	1,744	$	1,553

First American Bank has a wholly owned subsidiary, NBC Securities, Inc. (NBC Securities), that is a full service licensed broker-dealer. The trust department of First American Bank 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 $1.0 million, or 6.3%, to $16.9 million in 2004. Revenue for this division increased $2.3 million, or 16.8%, to $15.9 million in 2003. The increase in revenue during both 2004 and 2003 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. Asset management fees recorded by the trust department of NBC (now First American Bank) and NBC Securities also increased during 2004 as a result of an increase in the total assets managed by these divisions. The interest income from margin loans has remained relatively flat during the last three years, consistent with the securities industry in general. 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 2004.

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,
	2004		2003		2002
Gain on sale of mortgage loans(1)	$	12,398	$	17,061	$	11,334
Interest income		1,053		2,462		1,631

Total revenue		13,451		19,523		12,965
Expenses and allocated charges		9,152		10,929		7,845

Net mortgage lending division income	$	4,299	$	8,594	$	5,120

(1)

Includes intercompany income allocated to mortgage lending division totaling $832,000, $772,000 and $474,000 at December 31, 2004, 2003 and 2002, respectively.

Fees earned in connection with the origination and resale of mortgages decreased $4.7 million, or 27.3%, to $12.4 million in 2004, from $17.1 million in 2003. During 2003, 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. The revenue recorded by the mortgage division in 2003 was a record amount due to the historically low interest rate environment and its effect on mortgage origination and refinancing activity. Expenses and allocated charges totaled $9.2 million, compared to $10.9 million during 2003. The decrease is due to a lower level of mortgage revenue and its impact on compensation and other expenses. In addition, mortgage lending divisions of recently acquired banks did not operate as efficiently as Alabama National’s pre-existing mortgage divisions in 2004, with higher expenses relative to revenues. Interest income was down $1.4 million to $1.1 million during 2004, also due to the overall reduction in the volume of mortgage originations.

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 was extremely favorable during 2003. During 2004 mortgage activity from refinancing slowed considerably, but Alabama National continues to expand and grow mortgage origination activity in the markets served by the Company.

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,
	2004		2003		2002
Commission income	$	3,604	$	3,477	$	2,837
Other income		109		—		—

Total revenue		3,713		3,477		2,837
Expenses and allocated charges		3,642		3,298		2,870

Net insurance division income	$	71	$	179	$	(33	)

Commission income earned from the sale of insurance products during 2004 increased modestly by 3.6% to $3.6 million. The revenue from this division continues to increase from the addition of new employees and expansion of this business line into the markets served by Alabama National.

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 $3.22 billion in 2004, compared to $2.46 billion in 2003, an increase of $764.7 million, or 31.1%. At December 31, 2004, total loans and leases, net of unearned income, were $3.50 billion, compared to $2.66 billion at the end of 2003, an increase of $836.3 million, or 31.4%. Excluding the loans acquired in the 2004 acquisitions, average loans and leases increased $381.5 million, or 15.5%, and end of period year over year organic loan growth for 2004 was $337.0 million, or 12.7%.

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,
	2004					2003					2002					2001					2000
	Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total
Commercial and financial	$	282,212		8.06	%	$	265,923		9.99	%	$	253,569		11.56	%	$	247,613		12.59	%	$	275,107		16.07	%
Real estate:
Construction		776,594		22.20			530,024		19.91			311,259		14.19			231,369		11.76			185,814		10.85
Mortgage—residential		963,083		27.52			676,658		25.42			616,651		28.11			546,730		27.80			490,152		28.63
Mortgage—commercial		1,046,622		29.91			814,904		30.61			699,403		31.88			637,575		32.42			498,858		29.14
Mortgage—other		10,644		.30			9,412		.35			5,672		.26			5,645		.29			4,238		.25
Consumer		88,653		2.53			74,137		2.78			78,342		3.57			82,909		4.22			79,458		4.64
Lease financing receivables		70,289		2.01			77,857		2.92			80,113		3.65			73,924		3.76			58,668		3.43
Securities brokerage margin loans		14,517		.41			15,407		.58			14,502		.66			16,302		.83			29,901		1.75
Other		246,739		7.06			198,036		7.44			134,191		6.12			124,564		6.33			89,700		5.24

Total gross loans and leases		3,499,353		100.00	%		2,662,358		100.00	%		2,193,702		100.00	%		1,966,631		100.00	%		1,711,896		100.00	%

Unearned income		(3,652	)				(2,918	)				(2,308	)				(2,462	)				(1,086	)

Total loans and leases, net of unearned income(1)		3,495,701					2,659,440					2,191,394					1,964,169					1,710,810
Allowance for loan and lease losses		(46,584	)				(36,562	)				(32,704	)				(28,519	)				(22,368	)

Total net loans and leases(1)	$	3,449,117				$	2,622,878				$	2,158,690				$	1,935,650				$	1,688,442

(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. In general, Alabama National prefers real estate collateral to many other potential collateral sources, such as accounts receivable, inventory and equipment.

The principal component of Alabama National’s loan portfolio is real estate mortgage loans. At year-end 2004, this category totaled $2.02 billion and represented 57.7% of the total loan portfolio, compared to $1.50 billion, or 56.4% of the total loan portfolio at year-end 2003.

Residential mortgage loans increased $286.4 million, or 42.3%, to $963.1 million at December 31, 2004, compared with $676.7 million at December 31, 2003. Commercial mortgage loans increased $231.7 million, or 28.4%, to $1.05 billion at December 31, 2004. Increases in both of these categories of loans are primarily the result of Alabama National’s 2004 acquisitions. Organic loan growth for 2004 for residential mortgage loans totaled $140.1 million, or 20.2%, and organic loan growth for commercial mortgage loans totaled $65.8 million, or 8.1%.

Real estate construction loans increased $246.6 million, or 46.5%, to $776.6 million at December 31, 2004, compared with $530.0 million at December 31, 2003. Alabama National’s focus on the home construction market, as well as strong commercial construction activity in markets it serves, led to $118.7 million of this increase, and the remainder is attributable to the 2004 acquisitions.

The slight increase in consumer loans was due to the 2004 acquisitions. Lease financing receivables and margin loan balances experienced a slight decrease from 2003 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, 2004.

LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES

(Amounts in thousands)


	December 31, 2004
	One year or less		Over one year through five Years		Over five years		Total
Commercial, financial and agricultural	$	154,164	$	114,187	$	13,861	$	282,212
Real estate—construction		462,403		282,765		31,426		776,594
Real estate—residential		194,580		235,941		532,562		963,083
Real estate—commercial		127,612		619,529		299,481		1,046,622
Consumer		30,776		54,046		3,831		88,653

	$	969,535	$	1,306,468	$	881,161	$	3,157,164


	Predetermined Rates		Floating Rates		Total
Maturing after one year but within five years	$	630,329	$	676,139	$	1,306,468
Maturing after five years		112,690		768,471		881,161

	$	743,019	$	1,444,610	$	2,187,629

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 $1.10 billion during 2004, compared with $791.6 million during 2003, an increase of $310.4 million, or 39.2%. The 2004 acquisitions accounted for $259.9 million of this increase. Growth in the securities portfolio is generally a function of growth in funding sources net of lending opportunities, and during 2004 most of the earning asset growth of Alabama National was in loans and leases and the securities portfolio remained relatively flat, excluding the 2004 acquisitions. Management attempts to maintain earning asset growth commensurate with its funding growth and with its overall growth plans. At December 31, 2004, the securities portfolio totaled $1.20 billion, including securities held to maturity with an amortized cost of $568.5 million and securities available for sale with a market value of $631.9 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,
	2004				2003				2002
	Cost		Market		Cost		Market		Cost		Market
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
U.S. Government corporations and agencies		24,207		24,003		23,962		24,012		42,211		42,225
State and political subdivisions		15,569		15,866		1,553		1,603		3,704		3,836
Mortgage backed securities		528,717		526,733		245,520		245,921		309,530		311,751

Total	$	568,493	$	566,602