<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  ____________

                                   FORM 10-Q
                                        
       [  ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 1998

                                       OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                          Commission File No. 0-25160

                        ALABAMA NATIONAL BANCORPORATION
                        -------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

       DELAWARE                                        63-1114426
       --------                                        ----------
(State of Incorporation)                  (I.R.S. Employer Identification No.)

            1927 FIRST AVENUE NORTH, BIRMINGHAM, ALABAMA 35203-4009
            -------------------------------------------------------
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (205) 583-3654
                                                     --------------

              ----------------------------------------------------
              (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
                         IF CHANGED SINCE LAST REPORT)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
  THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
    REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
                       REQUIREMENTS FOR THE PAST 90 DAYS.

                                YES    X     NO
                                    -------     -------

     INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
          CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

          CLASS                               OUTSTANDING AT AUGUST 11, 1998
          -----                               ------------------------------
COMMON STOCK, $1.00 PAR VALUE                            9,215,120
<PAGE>
 
                                     INDEX

                ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION                                            PAGE
-----------------------------                                            ----

Item 1.   Financial Statements (Unaudited)

          Consolidated statements of condition
          June 30, 1998 and December 31, 1997............................  3

          Consolidated statements of income
          Three month periods ended June 30, 1998 and 1997;
          Six month periods ended June 30, 1998 and 1997.................  4

          Consolidated statements of other comprehensive income
          Three month periods ended June 30, 1998 and 1997;
          Six month periods ended June 30, 1998 and 1997.................  8

          Consolidated statements of cash flows
          Six month periods ended June 30, 1998 and 1997.................  9

          Notes to the unaudited consolidated financial statements
          June 30, 1998.................................................. 10



Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................... 12

PART II. OTHER INFORMATION
--------------------------

Item 4.  Submission of Matters to a Vote of Security Holders............ 25

Item 6.  Exhibits and Reports on Form 8-K............................... 26

SIGNATURES.............................................................. 27

FORWARD LOOKING INFORMATION
---------------------------
Statements contained in this Quarterly Report on Form 10-Q which are not
historical facts are forward-looking statements. In addition, Alabama National
BanCorporation (the "Company" or "ANB"), through its senior management, from
time to time makes forward-looking public statements concerning its expected
future operations and performance and other developments. Such forward-looking
statements are necessarily estimates reflecting the Company's best judgement
based upon current information and involve a number of risks and uncertainties,
and various factors could cause results to differ materially from those
contemplated by such forward looking statements. Such factors could include
those identified from time to time in the Company's Securities and Exchange
filings and other public announcements. With respect to the adequacy of the
allowance for loan losses for the Company, these factors include the rate of
growth in the economy, especially in the Southeast, the relative strength and
weakness in the consumer and commercial credit sectors and in the real estate
markets and the performance of the stock and bond markets.

                                       2
<PAGE>
 
PART I - FINANCIAL INFORMATION

                   ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
               ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                                                    June 30, 1998   December 31, 1997
                                                                                    -------------   -----------------
                                                                                             (In thousands)   
<S>                                                                                  <C>             <C>
 ASSETS                                                                           
   Cash and due from banks ..........................................................  $   76,366     $   46,192
   Interest-bearing deposits in other banks .........................................         209          2,391
   Investment securities (estimated market values of $52,539 and $65,521)............      52,099         65,003
   Securities available for sale ....................................................     178,044        157,504
   Trading securities ...............................................................       1,988            399
   Federal funds sold and securities purchased under resell agreements ..............      56,876         55,545
   Loans ............................................................................     904,787        875,430
   Unearned income ..................................................................      (1,452)        (2,102)
                                                                                       ----------     ----------
   Loans, net of unearned income ....................................................     903,335        873,328
   Allowance for loan losses ........................................................     (14,116)       (13,298)
                                                                                       ----------     ----------
   Net loans ........................................................................     889,219        860,030
   Property, equipment and leasehold improvements, net ..............................      32,714         32,830
   Intangible assets ................................................................       8,476          8,726
   Cash surrender value of life insurance ...........................................      26,503         25,842
   Other assets......................................................................      50,085         70,130
                                                                                       ----------     ----------
   Totals............................................................................  $1,372,579     $1,324,592
                                                                                       ==========     ==========
                                                                                  
 LIABILITIES AND STOCKHOLDERS' EQUITY                                             
   Deposits:                                                                      
     Noninterest bearing ............................................................  $  162,246     $  156,035
     Interest bearing ...............................................................     916,427        817,389
                                                                                       ----------     ----------
   Total deposits ...................................................................   1,078,673        973,424
   Federal funds purchased and securities sold under repurchase agreements ..........     106,042        139,118
   Treasury, tax and loan account....................................................       6,158          6,762
   Short-term borrowings.............................................................      12,900         27,750
   Accrued expenses and other liabilities............................................      34,965         59,451
   Long-term debt ...................................................................      24,572         14,587
                                                                                       ----------     ----------
   Total liabilities ................................................................   1,263,310      1,221,092
                                                                                  
   Common stock, $1 par, authorized 17,500,000 and 10,000,000 shares at June 30, 1998 
     and December 31, 1997, respectively; issued 9,215,120 and 9,198,120 shares at 
     June 30, 1998 and December 31, 1997, respectively................................      9,215          9,198
   Additional paid-in capital .......................................................      65,321         65,241
   Retained earnings ................................................................      34,155         28,696
   Unearned restricted stock ........................................................         (46)           (92)
   Accumulated other comprehensive income, net of tax ...............................         624            457
                                                                                       ----------     ----------
   Total stockholders' equity .......................................................     109,269        103,500
                                                                                       ----------     ----------
   Totals............................................................................  $1,372,579     $1,324,592
                                                                                       ==========     ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements

                                       3
<PAGE>
 
               ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
 
                                                                              For the three months
                                                                                 ended June 30,
                                                                                 -------------
                                                                                1998       1997
                                                                                ----       ----
<S>                                                                            <C>       <C>
 INTEREST INCOME:
   Interest and fees on loans ..............................................  $20,832    $19,340
   Interest on securities ..................................................    3,526      3,223
   Interest on deposits in other banks .....................................       35          3
   Interest on trading securities ..........................................      106         29
   Interest on Federal funds sold and securities purchased                  
     under resell agreements ...............................................    1,296        685
                                                                              -------    -------
 Total interest income......................................................   25,795     23,280
 INTEREST EXPENSE
   Interest on deposits.....................................................   10,102      9,051
   Interest on Federal funds purchased and securities sold
     under repurchase agreements ...........................................    2,108      1,036
   Interest on long and short-term borrowings ..............................      749        786
                                                                              -------    -------
 Total interest expense.....................................................   12,959     10,873
                                                                              -------    -------
 Net interest income .......................................................   12,836     12,407
 Provision for loan losses .................................................      243      1,248
                                                                              -------    -------
 Net interest income after provision for loan losses .......................   12,593     11,159
 
 NONINTEREST INCOME:
   Securities gains ........................................................      145          1
   Service charges on deposit accounts .....................................    1,493      1,315
   Investment services .....................................................    2,699      1,710
   Trust department income..................................................      637        449
   Origination and sale of mortgage loans ..................................      897        372
   Gain on disposal of assets ..............................................      147          6
   Other....................................................................      772        494
                                                                              -------    -------
 Total noninterest income...................................................    6,790      4,347
 
</TABLE>

                                       4
<PAGE>
 
               ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
 
                                                                                 For the three months
                                                                                    ended June 30,
                                                                                    --------------
                                                                                   1998       1997
                                                                                   ----       ----
<S>                                                                             <C>          <C>  
NONINTEREST EXPENSE:
   Salaries and employee benefits.............................................     7,864     6,333
   Occupancy and equipment expenses ..........................................     1,480     1,404
   Other .....................................................................     3,977     3,429
                                                                                 -------   -------
Total noninterest expense ....................................................    13,321    11,166
                                                                                 -------   -------
                                                                              
Income before provision for income taxes .....................................     6,062     4,340
Provision for income taxes....................................................     1,915     1,302
                                                                                 -------   -------
Net income....................................................................   $ 4,147   $ 3,038
                                                                                 =======   =======
Net income per common share (basic) ..........................................    $  .45   $   .33
                                                                                 =======   =======
                                                                              
Weighted average common shares outstanding (basic) ...........................     9,201     9,147
                                                                                 =======   =======
                                                                              
Net income per common share (diluted) ........................................    $  .44   $   .32
                                                                                 =======   =======
                                                                              
Weighted average common and common equivalent shares outstanding (diluted)....     9,480     9,456
                                                                                 =======   =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements

                                       5
<PAGE>
 
               ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
 
                                                                        For the six months
                                                                          ended June 30,
                                                                        ------------------
                                                                         1998        1997
                                                                        ------      ------
<S>                                                                    <C>        <C>
 
 INTEREST INCOME:
   Interest and fees on loans ......................................  $40,791    $38,166
   Interest on securities...........................................    7,008      6,255
   Interest on deposits in other banks .............................       64          5
   Interest on trading securities ..................................      158         69
   Interest on Federal funds sold and securities purchased          
     under resell agreements .......................................    2,149      1,291
                                                                     --------   --------
 Total interest income..............................................   50,170     45,786
 INTEREST EXPENSE                                                   
   Interest on deposits.............................................   19,782     17,875
   Interest on Federal funds purchased and securities sold          
     under repurchase agreements ...................................    3,748      1,941
   Interest on long and short-term borrowings ......................    1,587      1,416
                                                                     --------   --------
 Total interest expense.............................................   25,117     21,232
                                                                     --------   --------
 Net interest income ...............................................   25,053     24,554
 Provision for loan losses .........................................      523      1,749
                                                                     --------   --------
 Net interest income after provision for loan losses ...............   24,530     22,805
                                                                    
 NONINTEREST INCOME:                                                
   Securities gains ................................................      173         12
   Service charges on deposit accounts .............................    2,914      2,732
   Investment services .............................................    5,788      3,663
   Trust department income..........................................    1,057        824
   Origination and sale of mortgage loans ..........................    1,699        632
   Gain on disposal of assets ......................................      280          7
   Other............................................................    1,642      1,171
                                                                     --------   --------
 Total noninterest income...........................................   13,553      9,041
 
</TABLE>

                                       6
<PAGE>
 
               ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
 
                                                                              For the six months
                                                                                ended June 30,
                                                                                --------------
                                                                               1998      1997
                                                                               ----      ----- 
<S>                                                                         <C>       <C>
 NONINTEREST EXPENSE:
   Salaries and employee benefits..........................................    15,696    12,692
   Occupancy and equipment expenses .......................................     2,965     2,823
   Other ..................................................................     7,661     7,003
                                                                              -------   -------
 Total noninterest expense ................................................    26,322    22,518
                                                                              -------   -------
                                                                           
 Income before provision for income taxes .................................    11,761     9,328
 Provision for income taxes................................................     3,644     2,955
                                                                              -------   -------
 Net income................................................................   $ 8,117   $ 6,373
                                                                              =======   =======

Net income per common share (basic) .......................................   $   .88   $   .70
                                                                              =======   =======
                                                                           
Weighted average common shares outstanding (basic) ........................     9,199     9,134
                                                                              =======   =======
                                                                           
Net income per common share (diluted) .....................................   $   .86   $   .67
                                                                              =======   =======
                                                                           
Weighted average common and common equivalent shares outstanding (diluted).     9,470     9,442
                                                                              =======   =======
</TABLE>

See accompanying notes to unaudited consolidated financial statements

                                       7
<PAGE>
 
               ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
       CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (UNAUDITED)
                                (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                           For the three months
                                                                              ended June 30,
                                                                             ----------------
                                                                              1998      1997
                                                                             ------    ------
<S>                                                                          <C>       <C>
 Net income..............................................................    $4,147    $3,038
                                                                             ------    ------

 Other comprehensive income:
   Unrealized gains (losses) on securities available for sale arising 
    during the period....................................................       (25)      960

 Less: Reclassification adjustment for net gains included in net income..       (15)       (1)
                                                                             ------    ------

 Other comprehensive income (loss), before tax...........................       (40)      959

 Provision for (benefit of) income taxes related to items of
   other comprehensive income ...........................................       (15)      355
                                                                             ------    ------

 Other comprehensive income (loss), net of tax...........................       (25)      604

 Comprehensive income....................................................    $4,122    $3,642
                                                                             ======    ======

                                                                            For the six months 
                                                                              ended June 30,     
                                                                             ----------------     
                                                                              1998      1997     
                                                                             ------    ------      
 Net income..............................................................    $8,117    $6,373
                                                                             ------    ------

 Other comprehensive income:
   Unrealized gains on securities available for sale arising 
    during the period....................................................       308       136

 Less: Reclassification adjustment for net gains included in net income..       (43)      (12)
                                                                             ------    ------

 Other comprehensive income, before tax..................................       265       124

 Provision for income taxes related to items of
   other comprehensive income ...........................................        98        46
                                                                             ------    ------

 Other comprehensive income, net of tax..................................       167        78
                                                                             ------    ------

 Comprehensive income....................................................    $8,284    $6,451
                                                                             ======    ======
</TABLE>

See accompanying notes to unaudited consolidated financial statements

                                       8
<PAGE>
 
               ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                     For the six months
                                                                                        ended June 30,
                                                                                    --------------------
                                                                                      1998        1997
                                                                                    --------    --------
                                                                                       (In thousands)
<S>                                                                                 <C>         <C>
 NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES................................    $  4,561    $  4,586
                                                                         
 CASH FLOWS FROM INVESTING ACTIVITIES:                                   
 Purchases of investment securities.............................................        (989)          -
 Proceeds from maturities of investment securities..............................      13,895      13,122
 Purchases of securities available for sale.....................................     (60,347)    (33,712)
 Proceeds from sale of securities available for sale............................          67       2,250
 Proceeds from maturities of securities available for sale......................      39,836       3,969
 Net decrease in interest bearing deposits in other banks.......................       2,182          63
 Net increase in Federal funds sold and securities purchased             
   under resell agreements......................................................      (1,331)     (2,356)
 Net increase in loans .........................................................     (30,762)    (23,988)
 Purchases of property, equipment, and leasehold improvements...................      (1,129)     (1,884)
 Proceeds from sale of property, equipment, and leasehold improvements..........          48           1
 Proceeds from sale of assets...................................................           -          46
                                                                                    --------    --------
 Net cash used by investing activities..........................................     (38,530)    (42,489)
                                                                                    --------    --------
                                                                         
 CASH FLOWS FROM FINANCING ACTIVITIES:                                   
 Net increase in deposits ......................................................     105,249      77,452
 Decrease in Federal funds purchased and securities sold                 
   under agreements to repurchase...............................................     (33,076)    (25,781)
 Net decrease in short and long-term borrowings and capital leases..............      (5,469)    (11,240)
 Exercise of stock options......................................................         100         205
 Dividends on common stock......................................................      (2,658)     (1,484)
 Repurchase fractional shares...................................................          (3)         (3)
                                                                                    --------    --------
 Net cash provided by financing activities......................................      64,143      39,149
                                                                                    --------    --------
                                                                         
 Decrease in cash and cash equivalents..........................................      30,174       1,246
 Cash and cash equivalents, beginning of period.................................      46,192      48,128
                                                                                    --------    --------
 Cash and cash equivalents, end of period.......................................    $ 76,366    $ 49,374
                                                                                    ========    ========
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                       
 Cash paid for interest ........................................................    $ 25,149    $ 21,242
                                                                                    ========    ========

 Cash paid for income taxes.....................................................    $  4,014    $  3,907
                                                                                    ========    ========
                                                                         
 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES     
 Acquisition of collateral in satisfaction of loans.............................    $  1,050    $    335
                                                                                    ========    ========
 Adjustment to market value of securities available for sale, net        
   of deferred income taxes.....................................................    $    167    $     78
                                                                                    ========    ========
</TABLE>

See accompanying notes to unaudited consolidated financial statements

                                       9
<PAGE>
 
                ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
            NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 1998

NOTE A - BASIS OF PRESENTATION
------------------------------

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.  Operating results for the six months ended June 30, 1998 are
subject to year-end audit and are not necessarily indicative of the results of
operations to be expected for the year ending December 31, 1998.  These interim
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's Form 10-K
for the year ended December 31, 1997.

NOTE B - COMMITMENT AND CONTINGENCIES
-------------------------------------

The Company's subsidiary banks make loan commitments and incur contingent
liabilities in the normal course of business which are not reflected in the
consolidated statements of condition.

NOTE C - RECENTLY ISSUED PRONOUNCEMENTS
---------------------------------------

Comprehensive Income

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. This Statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income includes all
changes in equity during a period, excluding investments by and distributions to
stockholders. Under Statement 130, the Company will report changes in realized
gains and losses attributable to available for sale securities as components of
comprehensive income. This Statement is effective for fiscal years beginning
after December 15, 1997, and requires comparative financial information
presented for prior periods to be reclassified to conform to the requirements of
the statement.  As a result of implementing Statement 130, the Company recorded
other comprehensive income, net of taxes, of $167,000 and $78,000 for the six
months ended June 30, 1998 and 1997, respectively. These amounts had previously
been reported as a direct change in stockholders equity and relate to the
change in unrealized gains (losses) on securities available for sale.
 
Segment Reporting

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures About Segments of a Business Enterprise and Related Information
("Statement 131"). Statement 131, effective for fiscal years beginning after
December 15, 1997, establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Early application is permitted, but is
not required, and comparative information for interim periods in the initial
year of application must be reported in statements for interim periods in the
second year of application.

Pensions and Other Postretirement Benefits

In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits
("Statement 132"). Statement 132, effective for fiscal years beginning after
December 15, 1997, standardizes the disclosure requirements for pensions and
other postretirement benefits, eliminates certain disclosures, and requires
additional information on changes in the benefit obligations and fair values of
plan assets. Restatement of disclosures for previous periods is required.

Accounting for Derivatives

On June 15, 1998, the FASB issued Statement of Financial Accounting Standards 
No. 133, "Accounting for Derivative Instruments and Hedging Activities," 
(Statement 133) which standardizes the accounting for derivative instruments by 
requiring that all derivatives be recognized as assets and liabilities and 
measured at fair value.  This statement is effective for fiscal years beginning 
after June 15, 1999.
                                       10
<PAGE>
 
NOTE D-MERGERS AND ACQUISITIONS
-------------------------------

On May 29, 1998, Public Bank Corporation ("Public"), a one bank holding company
headquartered in St. Cloud Florida, was merged with and into the Company (the
"Public Merger"). Pursuant to the Public Merger, each share of Public common
stock was converted into .2353134 shares of the Company's common stock for a
total of 549,913 shares of the Company's common stock issued to Public
shareholders. The Public Merger was accounted for as a pooling of interests.

Separate results of ANB and Public are presented below:

<TABLE> 
<CAPTION> 
                          Three months ended   Three months ended     Six months ended     Six months ended
                             June 30, 1998       June 30, 1997         June 30, 1998         June 30, 1997
                          ------------------   ------------------     ----------------     ----------------
<S>                       <C>                  <C>                    <C>                  <C> 
Net interest income            
    ANB                       $12,212              $11,827                $23,791               $23,377
    Public                        624                  580                  1,282                 1,177
                              -------              -------                -------               ------- 
As currently reported         $12,836              $12,407                $25,053               $24,554

Net income
    ANB                       $ 3,925              $ 2,827                $ 7,654               $ 5,962
    Public                        222                  211                    463                   411
                              -------              -------                -------               ------- 
As currently reported         $ 4,147              $ 3,038                $ 8,117               $ 6,373
</TABLE> 

On June 8, 1998, the Company entered into a merger agreement (the "CFC Merger
Agreement") with Community Financial Corporation ("CFC"), headquartered in
Mableton Georgia. Under terms of the CFC Merger Agreement, CFC will be merged
with and into the Company. The Company will issue approximately 1,076,000 shares
of Company common stock to existing CFC shareholders on a ratio of 0.351807
shares of Company common stock for each share of CFC common stock. Upon
consummation, Georgia State Bank, CFC's operating bank subsidiary, will become a
wholly owned subsidiary of the Company. CFC had assets of $123.7 million at June
30, 1998. The merger with CFC is expected to be completed by October 31, 1998,
subject to CFC shareholder approval and certain regulatory approvals, and is
expected to be accounted for as a pooling of interests.

NOTE E-EARNINGS PER SHARE

The following table reflects the reconciliation of the numerator and denominator
of the basic earnings per share computation to the diluted earnings per share 
computation for the 1998 and 1997 six months and the 1998 and 1997 quarters.


                        ALABAMA NATIONAL BANCORPORATION
                 COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
                   (In thousands, except per share amounts)
                   ----------------------------------------
<TABLE>
<CAPTION>
                                                                           PER SHARE
                                                          INCOME   SHARES   AMOUNT
<S>                                                      <C>       <C>     <C>  
 THREE MONTHS ENDED JUNE 30, 1998
 Basic EPS net income .................................   $4,147   9,201    $0.45
                                                                            =====
 Effect of dilutive securities options ................        -     279
                                                          ------   -----
 Diluted EPS...........................................   $4,147   9,480    $0.44
                                                          ======   =====    =====
                                                  
 THREE MONTHS ENDED JUNE 30, 1997                 
 Basic EPS net income .................................   $3,038   9,147    $0.33
                                                                            =====
 Effect of dilutive securities options ................        -     309
                                                          ------   -----
 Diluted EPS...........................................   $3,038   9,456    $0.32
                                                          ======   =====    =====
                                                  
 SIX MONTHS ENDED JUNE 30, 1998                   
 Basic EPS net income .................................   $8,117   9,199    $0.88
                                                                            =====
 Effect of dilutive securities options ................        -     271
                                                          ------   -----
 Diluted EPS...........................................   $8,117   9,470    $0.86
                                                          ======   =====    =====
                                                  
 SIX MONTHS ENDED JUNE 30, 1997                   
 Basic EPS net income .................................   $6,373   9,134    $0.70
                                                                            =====
 Effect of dilutive securities options ................        -     308
                                                          ------   -----
 Diluted EPS...........................................   $6,373   9,442    $0.67
                                                          ------   -----    -----
 </TABLE>



                                       11
<PAGE>
 
                 ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                        
BASIS OF PRESENTATION
---------------------

The following is a discussion and analysis of the consolidated financial
condition of the Company at June 30, 1998, and the results of its operations for
the three and six month periods ended June 30, 1998 and 1997. On November 30,
1997, First American Bancorp ("FAB"), a one bank holding company headquartered
in Decatur, Alabama, was merged with and into the Company, pursuant to which
each share of FAB common stock was converted into .7199 shares of the Company's
common stock, for a total of 2,071,966 shares of Company common stock issued to
FAB shareholders. On May 29, 1998, Public Bank Corporation ("Public"), a one
bank holding company headquartered in St. Cloud Florida, was merged with and
into the Company, pursuant to which each share of Public common stock was
converted into .2353134 shares of the Company's common stock, for a total of
549,913 shares of Company common stock issued to Public shareholders. The FAB
and Public Mergers were each accounted for as a pooling of interests and
accordingly, financial statements for all periods have been restated to reflect
the results of operations of the Company on a combined basis from the earliest
period presented, except for dividends per share.

This information should be read in conjunction with the Company's unaudited
consolidated financial statements and related notes appearing elsewhere in this
report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.

PERFORMANCE OVERVIEW
--------------------

The Company's net income was $4.15 million for the second quarter of 1998 (the
"1998 quarter") compared to $3.04 million for the second quarter of 1997 (the
"1997 quarter").  Net income for the six month period ended June 30, 1998 (the
"1998 six months") was $8.12 million compared to $6.37 million for the six
months ended June 30, 1997 (the "1997 six months").  Net income per diluted
common share for the 1998 and 1997 quarters was $.44 and $.32, respectively.
For the 1998 six months, net income per diluted common share was $.86 compared
to $.67 for the 1997 six months.

The annualized return on average assets for the Company was 1.19% for the 1998
six months compared to 1.10% for the 1997 six months.  The annualized return on
average stockholders' equity increased for the 1998 six months to 15.18%, as
compared to 13.25% for the 1997 six months. Book value per share at June 30,
1998 was $11.86, an increase of $.61 from December 31, 1997. Tangible book value
per share at June 30, 1998 was $10.94, an increase of $.64 from year end 1997.
The Company paid cash dividends of $.30 on common shares in the 1998 six
months, compared to $.23 on common shares in the 1997 six months.

NET INCOME
----------

The principal reason for the increase in net income for the 1998 quarter and the
1998 six months, compared to the same periods in 1997, was the growth in fee
based divisions of the Company and a reduction in the provision for loan losses.
Total noninterest income increased by $2.4, or 56.2%, to $6.8 million during the
1998 quarter from $4.3 million during the 1997 quarter. Total noninterest income
increased to $13.6 million during the 1998 six months from $9.0 million during
the 1997 six months, an increase of $4.5 million, or 49.9%.  As a result of 
eliminating the indirect dealer lending and sub-prime lending portfolios 
associated with FAB, the Company recorded a provision for loan losses of
$243,000 during the 1998 quarter, compared with $1.2 million during the 1997
quarter and a provision for loan losses of $523,000 during the 1998 six months
compared with $1.7 million during the 1997 six months.

The largest component of the Company's net income is its net interest income,
which is the difference between the income earned on assets and the interest
paid on deposits and borrowings used to support such assets. The Company's net
interest income totaled $12.8 million during the 1998 quarter, an increase of
$429,000 over the 1997 quarter. During the 1998 six months, net interest income
totaled $25.1 million, an increase of $499,000 over the 1997 six months. The
Company's net interest income increased primarily as a result of the recovery of
interest associated with the collection of previously charged-off loans totaling
$523,000 during the 1998 quarter and $567,000 during the 1998 six months.
Average earning assets for the 1998 six months increased by approximately $134.4
million and average interest-bearing liabilities increased by approximately
$136.9 million. The Company's net interest income increased because of an
increase in average loans, despite faster growth of interest-bearing liabilities
compared with interest earning assets. The average taxable equivalent rates
earned on assets were 8.43% for the 1998 six months compared to 8.68% for the
1997 six months. The average rates paid on
                                       12
<PAGE>
 
interest-bearing liabilities were 4.78% for the 1998 six months compared to
4.65% for the 1997 six months. Accordingly, the net interest margin for the 1998
six months was 4.17% compared to 4.60% for the 1997 six months. Absent a change 
in the interest rate environment, management expects continued pressure on the 
net interest margin.

The following table depicts, on a taxable equivalent basis for the 1998 and 1997
six months, certain information related to the Company'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 balance
of the associated assets or liabilities.

                AVERAGE BALANCES, INCOME AND EXPENSES AND RATES
                (AMOUNTS IN THOUSANDS, EXCEPT YIELDS AND RATES)
<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED JUNE 30,
                                              ------------------------------------------------------------------
                                                              1998                             1997
                                              --------------------------------   -------------------------------
                                                AVERAGE      INCOME/    YIELD/    AVERAGE     INCOME/     YIELD/
ASSETS:                                         BALANCE      EXPENSE     RATE     BALANCE     EXPENSE      RATE
                                              -----------   ---------   ------   ----------   ---------   ------
<S>                                            <C>          <C>         <C>       <C>         <C>         <C>
 Earning assets:
 Loans (1) (3)...............................  $  891,015    $40,850     9.17%   $  821,478    $38,242     9.31%
 Securities:
  Taxable....................................     194,878      6,193     6.36       167,009      5,386     6.45
  Tax exempt.................................      31,566      1,235     7.82        30,832      1,317     8.54
 Cash balances in other banks................       2,158         64     5.93           172          5     5.81
 Funds sold..................................      76,105      2,149     5.65        44,565      1,291     5.79
 Trading account securities..................       5,348        158     5.91         2,588         69     5.33
                                               ----------    -------             ----------    -------
     Total earning assets (2)................   1,201,070     50,649     8.43     1,066,644     46,310     8.68
                                               ----------    -------             ----------    -------
 Cash and due from banks.....................      45,538                            40,260
 Premises and equipment......................      30,917                            30,628
 Other assets................................      98,782                            36,766
 Allowance for loan losses...................     (13,551)                          (11,612)
                                               ----------                        ----------
  Total assets...............................  $1,362,756                        $1,162,686
                                               ----------                        ----------

 LIABILITIES:
 Interest-bearing liabilities:
   Interest-bearing transaction accounts.....  $  135,350      1,873     2.77    $  154,955      2,267     2.93
   Savings deposits..........................     270,134      5,194     3.85       197,906      3,506     3.54
   Time deposits.............................     454,875     12,715     5.59       441,013     12,102     5.49
   Funds purchased...........................     138,873      3,748     5.40        73,178      1,941     5.30
   Other short-term borrowings...............      35,342      1,083     6.13        31,320        958     6.12
   Long-term debt............................      16,454        504     6.13        15,775        458     5.81
                                               ----------    -------             ----------    -------
     Total interest-bearing liabilities......   1,051,028     25,117     4.78       914,147     21,232     4.65
                                               ----------    -------     ----    ----------    -------     ----
 Demand deposits.............................     158,189                           136,687
 Accrued interest and other liabilities......      46,619                            15,687
 Stockholders' equity........................     106,920                            96,166
                                               ----------                        ----------
     Total liabilities and stockholders'
      equity.................................  $1,362,756                        $1,162,687
                                               ==========                        ==========

 Net interest spread.........................                            3.65%                             4.03%
                                                                         ====                              ====
 Net interest income/margin on
  a taxable equivalent basis.................                 25,532     4.25%                  25,078     4.70%
                                                                         ====                              ====
 Tax equivalent adjustment (2)...............                    479                               524
                                                             -------                           -------
 Net interest income/margin..................                $25,053     4.17%                 $24,554     4.60%
                                                             =======     ====                  =======     ====
</TABLE>
---------
(1) Average loans include nonaccrual loans. All loans and deposits are domestic.

                                       13
<PAGE>
 
(2)  Tax equivalent adjustments are based upon assumed tax rate of 34%, and do
     not reflect the disallowance for Federal income tax purposes of interest
     expense related to certain tax exempt assets.
(3)  Fees in the amount of $1,107,000 and $1,212,000 are included in interest
     and fees on loans for the six months ended June 30, 1998 and 1997,
     respectively.

                                       14
<PAGE>
 
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 the 1998 six months
compared to the 1997 six months.  For the purposes of this table, changes which
are not solely attributable to volume or rate are allocated to volume and rate
on a pro rata basis.

<TABLE>
<CAPTION>
 
                  ANALYSIS OF CHANGES IN NET INTEREST INCOME
                            (AMOUNTS IN THOUSANDS)
 
                                                         JUNE 30,
                                               -----------------------------
                                                   1998 COMPARED TO 1997
                                                      VARIANCE DUE TO
                                               -----------------------------                                              
                                                 VOLUME  YIELD/RATE   TOTAL
                                               -----------------------------
<S>                                           <C>          <C>        <C>
 EARNING ASSETS:
 Loans......................................      $3,191    $  (583)   $2,608
 Securities:
   Taxable..................................         883        (76)      807
   Tax exempt...............................          31       (113)      (82)
 Cash balances in other banks...............          59          -        59
 Funds sold.................................         890        (32)      858
 Trading account securities.................          80          9        89
                                                  ------    -------    ------
      Total interest income.................       5,134       (795)    4,339
 
 INTEREST-BEARING LIABILITIES:
 Interest-bearing transaction accounts......        (275)      (119)     (394)
 Savings and money market deposits..........       1,361        327     1,688
 Time deposits..............................         388        225       613
 Funds purchased............................       1,769         38     1,807
 Other short-term borrowings................         123          2       125
 Long-term debt.............................          20         26        46
                                                  ------    -------    ------
       Total interest expense...............       3,386        499     3,885
                                                  ------    -------    ------
       Net interest income on  a taxable
         equivalent basis...................      $1,748    $(1,294)      454
                                                  ======    =======
 Taxable equivalent adjustment..............                               45
                                                                       ------
 Net interest income........................                           $  499
                                                                       ======
</TABLE>


Net revenue from earning assets during the 1998 six months increased $499,000 or
2.0%, over the corresponding period in 1997 attributable to the growth in loan
volume.

The provision for loan losses represents a charge to current earnings necessary
to maintain the allowance for loan losses at an appropriate level based on
management's analysis of the potential risk in the loan portfolio.  The amount
of the provision is a function of the level of loans outstanding, the level of
non-performing loans, historical loan loss experience, the amount of loan losses
actually charged against the allowance during a given period and current and
anticipated economic conditions.  The provision for loan losses was $243,000 for
the 1998 quarter, compared with $1.2 million in the 1997 quarter. The provision
for loan losses was $523,000 for the 1998 six months, compared to $1.7 million
in the 1997 six months.  The ability to establish a lower provision in the 1998 
quarter and 1998 six months relates to elimination of the indirect automobile
lending and sub-prime lending portfolios associated with FAB. In addition, the
Company's loan loss experience was favorable in the first six months of 1998,
with recoveries exceeding charge-offs by $295,000 for the 1998 six months. The
allowance for loan losses as a percentage of outstanding loans, net of unearned
income, was 1.56% at June 30, 1998, compared to 1.52% at December 31, 1997.

                                       15
<PAGE>
 
Because of the inherent uncertainty of assumptions made during the assessment
process, there can be no assurance that loan losses in future periods will not
exceed the allowance for loan losses or that additional allocations to the
allowance will not be required.  See Asset Quality.
                                     ------------- 

Total noninterest income for the 1998 quarter was $6.8 million, compared to $4.3
million for the 1997 quarter. For the 1998 six months, noninterest income
increased to $13.6 million, compared to $9.0 million for the 1997 six months.
Noninterest income includes service charges on deposits, investment services
revenues, trust department revenues, and fees relating to the sale and
origination of mortgage loans. Service charges on deposits for the 1998 quarter
were $1.5 million, compared with $1.3 million for the 1997 quarter. For the 1998
six months, service charges were $2.9 million, compared with $2.7 million for
the 1997 six months. Reflecting good demand for debt securities, revenue in the
investment services division totaled $2.7 million in the 1998 quarter and $1.7
million the 1997 quarter, and totaled $5.8 million in the 1998 six months,
compared to $3.7 million in the 1997 six months. Trust fees increased $188,000
in the 1998 quarter compared to the 1997 quarter and increased $233,000 for the
1998 six months, when compared with the 1997 six months. Fees relating to the
sale and origination of mortgage loans totaled $897,000 in the 1998 quarter
compared with $372,000 in the 1997 quarter and $1.7 million in the 1998 six
months compared with $632,000 during the 1997 six months. Other noninterest
income increased $278,000 in the 1998 quarter when compared to the 1997 quarter
and increased $471,000 for the 1998 six months when compared with the 1997 six
months.

Noninterest expense was $13.3 million for the 1998 quarter, compared to $11.2
million for the 1997 quarter. For the 1998 six months, noninterest expense was
$26.3 million, compared to $22.5 million for the 1997 six months. Noninterest
expense includes salaries and employee benefits, occupancy and equipment
expenses and other expenses. Salaries and employee benefits were $7.9 million
for the 1998 quarter, compared to $6.3 million for the 1997 quarter. For the
1998 six months, salaries and employee benefits were $15.7 million compared to
$12.7 million in the 1997 six months. The increase in salaries and employee
benefits is primarily attributable to additional sales volume in the investment
services and mortgage origination divisions of the Company, as much of the
compensation in these divisions is commission-based. Occupancy and equipment
expense totaled $1.5 million in the 1998 quarter and $1.4 million in the 1997
quarter. For the 1998 six months, occupancy and equipment expenses totaled $3.0
million compared to $2.8 million during the 1997 six months. Other noninterest
expense increased to $4.0 million in the 1998 quarter, compared with $3.4
million in the 1997 quarter. Other noninterest expense was $7.7 million in the
1998 six months and $7.0 million in the 1997 six months. Other noninterest
expense includes merger related charges of $196,000 and $271,000 in the 1998
quarter and 1998 six months, respectively.

Income tax expense was $1.9 million for the 1998 quarter compared to $1.3 for
the 1997 quarter, reflecting higher taxable income.  For the 1998 six months,
income tax expense was $3.6 million, compared to $3.0 million for the 1997 six
months, which also reflects higher taxable income.  The effective tax rates for
the 1998 quarter and the 1998 six months were 31.6% and 31.0%, respectively.


EARNING ASSETS
--------------

Loans comprised the largest single category of the Company's earning assets on
June 30, 1998.  Loans, net of unearned income, were $903.3 million or 65.8% of
total assets at June 30, 1998, compared to $873.3 million or 65.9% at December
31, 1997.  Loans grew $30 million, or 3.4%, during the 1998 six months.

Investment securities decreased $12.9 million in the 1998 six months,
substantially all of which is attributable to paydowns of mortgage backed
securities.

Securities available for sale increased $20.5 million in the 1998 six months.
Purchases of available for sale securities totaled $60.3 million and maturities
and calls of available for sale securities totaled $40.0 million.  Write up to

                                       16
<PAGE>
 
estimated market value of available for sale securities totaled $167,000, net of
income taxes, during the 1998 six months.

Trading account securities, which totaled $2.0 million at June 30, 1998, are
securities owned by the Company prior to delivery to the Company's customers. It
is the policy of the Company to limit positions in such securities to reduce its
exposure to market and interest rate changes . Federal funds sold and securities
purchased under agreements to resell totaled $56.9 million at June 30, 1998 and
$55.5 at December 31, 1997.

DEPOSITS AND OTHER FUNDING SOURCES
----------------------------------

Deposits increased $105.2 million from year-end 1997, to $1.1 billion at June
30, 1998. Primarily all of the growth in deposits are related to consumer
savings and money market accounts.

Federal funds purchased and securities sold under agreements to repurchase
totaled $106.0 million at June 30, 1998, a decrease of $33.1 million from
December 31, 1997.  The Treasury tax and loan account decreased to $6.2 million
at June 30, 1998, compared with $6.8 million at December 31, 1997.  Short-term
borrowings at June 30, 1998 totaled $12.9 million, representing a note payable
to an independent bank. The note payable balance was $15.3 million at 
December 31, 1997.

The Company's long-term debt at June 30, 1998 and December 31, 1997 is
summarized as follows:

<TABLE> 
<CAPTION> 
                                                                             June 30,    December 31,
                                                                               1998         1997
                                                                             --------    ------------
<S>                                                                           <C>         <C> 

FHLB debt due May 24, 1999; varies with LIBOR; collateralized
by FHLB stock and certain first mortgage loans.............................  $ 9,200      $ 9,200

FHLB debt due July 11, 2002; bears interest at 5.78%; convertible
at the option of the FHLB on July 12, 1999 to a three-month LIBOR
advance; collateralized by FHLB stock and certain first mortgage loans.....    5,000        5,000

FHLB debt due June 18, 2003; bears interest at 5.40%; convertible
at the option of the FHLB on June 18, 2000 to a three-month LIBOR
advance; collateralized by FHLB stock and certain first mortgage loans.....    5,000

FHLB debt due March 26, 2008; bears interest at 5.51%; convertible
at the option of the FHLB on March 26, 2003 to a three-month LIBOR
advance; collateralized by FHLB stock and certain first mortgage loans.....    5,000

Capital lease obligations..................................................      372          387
                                                                             -------      -------
                                                                             $24,572      $14,587
                                                                             =======      =======
</TABLE> 

ASSET QUALITY
-------------

Nonperforming loans are comprised of loans past due 90 days or more and still
accruing interest, loans accounted for on a nonaccrual basis and loans in which
the terms have been restructured to provide a reduction or deferral of interest
or principal because of a deterioration in the financial position of the
borrower.  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 the collection of
interest is doubtful.  A delinquent loan is generally placed on nonaccrual
status when it becomes 90 days or more past due.  When a loan is placed on
nonaccrual status, all interest 

                                       17
<PAGE>
 
which has been accrued on the loan but remains unpaid is reversed and deducted
from earnings as a reduction of reported interest income. No additional interest
is accrued on the loan balance until the 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 could necessitate additional charges to earnings.

At June 30, 1998, nonperforming assets totaled $5.7 million, a decrease of $1.3
million from December 31, 1997.  Nonperforming assets as a percentage of loans
plus other real estate were .63% at June 30, 1998 compared to .80% at December
31,1997. The reduction in the level of nonperforming assets is consistent with 
the elimination of the indirect automobile and sub-prime lending portfolios 
associated with the FAB.

                                       18
<PAGE>
 
                                      NONPERFORMING ASSETS
                            (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
                                                                  June 30,      December 31,
                                                                   1998             1997
                                                                 ---------       ----------
<S>                                                              <C>             <C>
 Nonaccrual loans.............................................    $ 3,751          $ 4,178
 Restructured loans...........................................        556            1,052
 Loans past due 90 days or more and still accruing............          -                -
                                                                  -------          -------
   Total nonperforming loans..................................      4,307            5,230

 Other real estate owned......................................      1,360            1,756
                                                                  -------          -------
   Total nonperforming assets.................................    $ 5,667          $ 6,986
                                                                  =======          =======

 Allowance for loan losses to period-end loans................       1.56%            1.52%

 Allowance for loan losses to period-end
   nonperforming loans........................................     327.75           254.26

 Allowance for loan losses to period-end
   nonperforming assets.......................................     249.09           190.35

 Net charge-offs (recoveries) to average loans................      (0.07)            0.14

 Nonperforming assets to period-end loans
   and other real estate owned................................       0.63             0.80

 Nonperforming loans to period-end loans......................       0.48             0.60

</TABLE>

Net loan recoveries for the 1998 six months totaled $295,000, or .07%
(annualized) of average loans for the period.  The allowance for loan losses as
a percentage of total loans, net of unearned income, was 1.56% at June 30, 1998
compared to 1.52% at December 31, 1997.  The following table analyzes activity
in the allowance for loan losses for the 1998 six months.

                                       19
<PAGE>
 

                   ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
                    FOR THE SIX MONTHS ENDED JUNE 30, 1998
                  (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)

 
 Allowance for loan losses at
      beginning of period.....................   $13,298
 
 Charge-offs:
      Commercial, financial and agricultural..       108
      Real estate - mortgage..................       111
      Consumer................................       786
                                                 -------
       Total charge-offs......................     1,005
                                                 -------
  Recoveries:
      Commercial, financial and agricultural..       822
      Real estate - mortgage..................       225
      Consumer................................       253
                                                 -------
       Total recoveries.......................     1,300
                                                 -------
       Net charge-offs........................      (295)
 
  Provision for loan losses...................       523
                                                 -------
 
  Allowance for loan losses at
      period-end..............................   $14,116
                                                 =======

The loan portfolio is periodically reviewed to evaluate the outstanding loans
and to measure both the performance of the portfolio and the adequacy of the
allowance for loan losses.  This analysis includes a review of delinquency
trends, actual losses and internal credit ratings.  Based on this analysis,
management considers the allowance for loan losses at June 30, 1998 to be
adequate to cover possible loan losses in the portfolio as of that date.
However, because of the inherent uncertainty of assumptions made during the
evaluation process, there can be no assurance that loan losses in future periods
will not exceed the allowance for loan losses or that additional allocations to
the allowance will not be required.

INTEREST RATE SENSITIVITY
-------------------------

The Company 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 its net interest income.  The principal monitoring
technique employed by the Company 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, replacing an asset or
liability at maturity, or by adjusting the interest rate during the life of an
asset or liability.  Managing the amount of assets and liabilities repricing in
the same time interval helps to hedge the risk and minimize the impact of rising
or falling interest rates on net interest income.

The Company evaluates interest sensitivity risk and then formulates guidelines
regarding asset generation and repricing, funding sources and pricing, and off-
balance sheet commitments in order to decrease interest sensitivity risk.  The
Company 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.

                                       20
<PAGE>
 
The following table illustrates the Company's interest rate sensitivity at June
30, 1998, assuming 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)
<TABLE>
<CAPTION>
 
                                                                                     JUNE 30, 1998
                                                    -----------------------------------------------------------------------------
                                                                  AFTER ONE   AFTER THREE
                                                                   THROUGH      THROUGH
                                                    WITHIN ONE      THREE        TWELVE      WITHIN ONE   GREATER THAN
                                                       MONTH        MONTHS       MONTHS         YEAR        ONE YEAR        TOTAL
                                                    ----------     -------      -------      ----------   ------------    ----------
<S>                                                 <C>            <C>          <C>          <C>           <C>            <C>
 ASSETS:
 Earning assets:
  Loans (1).......................................    $397,943       $79,215    $ 141,571     $ 618,729       $280,855    $  899,584
  Securities (2)..................................      26,651        15,339       60,282       102,272        124,550       226,822
  Interest-bearing deposits in
   other banks....................................         209             -            -           209              -           209

  Funds sold......................................      56,876             -            -        56,876              -        56,876
                                                      --------       -------    ---------     ---------       --------    ----------
    Total interest-earning assets.................    $481,679       $94,554    $ 201,853     $ 778,086       $405,405    $1,183,491

 
 LIABILITIES:
 Interest-bearing liabilities:
  Interest-bearing deposits:
   Demand deposits................................    $     -        $     -    $ 177,891     $ 177,891       $      -    $  177,891
   Savings deposits...............................     276,791             -            -       276,791              -       276,791
   Time deposits (3)..............................      71,662        73,620      243,121       388,403         73,342       461,745
  Funds purchased.................................     106,042             -            -       106,042              -       106,042
  Short-term borrowings (4).......................      19,058             -            -        19,058              -        19,058
  Long-term debt..................................       9,202             4           18         9,224         15,348        24,572
                                                      --------       -------    ---------     ---------       --------    ----------
     Total interest-bearing liabilities...........    $482,755       $73,624    $ 421,030     $ 977,409       $ 88,690    $1,066,099
                                                      --------       -------    ---------     ---------       --------    ----------

 
 Period gap.......................................    $ (1,076)      $20,930    $(219,177)    $(199,323)      $316,715
                                                      ========       =======    =========     =========       ======== 

 Cumulative gap...................................    $ (1,076)      $19,854    $(199,323)    $(199,323)      $117,392    $  117,392
                                                      ========       =======    =========     =========       ========    ==========

 Ratio of cumulative gap to total
  earning assets..................................       (0.09)%        1.68%      (16.84)%      (16.84)%         9.92%

</TABLE> 
----------------------------
 (1)  Excludes nonaccrual loans of $3,751,000.
 (2)  Excludes investment equity securities of $5,309,000.
 (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 account of $6,158,000.


                                       21
<PAGE>
 
The Company generally would benefit from increasing market rates of interest
when it has an asset-sensitive gap and generally would benefit from decreasing
market rates of interest when it is liability sensitive.  The Company is
liability sensitive through the one year time frame.  However, the Company's gap
analysis is not a precise indicator of its interest sensitivity position.  The
analysis presents only a static view of the timing of maturities 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 rates are viewed by management as
significantly less interest-sensitive than market-based rates, such as those
paid on non-core deposits.  Accordingly, management believes that a liability-
sensitive gap position is not as indicative of the Company's true interest
sensitivity as it would be for an organization which depends to a greater extent
on purchased funds to support earning assets.  Net interest income may be
affected 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
-----------

The Company's earnings are dependent on its net interest income which is the
difference between interest income earned on all earning assets, primarily loans
and securities, and interest paid on all interest bearing liabilities, primarily
deposits.  Market risk is the risk of loss from adverse changes in market prices
and rates.  The Company's market risk arises primarily from inherent interest
rate risk in its lending, investing and deposit gathering activities.  The
Company 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 the
Company'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 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, imbedded options exist whereby the borrower may elect to
repay the obligation at any time. These imbedded prepayment options make
anticipating the performance of those instruments difficult given changes in
prevailing rates.  At June 30, 1998, mortgage backed securities totaling $183.8
million, or 13.4% of total assets and essentially every loan, net of unearned
income, (totaling  $903.3 million, or 65.8% of total assets), carry such
imbedded options.  Management believes that assumptions used in its simulation
analysis about the performance of financial instruments with such imbedded
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 $1.08 billion, or 78.6%, of total assets at June 30, 1998.
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 the Company in its simulation analysis.
Specifically, the Company'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 effects
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.

                                       22
<PAGE>
 
The following table illustrates the results of simulation analysis used by the
Company to determine the extent to which market risk would have effected the net
interest margin if prevailing interest rates differed from actual rates during
the 1998 six months. Because of the inherent use of estimates and assumptions in
the simulation model used to derive this information, the actual results for the
1998 six months and the future impact of market risk on the Company's net
interest margin may differ from that found in the table.


                                  MARKET RISK
                  (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)

 
                                                         Change from
                                       Net Interest   1997 Net Interest
Change in prevailing Interest Rates    Income Amount    Income Amount
-------------------------------------  -------------  ------------------
 
 + 200 basis points..................        $27,142          8.34 %
 + 100 basis points..................         26,100          4.18  
     0 basis points..................         25,053            --
 - 100 basis points..................         24,254         (3.19)
 - 200 basis points..................         23,455         (6.38)
 

LIQUIDITY AND CAPITAL ADEQUACY
------------------------------

The Company's net loan to deposit ratio was 82.4% at June 30, 1998, compared to
88.4% at year end 1997.  The Company's liquid assets as a percentage of total
deposits were 12.4% at June 30, 1998, compared to 10.7% at year-end 1997.  At
June 30, 1998, the Company had unused federal funds lines of approximately $97.0
million, unused lines at the Federal Home Loan Bank of $53.7 million and an
unused credit line at an independent bank of $7.1 million.   Management analyzes
the level of off-balance sheet assets such as unfunded loan commitments and
outstanding letters of credit as they relate to the levels of cash, cash
equivalents, liquid investments, and available funds lines in an attempt to
minimize the possibility that a potential liquidity shortfall will exist. Based
on this analysis, management believes that the Company has adequate liquidity to
meet short-term operating requirements. However, no assurances can be given in
this regard.

The Company's stockholders' equity increased by $5.8 million from December 31,
1997 to $109.3 million at June 30, 1998.  This increase was attributable to:

 Net income .............................................    $ 8,117,000

 Increase in unrealized gain on securities 
   available for sale, net of deferred income taxes .....        167,000
                                                                         
 Cash dividends declared ................................     (2,658,000)
                                                                         
 Exercise of options ....................................        100,000
                                                                         
 Payment for fractional shares  .........................         (3,000)
                                                                         
 Decrease in unearned restricted stock ..................         46,000
                                                              -----------
                                                                         
   Net increase .........................................     $5,769,000
                                                              ===========


                                       23
<PAGE>
 
A strong capital position is vital to the continued profitability of the Company
because it promotes depositor and investor confidence and provides a solid
foundation for future growth of the organization.  The capital of the Company
and its subsidiary banks (the "Banks") exceeded all prescribed regulatory
capital guidelines at June 30, 1998.  Under the capital guidelines of their
regulators, the Company and the Banks are currently required to maintain a
minimum risk-based total capital ratio of 8%, with at least 4% being Tier 1
capital.  Tier 1 capital consists of common stockholders' equity, qualifying
perpetual preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, less goodwill.  In addition, the Company and the
Banks must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total
assets) of at least 3%, but this minimum ratio is increased by 100 to 200 basis
points for other than the highest rated institutions.  The following table sets
forth the risk-based and leverage ratios of the Company and each subsidiary bank
at June 30, 1998:

<TABLE>
<CAPTION>
 
                                              TIER 1 RISK      TOTAL RISK          TIER 1
                                                  BASED           BASED           LEVERAGE
                                                 ------          -------          -------- 
<S>                                           <C>                <C>              <C>    
 Alabama National BanCorporation..........        8.87 %          10.11%             6.63%
                                                                                         
 National Bank of Commerce of Birmingham..        9.94            11.19              7.40
 Alabama Exchange Bank....................       12.55            13.48              7.02
 Bank of Dadeville........................       12.23            13.12              8.80
 Citizens & Peoples Bank, N.A.............       31.83            32.48             19.78
 First American Bank......................       10.63            11.88              8.95
 First Citizens Bank, N.A.................       13.35            14.50              8.00
 First Gulf Bank..........................        8.48             9.51              7.00
 Public Bank..............................       16.71            17.96              9.45
 Required minimums........................        4.00             8.00              4.00 
</TABLE>

                                       24
<PAGE>
 
Part II Other Information

          Item 4 - Submission of Matters to a Vote of Security-Holders

The Company held its Annual Meeting of Stockholders on April 23, 1998.  At the
meeting, the stockholders of the Company were asked to vote on two matters.  The
first was the election of 13 directors to serve until the next annual meeting of
stockholders and their successors are elected and qualified. The second matter
requiring shareholder approval was a proposed amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of the
Company's common stock from 10,000,000 to 17,500,000 shares. The results of the
shareholder voting on these matters are summarized as follows:

<TABLE>
<CAPTION>
                                                              FOR     AGAINST  ABSTAIN
                                                           ---------  -------  -------
<S>                                                        <C>        <C>      <C>
 Election of directors:

 Dan M. David............................................. 7,140,263    14,261      -

 T. Morris Hackney........................................ 7,140,508    14,016      -

 John H. Holcomb, III..................................... 7,012,508   142,016      -

 John D. Johns............................................ 7,141,708    12,816      -

 John J. McMahon, Jr...................................... 7,019,336   135,188      -

 C. Phillip McWane........................................ 6,882,788   271,736      -

 William D. Montgomery.................................... 7,141,708    12,816      -

 Drayton Nabers, Jr....................................... 7,141,708    12,816      -

 C. Lloyd Nix............................................. 7,141,608    13,916      -

 Victor E. Nichol, Jr..................................... 7,141,708    12,816      -

 G. Ruffner Page, Jr...................................... 7,141,460    13,064      -

 William E. Sexton........................................ 7,141,708    12,816      -

 W. Stancil Starnes....................................... 7,141,708    12,816      -

Approval of amendment to Certificate of Incorporation
increasing authorized shares of Company common stock
to 17,500,000 shares...................................... 7,091,360    55,146   8,018
</TABLE>
                                       
          Item 5 - Other Information

Shareholder proposals submitted to the Company in compliance with SEC Rule 14a-8
(which concerns shareholder proposals that are requested to be included in a 
company's proxy statement) must be received at the Company's executive offices 
on or before December 24, 1998.  Pursuant to SEC Rules 14a-4 and 14a-5 (which, 
among other things, concern the exercise of discretionary voting authority with 
respect to shareholder proposals other than proposals that have been requested 
to be included in the Company's proxy statement) shareholders are advised that 
under the advance notice provisions of the Company's bylaws a shareholder 
proposal will be considered untimely if provided to the Company after February 
14, 1999.


                                       25
<PAGE>
 
                   Item 6 - Exhibits and Reports on Form 8-K

(a)  Exhibits:   Exhibit 3.1 -  Certificate of Incorporation (filed as an
                                Exhibit to the Company's Registration Statement
                                on Form S-1 (Commission File no. 33-83800) and
                                incorporated herein by reference).

                 Exhibit 3.1A - Certificate of Amendment of Certificate of
                                Incorporation (filed as an Exhibit to the
                                Company's Annual Report of Form 10-K for the
                                year ended December 31, 1997 and incorporated
                                herein by reference).

                 Exhibit 3.1B - Certificate of Merger (filed as an Exhibit to
                                the Company's Annual Report of Form 10-K for the
                                year ended December 31, 1997 and incorporated
                                herein by reference).

                 Exhibit 3.1C - Certificate of Amendment of Certificate of
                                Incorporation dated April 23, 1998 (filed as an
                                Exhibit to the Company's Report of Form 10-Q for
                                the quarter ended March 31, 1998 and
                                incorporated herein by reference).

                  Exhibit 3.2 - Bylaws (filed as an Exhibit to the Company's
                                Registration Statement on Form S-1 (Commission
                                File No. 33-83800) and incorporated herein by
                                reference).

                 Exhibit 10.1 - Agreement and Plan of Merger between the Company
                                and Community Financial Corporation dated June
                                8, 1998 (filed as an Exhibit to the Company's
                                Registration Statement on Form S-4, (Commission
                                File No. 333-59813) and is incorporated herein
                                by reference).

                  Exhibit 11 -  Computation of Earnings Per Share

                  Exhibit 27 -  Financial Data Schedules (for SEC use only)

(b)  Reports on Form 8-K
 
     Report on Form 8-K filed June 11, 1998 to report the Company's proposed
     merger with Community Financial Corporation.

                                       26
<PAGE>
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                        ALABAMA NATIONAL BANCORPORATION


DATE:   August 11, 1998  /s/John H. Holcomb, III
        ---------------  -----------------------
                         John H. Holcomb, III, its Chairman and 
                         Chief Executive Officer



DATE:   August 11, 1998  /s/ William E. Matthews, V
        ---------------  ---------------------------
                         William E. Matthews, V, its Executive Vice President
                         and Chief Financial Officer

                                       27