---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---

FORM 10-K/A

Amendment No. 3



---



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



| | For the fiscal year ended December 31, 2006
| | -------------------------------------------

OR



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



| | For the transition period from                      to
| | ------------------------------------------------------

Commission file number: 000-51273



---

NEXITY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 63-0523669                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|3500 Blue Lake Drive Suite 330 Birmingham, AL                  |  | 35243                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(205) 298- 6391

(Registrants telephone number, including area code)



---

None

(Former name, former address
and former fiscal year, if changed since last report)

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



|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of each class                     |  | Name of each exchange on which registered
|Common Stock, $0.01 par value per share |  | The NASDAQ Stock Market LLC              

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act.    Yes ̈No  x

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

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

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer  x                    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.)    Yes ̈No  x

As of June 30, 2006, the aggregate market value of the registrants common stock held by
non-affiliates of the registrant was approximately $96.7 million based on the closing sale price as reported on National Association of Securities Dealers Automated Quotation System National Market.

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                                        |  |                                  
|--------------------------------------- |  | ---------------------------------
|Class                                   |  | Outstanding at September 26,
2007
|Common Stock, $0.01 par value per share |  | 8,098,680 shares                 

DOCUMENTS INCORPORATED BY REFERENCE



|                                                                                 |  |                              
|-------------------------------------------------------------------------------- |  | -----------------------------
|Document                                                                         |  | Parts Into Which
Incorporated
|Proxy Statement for the Annual Meeting of Stockholders to be held April 19, 2007 |  | Part III                     



---



---

Explanatory Note

This Amendment No. 3 to the Annual Report on Form 10-K of Nexity Financial Corporation (the Corporation) amends and restates Item 8 of Amendment No. 2 (Amendment No. 2) of the
Corporations Form 10-K for the fiscal year ended December 31, 2006 filed on March 14, 2007 to revise the Report of Independent Registered Public Accounting Firm to add an explanatory paragraph and dual report date for the restatements to the
financial statements described in Amendment No. 2, to move the paragraph titled Correction of Error, which describes the restatements to the financial statements, from footnote 1 of the consolidated financial statements filed in
Amendment No. 2 to footnote 22 and to update the consent for the Independent Registered Public Accounting Firm.



---

Item 8. Financial Statements and Supplementary Data

MANAGEMENTS STATEMENT OF FINANCIAL RESPONSIBILITY

Management of Nexity Financial Corporation (the
Corporation) and subsidiaries is committed to quality customer service, enhanced shareholder value, financial stability, and integrity in all dealings. Management has prepared the accompanying consolidated financial statements in
conformity with U.S. generally accepted accounting principles. The statements include amounts that are based on managements best estimates and judgments. Other financial information in this report is consistent with the consolidated financial
statements. Both the Chief Executive Officer and the Chief Financial Officer have certified that the Corporations 2006 Annual Report of Form 10-K fully complies with the applicable sections of the Securities Exchange Act of 1934 and that the
information reported therein fairly represents, in all material respects, the financial position and results of operations of the Corporation.

In meeting its responsibility, management relies on its internal control structure that is supplemented by a program of internal audits. The internal control structure is designed to provide reasonable assurance that financial records are
reliable for preparing financial statements and maintaining accountability for assets, and that assets are safeguarded against unauthorized use or disposition. See Managements Report of Internal Control over Financial Reporting in
Item 9A for additional discussion. Mauldin & Jenkins LLCs report on internal control in accordance with the Sarbanes-Oxley Act of 2002 is also included in Item 9A of this Annual Report on Form 10-K.

Mauldin & Jenkins LLC, independent registered public accounting firm, audited the Corporations consolidated financial statements in
accordance with standards of the Public Company Accounting Oversight Board (United States). Mauldin & Jenkins LLC reviews the results of its audit with both management and the Audit Committee of the Board of Directors of the Corporation.
The consolidated financial statements have not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.

The Audit Committee, composed entirely of independent directors, meets periodically with management, the Corporations internal auditors and Mauldin & Jenkins LLC (separately and jointly) to discuss audit, financial reporting
and related matters. Mauldin & Jenkins LLC and the internal auditors have direct access to the Audit Committee.



|                                                 |  |  |  |                                                                   
|------------------------------------------------ |  |  |  | ------------------------------------------------------------------
|Greg L. Lee Chairman and Chief Executive Officer |  |  |  | John J. Moran Executive Vice President and
Chief Financial Officer



2



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Nexity Financial Corporation

Birmingham, Alabama

We have audited the accompanying consolidated balance sheet of Nexity Financial Corporation and Subsidiaries as of December 31, 2006 and
the related consolidated statements of income, changes in stockholders equity and comprehensive income and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Nexity Financial Corporation and Subsidiaries as of December 31, 2005 and for each of the two years in the period ended
December 31, 2005 were audited by other auditors, whose report dated March 16, 2006 expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nexity Financial Corporation and Subsidiaries as of December 31, 2006
and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

As described in Note 22 to the consolidated financial statements, the 2006 consolidated financial statements have been restated for an error in the application of accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Nexity
Financial Corporation and Subsidiaries internal control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 14, 2007 expressed an unqualified opinion on managements assessment of the effectiveness of Nexity Financial Corporation and Subsidiaries internal control
over financial reporting and an unqualified opinion on the effectiveness of Nexity Financial Corporation and Subsidiaries internal control over financial reporting.

/s/    Mauldin & Jenkins, LLC

Birmingham,
Alabama

March 14, 2007, except for Note 22 as to

which
the date is September 17, 2007



3



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Nexity Financial
Corporation:

We have audited the accompanying consolidated balance sheet of Nexity Financial Corporation and subsidiaries as of
December 31, 2005, and the related consolidated statements of income, stockholders equity, and cash flows for each of the two years in the period ended December 31, 2005. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Nexity Financial Corporation and subsidiaries at December 31, 2005, and the consolidated results of their operations and their cash flows for each of the two years in the
period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

/s/    Ernst & Young LLP

Birmingham, Alabama

March 16, 2006



4



---

Nexity Financial Corporation and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                                                            |  |             |             |   |      |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                            |  | December 31 |            
|                                                                                                                                                            |  | 2006        |             |   | 2005 |  
|ASSETS                                                                                                                                                      |  |             |             |   |      |   |             |  
|Cash and due from banks                                                                                                                                     |  | $           | 5,590,753   |   |      | $ | 2,221,766   |  
|Interest-bearing deposits in other banks                                                                                                                    |  |             | 1,904,898   |   |      |   | 2,593,302   |  
|Federal funds sold                                                                                                                                          |  |             | 19,977,025  |   |      |   | 43,508,853  |  
|Investment securities available-for-sale, at fair value                                                                                                     |  |             | 239,532,759 |   |      |   | 209,018,026 |  
|Trading securities, at fair value                                                                                                                           |  |             | 1,998,500   |   |      |   | 0           |  
|Loans, net of unearned income                                                                                                                               |  |             | 605,953,221 |   |      |   | 515,573,188 |  
|Allowance for loan losses                                                                                                                                   |  |             | (7,411,803  | ) |      |   | (6,466,714  | )
|                                                                                                                                                            |  |             |             |   |      |   |             |  
|Net loans                                                                                                                                                   |  |             | 598,541,418 |   |      |   | 509,106,474 |  
|                                                                                                                                                            |  |             |             |   |      |   |             |  
|Premises and equipment, net of accumulated depreciation                                                                                                     |  |             | 977,552     |   |      |   | 1,206,881   |  
|Deferred tax asset                                                                                                                                          |  |             | 3,931,577   |   |      |   | 3,613,706   |  
|Intangible assets                                                                                                                                           |  |             | 910,655     |   |      |   | 910,655     |  
|Accrued interest receivable and other assets                                                                                                                |  |             | 17,656,364  |   |      |   | 12,338,130  |  
|                                                                                                                                                            |  |             |             |   |      |   |             |  
|Total assets                                                                                                                                                |  | $           | 891,021,501 |   |      | $ | 784,517,793 |  
|                                                                                                                                                            |  |             |             |   |      |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                        |  |             |             |   |      |   |             |  
|Liabilities:                                                                                                                                                |  |             |             |   |      |   |             |  
|Deposits:                                                                                                                                                   |  |             |             |   |      |   |             |  
|Demand Deposits                                                                                                                                             |  | $           | 6,677,509   |   |      | $ | 4,300,846   |  
|NOW and money market accounts                                                                                                                               |  |             | 240,368,605 |   |      |   | 249,906,128 |  
|Time deposits $100,000 and over                                                                                                                             |  |             | 140,145,532 |   |      |   | 111,813,710 |  
|Other time and savings deposits                                                                                                                             |  |             | 271,200,816 |   |      |   | 230,648,960 |  
|                                                                                                                                                            |  |             |             |   |      |   |             |  
|Total deposits                                                                                                                                              |  |             | 658,392,462 |   |      |   | 596,669,644 |  
|                                                                                                                                                            |  |            
|Federal funds purchased and securities sold under agreements to repurchase                                                                                  |  |             | 35,000,000  |   |      |   | 560,000     |  
|Long-term borrowings                                                                                                                                        |  |             | 110,000,000 |   |      |   | 105,000,000 |  
|Subordinated debentures                                                                                                                                     |  |             | 12,372,000  |   |      |   | 12,372,000  |  
|Accrued expenses and other liabilities                                                                                                                      |  |             | 10,086,617  |   |      |   | 6,643,944   |  
|                                                                                                                                                            |  |             |             |   |      |   |             |  
|Total liabilities                                                                                                                                           |  |             | 825,851,079 |   |      |   | 721,245,588 |  
|                                                                                                                                                            |  |             |             |   |      |   |             |  
|Stockholders Equity:                                                                                                                                       |  |             |             |   |      |   |             |  
|Preferred stock, $0.01 par value: 5,000,000 shares authorized; shares issued and outstandingnone in 2006 and 2005                                          |  |             | 0           |   |      |   | 0           |  
|Common stock, $0.01 par value; 50,000,000 shares authorized; shares issued and outstanding including treasury stock8,740,680 in 2006 and
8,711,175 in 2005 |  |             | 87,407      |   |      |   | 87,111      |  
|Surplus                                                                                                                                                     |  |             | 62,187,656  |   |      |   | 61,904,905  |  
|Retained earnings                                                                                                                                           |  |             | 9,438,618   |   |      |   | 3,344,057   |  
|Accumulated other comprehensive loss                                                                                                                        |  |             | (1,983,014  | ) |      |   | (2,063,868  | )
|Treasury Stock, at cost365,950 shares in 2006 and 0 shares in 2005                                                                                         |  |             | (4,560,245  | ) |      |   | 0           |  
|                                                                                                                                                            |  |             |             |   |      |   |             |  
|Total stockholders equity                                                                                                                                  |  |             | 65,170,422  |   |      |   | 63,272,205  |  
|                                                                                                                                                            |  |             |             |   |      |   |             |  
|Total liabilities and stockholders equity                                                                                                                  |  | $           | 891,021,501 |   |      | $ | 784,517,793 |  
|                                                                                                                                                            |  |             |             |   |      |   |             |  

The accompanying notes to the consolidated financial statements

are an integral part of these financial statements.



5



---

Nexity Financial Corporation and Subsidiaries

Consolidated Statements of Income



|                                                        |  |                         |            |      |   |            |  |   |            |  
|------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ---------- | -
|                                                        |  | Years ended December 31 |           
|                                                        |  | 2006                    |            | 2005 |   | 2004       | 
|INTEREST INCOME:                                        |  |                         |            |      |   |            |  |   |            |  
|Interest and fees on loans                              |  | $                       | 45,388,240 |      | $ | 31,143,523 |  | $ | 19,819,683 |  
|Interest and dividends on taxable investment securities |  |                         | 11,072,787 |      |   | 9,224,681  |  |   | 8,500,225  |  
|Interest on federal funds sold                          |  |                         | 1,052,508  |      |   | 612,327    |  |   | 187,404    |  
|Other interest income                                   |  |                         | 208,179    |      |   | 158,105    |  |   | 104,870    |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Total interest income                                   |  |                         | 57,721,714 |      |   | 41,138,636 |  |   | 28,612,182 |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|INTEREST EXPENSE:                                       |  |                         |            |      |   |            |  |   |            |  
|Interest on deposits                                    |  |                         | 27,440,923 |      |   | 16,025,312 |  |   | 8,590,820  |  
|Interest on short-term borrowings                       |  |                         | 164,745    |      |   | 119,103    |  |   | 46,323     |  
|Interest on long-term borrowings                        |  |                         | 3,999,689  |      |   | 3,343,197  |  |   | 2,795,559  |  
|Interest on subordinated debentures                     |  |                         | 1,002,588  |      |   | 776,464    |  |   | 734,127    |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Total interest expense                                  |  |                         | 32,607,945 |      |   | 20,264,076 |  |   | 12,166,829 |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Net interest income                                     |  |                         | 25,113,769 |      |   | 20,874,560 |  |   | 16,445,353 |  
|Provision for loan losses                               |  |                         | 1,600,000  |      |   | 1,870,000  |  |   | 1,115,000  |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Net interest income after provision for loan losses     |  |                         | 23,513,769 |      |   | 19,004,560 |  |   | 15,330,353 |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|NONINTEREST INCOME:                                     |  |                         |            |      |   |            |  |   |            |  
|Service charges on deposit accounts                     |  |                         | 110,119    |      |   | 89,914     |  |   | 52,464     |  
|Commissions and fees                                    |  |                         | 318,476    |      |   | 287,669    |  |   | 326,445    |  
|Gains on sales of investment securities                 |  |                         | 240,952    |      |   | 468,351    |  |   | 207,690    |  
|Brokerage and investment services income                |  |                         | 851,987    |      |   | 691,632    |  |   | 877,365    |  
|Other operating income                                  |  |                         | 383,964    |      |   | 367,228    |  |   | 240,370    |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Total noninterest income                                |  |                         | 1,905,498  |      |   | 1,904,794  |  |   | 1,704,334  |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|NONINTEREST EXPENSE:                                    |  |                         |            |      |   |            |  |   |            |  
|Salaries and employee benefits                          |  |                         | 9,525,060  |      |   | 8,637,568  |  |   | 6,645,908  |  
|Net occupancy expense                                   |  |                         | 595,861    |      |   | 543,082    |  |   | 491,647    |  
|Equipment expense                                       |  |                         | 717,315    |      |   | 672,120    |  |   | 662,354    |  
|Other operating expense                                 |  |                         | 5,000,927  |      |   | 4,270,193  |  |   | 3,586,126  |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Total noninterest expense                               |  |                         | 15,839,163 |      |   | 14,122,963 |  |   | 11,386,035 |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Income before income taxes                              |  |                         | 9,580,104  |      |   | 6,786,391  |  |   | 5,648,652  |  
|Provision for income taxes                              |  |                         | 3,485,543  |      |   | 2,245,080  |  |   | 273,646    |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Net income                                              |  | $                       | 6,094,561  |      | $ | 4,541,311  |  | $ | 5,375,006  |  
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Net income per sharebasic                              |  | $                       | 0.72       |      | $ | 0.61       |  | $ | 0.77       | *
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Net income per sharediluted                            |  | $                       | 0.67       |      | $ | 0.57       |  | $ | 0.72       | *
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Weighted average common shares outstandingbasic        |  |                         | 8,496,457  |      |   | 7,415,241  |  |   | 6,941,062  | *
|                                                        |  |                         |            |      |   |            |  |   |            |  
|Weighted average common shares outstandingdiluted      |  |                         | 9,046,809  |      |   | 8,018,058  |  |   | 7,501,570  | *
|                                                        |  |                         |            |      |   |            |  |   |            |  

---

|* | Adjusted for one-for-four reverse stock split effected on September 1, 2005.
|- | ----------------------------------------------------------------------------

The accompanying notes to the consolidated financial statements

are an integral part of these financial
statements.



6



---

Nexity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                  |  |                         |              |   |      |   |              |      |  |   |             |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------------ | - | ---- | - | ------------ | ---- |  | - | ----------- | -
|                                                                                  |  | Years ended December 31 |             
|                                                                                  |  | 2006                    |              |   | 2005 |   |              | 2004 | 
|                                                                                  |  | (Restated)              |              |   |      |   |              |      | 
|Cash flows from operating activities:                                             |  |                         |              |   |      |   |              |      |  |   |             |  
|Net income                                                                        |  | $                       | 6,094,561    |   |      | $ | 4,541,311    |      |  | $ | 5,375,006   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |              |   |      |   |              |      |  |   |             |  
|Accretion and amortization of investment securities                               |  |                         | (370,698     | ) |      |   | (236,378     | )    |  |   | (3,364      | )
|Depreciation and amortization                                                     |  |                         | 719,941      |   |      |   | 582,603      |      |  |   | 584,970     |  
|Provision for loan losses                                                         |  |                         | 1,600,000    |   |      |   | 1,870,000    |      |  |   | 1,115,000   |  
|Gain on sales of investment securities available-for-sale                         |  |                         | (240,952     | ) |      |   | (468,351     | )    |  |   | (207,690    | )
|Gain on sales of other real estate                                                |  |                         | 0            |   |      |   | (48,000      | )    |  |   | 0           |  
|Gain on sales of premises and equipment                                           |  |                         | 0            |   |      |   | (3,581       | )    |  |   | 0           |  
|Stock based compensation                                                          |  |                         | 62,476       |   |      |   | 0            |      |  |   | 0           |  
|Purchase of trading securities                                                    |  |                         | (1,998,500   | ) |      |   | 0            |      |  |   | 0           |  
|Change in deferred tax asset                                                      |  |                         | (463,438     | ) |      |   | (2,008,390   | )    |  |   | 25,664      |  
|Change in other assets                                                            |  |                         | (4,329,875   | ) |      |   | (3,352,894   | )    |  |   | (939,616    | )
|Change in other liabilities                                                       |  |                         | 3,442,673    |   |      |   | 4,177,532    |      |  |   | 1,089,610   |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |             |  
|Net cash provided by operating activities                                         |  |                         | 4,516,188    |   |      |   | 5,053,852    |      |  |   | 7,039,580   |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |             |  
|Cash flows from investing activities:                                             |  |                         |              |   |      |   |              |      |  |   |             |  
|Purchase of investment securities available-for-sale                              |  |                         | (71,171,994  | ) |      |   | (62,837,816  | )    |  |   | (72,576,526 | )
|Proceeds from sales of investment securities available-for-sale                   |  |                         | 15,768,261   |   |      |   | 4,560,304    |      |  |   | 6,867,543   |  
|Proceeds from maturities of investment securities available-for-sale              |  |                         | 25,727,071   |   |      |   | 46,802,513   |      |  |   | 40,637,756  |  
|Net increase in loans                                                             |  |                         | (91,034,944  | ) |      |   | (128,384,954 | )    |  |   | (63,749,849 | )
|Purchase of cash surrender value life insurance                                   |  |                         | (1,200,000   | ) |      |   | 0            |      |  |   | (5,000,000  | )
|Capital expenditures                                                              |  |                         | (278,971     | ) |      |   | (814,212     | )    |  |   | (282,706    | )
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |             |  
|Net cash used for investing activities                                            |  |                         | (122,190,577 | ) |      |   | (140,674,165 | )    |  |   | (94,103,782 | )
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |             |  
|Cash flows from financing activities:                                             |  |                         |              |   |      |   |              |      |  |   |             |  
|Net change in deposits                                                            |  |                         | 61,722,818   |   |      |   | 139,978,302  |      |  |   | 68,436,125  |  
|Net change in short-term borrowings                                               |  |                         | 34,440,000   |   |      |   | (6,704,000   | )    |  |   | 2,264,000   |  
|Net change in long-term borrowings                                                |  |                         | 5,000,000    |   |      |   | 10,000,000   |      |  |   | 8,250,000   |  
|Proceeds from issuance of common stock                                            |  |                         | 124,020      |   |      |   | 25,579,541   |      |  |   | 1,000       |  
|Tax benefit from exercise of stock options                                        |  |                         | 96,551       |   |      |   | 0            |      |  |   | 0           |  
|Purchase of treasury stock                                                        |  |                         | (4,560,245   | ) |      |   | 0            |      |  |   | 0           |  
|Net change in subordinated debentures                                             |  |                         | 0            |   |      |   | 0            |      |  |   | 3,072,000   |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |             |  
|Net cash provided by financing activities                                         |  |                         | 96,823,144   |   |      |   | 168,853,843  |      |  |   | 82,023,125  |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |             |  
|Net change in cash and cash equivalents                                           |  |                         | (20,851,245  | ) |      |   | 33,233,530   |      |  |   | (5,041,077  | )
|Cash and cash equivalents at January 1                                            |  |                         | 48,323,921   |   |      |   | 15,090,391   |      |  |   | 20,131,468  |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |             |  
|Cash and cash equivalents at December 31                                          |  | $                       | 27,472,676   |   |      | $ | 48,323,921   |      |  | $ | 15,090,391  |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |             |  
|Supplemental disclosures of cash flow information:                                |  |                         |              |   |      |   |              |      |  |   |             |  
|Cash paid during the period for:                                                  |  |                         |              |   |      |   |              |      |  |   |             |  
|Interest                                                                          |  | $                       | 29,327,662   |   |      | $ | 17,866,975   |      |  | $ | 10,567,122  |  
|Income taxes                                                                      |  |                         | 3,573,244    |   |      |   | 2,165,081    |      |  |   | 366,405     |  
|                                                                                  |  |                         |              |   |      |   |              |      |  |   |             |  

The accompanying notes to the consolidated financial statements

are an integral part of these financial statements.



7



---

Nexity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders
Equity and Comprehensive Income



|                                                                        |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------- |  | ------------- | - | -------- | ------- | ------ | -------------------------- | - | ---------- | ------------------------------------------- |  | - | --------------------- | - |  | ------------------------ | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                        |  | Common Stock* |   | Surplus* |         |        | Retainedearnings (deficit) |   |            | Accumulated othercomprehensiveincome (loss) |  |   | TreasuryStock, atcost |   |  | Totalstockholdersequity |           
|                                                                        |  | Shares*       |   |          | Amount* |        |                            |   |            |                                            
|Balance at January 1, 2004                                              |  | 6,940,997     |   |          | $       | 69,410 |                            | $ | 36,342,065 |                                             |  | $ | (6,572,260            | ) |  | $                        | 743,454    |   |  | $ | 0          |   |  | $ | 30,582,669 |  
|Common stock activity:                                                  |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Exercise of stock options                                               |  | 250           |   |          |         | 2      |                            |   | 998        |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   | 1,000      |  
|Comprehensive income:                                                   |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Net income                                                              |  |               |   |          |         |        |                            |   |            |                                             |  |   | 5,375,006             |   |  |                          |            |   |  |   |            |   |  |   | 5,375,006  |  
|Other comprehensive loss, net of tax and reclassification adjustment:   |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Unrealized losses on investment securities                              |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          | (400,369   | ) |  |   |            |   |  |   | (400,369   | )
|                                                                        |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Total comprehensive income                                              |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   | 4,974,637  |  
|                                                                        |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Balance at December 31, 2004                                            |  | 6,941,247     |   |          | $       | 69,412 |                            | $ | 36,343,063 |                                             |  | $ | (1,197,254            | ) |  | $                        | 343,085    |   |  | $ | 0          |   |  | $ | 35,558,306 |  
|Common stock activity:                                                  |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Common Stock Offering (net of direct costs)                             |  | 1,755,000     |   |          |         | 17,550 |                            |   | 25,417,843 |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   | 25,435,393 |  
|Exercise of stock options                                               |  | 14,945        |   |          |         | 149    |                            |   | 144,230    |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   | 144,379    |  
|Fractional Shares                                                       |  | (17           | ) |          |         | 0      |                            |   | (231       | )                                           |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   | (231       | )
|Comprehensive income:                                                   |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Net income                                                              |  |               |   |          |         |        |                            |   |            |                                             |  |   | 4,541,311             |   |  |                          |            |   |  |   |            |   |  |   | 4,541,311  |  
|Other comprehensive loss, net of tax and reclassification adjustment:   |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Unrealized losses on investment securities                              |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          | (2,406,953 | ) |  |   |            |   |  |   | (2,406,953 | )
|                                                                        |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Total comprehensive income                                              |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   | 2,134,358  |  
|                                                                        |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Balance at December 31, 2005                                            |  | 8,711,175     |   |          | $       | 87,111 |                            | $ | 61,904,905 |                                             |  | $ | 3,344,057             |   |  | $                        | (2,063,868 | ) |  | $ | 0          |   |  | $ | 63,272,205 |  
|Common stock activity:                                                  |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Exercise of stock options, including income tax benefit of $96,551      |  | 29,505        |   |          |         | 296    |                            |   | 220,275    |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   | 220,571    |  
|Stock-based compensation                                                |  |               |   |          |         |        |                            |   | 62,476     |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   | 62,476     |  
|Purchase of Treasury Stock                                              |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|(365,950 shares)                                                        |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   | (4,560,245 | ) |  |   | (4,560,245 | )
|Comprehensive income:                                                   |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Net income                                                              |  |               |   |          |         |        |                            |   |            |                                             |  |   | 6,094,561             |   |  |                          |            |   |  |   |            |   |  |   | 6,094,561  |  
|Other comprehensive income, net of tax and reclassification adjustment: |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Unrealized gains on investment securities                               |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          | 80,854     |   |  |   |            |   |  |   | 80,854     |  
|                                                                        |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Total comprehensive income                                              |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   | 6,175,415  |  
|                                                                        |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Balance at December 31, 2006                                            |  | 8,740,680     |   |          | $       | 87,407 |                            | $ | 62,187,656 |                                             |  | $ | 9,438,618             |   |  | $                        | (1,983,014 | ) |  | $ | (4,560,245 | ) |  | $ | 65,170,422 |  
|                                                                        |  |               |   |          |         |        |                            |   |            |                                             |  |   |                       |   |  |                          |            |   |  |   |            |   |  |   |            |  

---

|* | Adjusted for one-for-four reverse stock split effected on September 1, 2005.
|- | ----------------------------------------------------------------------------

The accompanying notes to the consolidated financial statements

are an integral part of these financial
statements.



8



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation: Nexity Financial Corporation (the Corporation) is a registered bank holding company incorporated on March 12, 1999 under the laws of the State of Delaware. The
Corporation was formed to enter the commercial banking business and to invest in other bank-related businesses. We became a financial holding company on March 5, 2007. The Corporation provides its customers with banking services through its
subsidiary, Nexity Bank (the Bank), and owns 100% of its issued and outstanding capital stock. Nexity Capital Trust II, a statutory trust and wholly owned subsidiary, was established by the Corporation on May 20, 2004. Nexity
Capital Trust II is a special interest nonbank subsidiary that issues trust preferred securities, whereby the proceeds from the issuance are loaned to the Corporation.

Consolidation: The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain amounts in
prior year financial statements have been reclassified to conform to the current year presentation. In accordance with the revised Financial Accounting Standards Board Interpretation (FASB) No. 46, (FIN 46),
Consolidation of Variable Interest Entities, which addresses consolidation by business enterprises of variable interest entities, the Corporation deconsolidated one trust subsidiary at December 31, 2006 and 2005, which had been
formed to raise capital by issuing preferred securities to institutional investors.

Use of Estimates: The consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

Investment Securities: In accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, management determines at the time of purchase the classification of investment securities as either held-to-maturity,
available-for-sale or trading. In determining such classification, debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Investment
securities classified as available-for-sale are carried at estimated fair value with unrealized gains and losses included in stockholders equity on an after-tax basis as accumulated other comprehensive income. Realized gains and losses are
recognized on the specific identification method. Premiums and discounts are included in the basis of investment securities and are recognized in income using the effective interest method.

Trading securities are generally held for short-term purposes and carried in trading accounts at estimated fair value with unrealized gains and losses
recorded in earnings.

Investments in equity securities classified as available for sale without a readily determinable fair value are
carried at cost. Such equity securities generally consist of Federal Home Loan Bank stock.

Brokerage and Investment Services: Fee
income is derived from providing brokerage and investment services to correspondent banks. Fee income is recognized on a trade date basis.

Loans and Allowance for Loan Losses: Loans are reported at their face amount less payments collected. Unearned income on loans is reported as a reduction of the loan balances and is recognized as income using the
sum-of-the-months-digits method, a method approximating the effective interest method. Interest on loans is principally recognized over the term of the loan based on the loan balance outstanding.



9



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Net nonrefundable fees and direct costs of loan originations are deferred and amortized over the
lives of the underlying loans as an adjustment to interest income in accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.

In many lending transactions, collateral is obtained to provide an additional measure of security. Generally, the cash flow and earnings
power of the borrower represent the primary source of repayment and collateral is considered as an additional safeguard to further reduce credit risk. The need for collateral is determined on a case-by-case basis after considering the current and
prospective creditworthiness of the borrower, terms of the lending transaction, and economic conditions.

Generally, all loans that are
past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, including loans which are individually identified as being impaired, are classified as nonaccrual loans unless well secured and in the
process of collection. Previously accrued interest is reversed against current earnings and interest collections on nonaccrual loans for which ultimate collectibility of principal is uncertain are applied as principal reductions. Otherwise, such
collections are credited to income when received.

In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, the Corporation measures loans for impairment when it is probable that all amounts, including principal and interest, will not be collected in accordance with the contractual terms of the loan agreement. It is the Corporations
policy to apply the provisions of SFAS No. 114 to all impaired commercial and commercial real estate and real estate-construction loans on a loan-by-loan basis.

The allowance for loan losses is maintained at a level considered adequate by management to provide for potential losses inherent in the loan portfolio. Managements evaluation of the adequacy of the allowance is
based on a review of individual loans, recent loss experience, current economic conditions, risk characteristics of the various classifications of loans, underlying collateral values, and other relevant factors.

A formal review of the allowance for loan losses is prepared quarterly to assess the risk in the portfolio and to determine the adequacy of the allowance
for loan losses. For purposes of this review, the portfolio is segregated between commercial and consumer loans. Every commercial loan is assigned a risk rating based on a numerical scale of one to eight by loan officers using established credit
policy guidelines. These risk ratings are reviewed periodically and adjusted as warranted and are subject to review by loan review personnel and bank regulators. Each risk rating is assigned an allocation percentage which, when multiplied times the
dollar value of loans in that risk category, results in the amount of the allowance for loan losses allocated to these loans. The allocations are based on historical loss factors, taking into consideration current economic conditions, recent trends
in the portfolio and trends in the industry. Any adversely classified commercial loans greater than $50,000 are individually evaluated and a specific allowance is allocated for any impairment losses identified. The consumer loan portfolio is
separated by loan type into homogeneous pools and an allocation is made for each pool based on historical loss factors, taking into consideration recent trends in the portfolio, recent trends in the industry, and economic conditions.

Losses on loans are charged to and recoveries are credited to the allowance at the time the loss or recovery occurs. It is possible that a change in the
relevant factors used in managements evaluation may occur in the future.

Foreclosed Properties: Assets are classified as
foreclosed properties upon actual foreclosure or when physical possession of the collateral is taken regardless of whether foreclosure proceedings have taken place.



10



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Foreclosed properties are carried at the lower of the recorded amount of the loan for which the
property previously served as collateral, or the fair value of the property less estimated costs to sell.

Prior to foreclosure, the
recorded amount of the loan is reduced, if necessary, to the fair value, less estimated costs to sell. Subsequent to foreclosure, gains and losses on the sale of and losses on the periodic revaluation of foreclosed properties are credited or charged
to expense. Net costs of maintaining foreclosed properties are expensed as incurred.

Premises and Equipment: Premises and equipment
are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the assets estimated useful life (5 to 40 years for buildings and improvements; 3 to 7 years for furniture and equipment). Gains or
losses on dispositions are charged to operating expenses, and improvements and betterments are capitalized. Interest costs incurred related to the construction of banking premises is included in the cost of the related asset.

Intangible Assets:At December 31, 2006 and 2005, we had no unamortized goodwill. We had $910,655 in unamortized other intangible assets at
December 31, 2006 and 2005. The other intangible asset is the bank charter, which upon adoption of SFAS No. 142, we no longer amortize. In accordance with SFAS No. 142, our bank charter is reviewed at least annually to ensure that
there have been no events or circumstances resulting in an impairment of the recorded amount of the intangible asset. Adverse changes in the economic environment, operations of the business unit, or other factors could result in a decline in the
implied fair value. If the implied fair value is less than the carrying amount, a loss would be recognized to reduce the carrying amount to fair value.

Treasury Stock:In March of 2006, we announced a stock repurchase plan authorizing the Corporation to repurchase up to 400,000 shares of common stock. In connection with stock repurchases, we have repurchased
shares of our common stock in private transactions and open-market purchases, as authorized by our Board of Directors. At December 31, 2006, we had repurchased 365,950 shares or 91.5% of shares authorized for repurchase at an average price of
$12.46 per share. Treasury shares are recorded at cost.

Segment Information: SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information requires that public business enterprises report certain information about operating segments in their annual financial statements. It also requires that enterprises disclose information about products and
services provided by significant segments, geographic areas, major customers, differences between the measurement used in reporting segment information and those used in the enterprises general-purpose financial statements, and changes in
measurement of segment amounts from period to period.

Operating segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. During 2006 and 2005, we did not have any reportable segments.

Income Taxes: We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the
carrying amounts and tax bases of assets and liabilities.

The Corporation and its subsidiaries file a consolidated federal income tax
return. The consolidated financial statements (including the provision for income taxes) are prepared on the accrual basis. The Corporation accounts for income taxes using the liability method pursuant to SFAS No. 109, Accounting for
Income Taxes. Under this method, the Corporations deferred tax assets and liabilities are determined by applying federal and state tax rates currently in effect to its cumulative temporary book/tax differences.



11



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Temporary differences are differences between financial statement carrying amounts and the corresponding tax bases of assets and liabilities. Deferred taxes
are provided as a result of such temporary differences.

Earnings Per Share: Earnings per share computations are based upon the
weighted average number of shares outstanding during the periods. Diluted earnings per share computations are based upon the weighted average number of shares outstanding during the periods plus the dilutive effect of outstanding stock options.

Stock Based Compensation: At December 31, 2006, we had a stock option plan, which is described more fully in Note 16 to the
Consolidated Financial Statements in this annual report. Effective January 1, 2006, we adopted SFAS No. 123 (revised), Share-Based Payment (SFAS 123R) utilizing the modified prospective approach. Prior to the
adoption of SFAS 123R we accounted for stock option grants in accordance with the Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (the intrinsic value method), and accordingly
recognized no compensation expense for stock option grants.

Under the modified prospective approach, SFAS 123R applies to new awards and
to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized during 2006 includes compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard.

As a result of adopting SFAS 123R on January 1, 2006, our income before taxes and net income for the year ended December 31, 2006, were $62,476
and $41,234, lower than if we had continued to account for stock-based compensation under APB opinion No. 25 for our stock option grants. The effect of adopting this standard on our earnings per share was not significant.

The following table provides pro forma net income and earnings per share information, adjusted for the one-for-four reverse stock split effected on
September 1, 2005, as if we had applied the fair value recognitions provisions of SFAS No. 123, Accounting for Stock Based Compensation (SFAS 123) to stock-based employee compensation option plans for the two
years ended December 31, 2005:



|                                                                                                                                  |  |      |           |   |      |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                                                                                                                  |  | 2005 |           |   | 2004 |  
|Net Income                                                                                                                        |  |      |           |   |      |   |           |  
|Net income, as reported                                                                                                           |  | $    | 4,541,311 |   |      | $ | 5,375,006 |  
|Deduct:                                                                                                                           |  |      |           |   |      |   |           |  
|Total stock-based employee compensation expense determined under fair value based method for all option awards, net of income
tax |  |      | (90,632   | ) |      |   | (77,907   | )
|                                                                                                                                  |  |      |           |   |      |   |           |  
|Pro forma net income                                                                                                              |  | $    | 4,450,679 |   |      | $ | 5,297,099 |  
|                                                                                                                                  |  |      |           |   |      |   |           |  
|                                                                                                                                  |  |     
|Basic Earnings Per Share                                                                                                          |  |      |           |   |      |   |           |  
|As reported                                                                                                                       |  | $    | 0.61      |   |      | $ | 0.77      |  
|Pro forma                                                                                                                         |  |      | 0.60      |   |      |   | 0.76      |  
|                                                                                                                                  |  |     
|Diluted Earnings Per Share                                                                                                        |  |      |           |   |      |   |           |  
|As reported                                                                                                                       |  | $    | 0.57      |   |      | $ | 0.72      |  
|Pro forma                                                                                                                         |  |      | 0.56      |   |      |   | 0.71      |  

Prior to the adoption of Statement 123(R), the Company would have presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows in the statement of cash flows. Statement



12



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as financing cash flows.

Statement of Cash Flows: For purposes of the Consolidated Statement
of Cash Flows, the Corporation has defined cash on hand, amounts due from banks, and federal funds sold as cash and cash equivalents. Generally, federal funds are purchased and sold for one-day periods.

Comprehensive Income: SFAS No. 130, Reporting Comprehensive Income establishes standards for reporting and displaying
comprehensive income and its components in general-purpose financial statements. The statement requires additional reporting of items that are recorded directly to stockholders equity, but not reported in net income, such as unrealized gains
and losses on available-for-sale securities. The Corporation elected to present the required disclosures in the Consolidated Statements of Changes in Stockholders Equity.

Recently Issued Accounting Standards:The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and
disclosure of financial information by the Corporation:

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140. This Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets. SFAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest only-strips and principal-only
strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity
from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after September 15, 2006. We do not believe that the adoption of SFAS No. 155 will have a material impact on our financial position, results of operations and cash flows.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB Statement
No. 140. This Statement amends FASB No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately
recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose its subsequent measurement methods for each class of separately recognized servicing assets and servicing
liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale
securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entitys exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to
subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. An entity should adopt SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15, 2006. We do not believe the adoption of SFAS No. 156 will have a material
impact on our financial position, results of operations and cash flows.



13



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN
48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently analyzing the effects of FIN 48 on our financial
position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard does not require any new fair value measurements, but
rather eliminates inconsistencies found in various prior pronouncements. SFAS 157 is effective for us on January 1, 2008 and is not expected to have a significant impact on our financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans,
which amends SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any
remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of
net periodic cost. The measurement datethe date at which the benefit obligation and plan assets are measuredis required to be the companys fiscal year end. SFAS 158 is effective for publicly-held companies for fiscal years ending
after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. We do not have a defined benefit pension plan. Therefore, SFAS 158 will not impact our financial
condition or results of operations.

In September, 2006, The FASB ratified the consensuses reached by the FASBs Emerging Issues Task
Force (EITF) relating to EITF 06-4 Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 addresses employer accounting for endorsement
split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions, or APB Opinion No. 12, Omnibus Opinion1967. EITF 06-4 is effective for fiscal years beginning after December 15, 2006. Entities should recognize the effects of applying
this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of
adoption or (b) a change in accounting principle through retrospective application to all prior periods. We are currently analyzing the effect of adoption of EITF 06-4 on our financial position, results of operations and cash flows.

In September 2006, the FASB ratified the consensus reached related to EITF 06-5, Accounting for Purchases of Life InsuranceDetermining the
Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual
terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract. EITF 06-5 also states that a policyholder should determine the amount that could be realized under
the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for fiscal years beginning after December 15, 2006. We are
currently analyzing the effect of adoption of EITF 06-5 on our financial position, results of operations and cash flows.



14



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108. SAB 108
provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality of
financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative
amount of misstatement present in a companys balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial
statement misstatements as material if they are material according to either the income statement or balance sheet approach. We have analyzed SAB 108 and determined that upon adoption it will have no impact on our reported results of operations or
financial condition.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not
expected to have a material impact on our financial position, results of operations and cash flows.

NOTE 2RESTRICTIONS ON CASH AND DUE FROM BANK
ACCOUNTS

The Bank is required by regulation to maintain average cash reserve balances based on a percentage of deposits. The required
cash reserve balance for the period ended December 31, 2006 was $4.9 million. There was no required cash reserve balance for the period ended December 31, 2005.

NOTE 3INVESTMENT SECURITIES

The amortized cost and fair value of investment securities
available-for-sale at December 31 are presented below:



|                                                                  |  |                |             |                      |   |                       |  |   |            |   |  |   |            
|----------------------------------------------------------------- |  | -------------- | ----------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -----------
|                                                                  |  | 2006          
|                                                                  |  | Amortized Cost |             | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Securities of U.S. Government sponsored agencies and corporations |  | $              | 96,302,065  |                      | $ | 311,377               |  | $ | (752,835   | ) |  | $ | 95,860,607 
|Mortgage-backed securities                                        |  |                | 136,314,753 |                      |   | 253,459               |  |   | (2,901,560 | ) |  |   | 133,666,652
|Other debt securities                                             |  |                | 3,000,000   |                      |   | 40,000                |  |   | 0          |   |  |   | 3,040,000  
|                                                                  |  |                |             |                      |   |                       |  |   |            |   |  |   |            
|Total debt securities                                             |  |                | 235,616,818 |                      |   | 604,836               |  |   | (3,654,395 | ) |  |   | 232,567,259
|Equity securities                                                 |  |                | 6,965,500   |                      |   | 0                     |  |   | 0          |   |  |   | 6,965,500  
|                                                                  |  |                |             |                      |   |                       |  |   |            |   |  |   |            
|Total investment securities                                       |  | $              | 242,582,318 |                      | $ | 604,836               |  | $ | (3,654,395 | ) |  | $ | 239,532,759
|                                                                  |  |                |             |                      |   |                       |  |   |            |   |  |   |            



15



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



|                                                                  |  |                |             |                      |   |                       |  |   |            |   |  |   |            
|----------------------------------------------------------------- |  | -------------- | ----------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -----------
|                                                                  |  | 2005          
|                                                                  |  | Amortized Cost |             | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Securities of U.S. Government sponsored agencies and corporations |  | $              | 64,394,186  |                      | $ | 0                     |  | $ | (910,799   | ) |  | $ | 63,483,387 
|Mortgage-backed securities                                        |  |                | 136,680,796 |                      |   | 105,868               |  |   | (2,491,450 | ) |  |   | 134,295,214
|Other debt securities                                             |  |                | 4,550,000   |                      |   | 20,400                |  |   | 0          |   |  |   | 4,570,400  
|                                                                  |  |                |             |                      |   |                       |  |   |            |   |  |   |            
|Total debt securities                                             |  |                | 205,624,982 |                      |   | 126,268               |  |   | (3,402,249 | ) |  |   | 202,349,001
|Equity securities                                                 |  |                | 6,669,025   |                      |   | 0                     |  |   | 0          |   |  |   | 6,669,025  
|                                                                  |  |                |             |                      |   |                       |  |   |            |   |  |   |            
|Total investment securities                                       |  | $              | 212,294,007 |                      | $ | 126,268               |  | $ | (3,402,249 | ) |  | $ | 209,018,026
|                                                                  |  |                |             |                      |   |                       |  |   |            |   |  |   |            

The amortized cost and fair value of debt securities available-for-sale at December 31, 2006,
based on contractual maturities, are shown below. Actual maturities may differ from contractual maturities or maturities shown below because borrowers have the right to prepay obligations with or without prepayment penalties.



|                                       |  |                |             |            |   |            
|-------------------------------------- |  | -------------- | ----------- | ---------- | - | -----------
|                                       |  | Amortized Cost |             | Fair Value
|Due in one year or less                |  | $              | 0           |            | $ | 0          
|Due after one year through five years  |  |                | 82,960,316  |            |   | 82,450,786 
|Due after five years through ten years |  |                | 20,652,324  |            |   | 20,539,457 
|Due after ten years                    |  |                | 132,004,178 |            |   | 129,577,016
|                                       |  |                |             |            |   |            
|Total                                  |  | $              | 235,616,818 |            | $ | 232,567,259
|                                       |  |                |             |            |   |            

Investment securities with a fair value of $117,715,769 and $110,164,742 at December 31, 2006
and 2005, respectively, were pledged as collateral for borrowed funds.

Proceeds from sales of investment securities available-for-sale
were $15,768,262, $4,560,304, and $6,867,543 in 2006, 2005, and 2004, respectively. Gains of $722,506, $468,351, and $207,690 were realized on these sales during 2006, 2005, and 2004, respectively. Losses of $481,554 were realized on these sales
during 2006. There were no realized losses in 2005 and 2004.

The reclassification of unrealized holding gains to net gains realized in net
income is presented below for each year ended December 31:



|                                                                                                                                     |  |      |         |      |   |            |      |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                                                                                                     |  | 2006 |         | 2005 |   |            | 2004 | 
|Decrease in unrealized holding gains on available-for-sale securities, net of tax                                                    |  | $    | 237,473 |      | $ | (2,111,892 | )    |  | $ | (269,524 | )
|Less: Net gains realized on available-for-sale securities sold, net of tax                                                           |  |      | 156,619 |      |   | 295,061    |      |  |   | 130,845  |  
|                                                                                                                                     |  |      |         |      |   |            |      |  |   |          |  
|Change in unrealized gains on available-for-sale securities, net of tax of $43,537 in 2006, $1,413,608 in 2005, and $235,137 in
2004 |  | $    | 80,854  |      | $ | (2,406,953 | )    |  | $ | (400,369 | )
|                                                                                                                                     |  |      |         |      |   |            |      |  |   |          |  

The fair value and unrealized losses on investment securities with unrealized losses at
December 31, 2006 are presented below. The fair value and unrealized losses are presented for those securities that have had unrealized losses for less than 12 months and those that have been in an unrealized loss position for 12 consecutive
months or longer.



16



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



|                                                                  |  |                     |   |                     |   |            |  |                  |             |            |   |                  |  |   |             |  |   |          
|----------------------------------------------------------------- |  | ------------------- | - | ------------------- | - | ---------- |  | ---------------- | ----------- | ---------- | - | ---------------- |  | - | ----------- |  | - | ---------
|                                                                  |  | Less than 12 months |   | 12 months or longer |   | Total     
|                                                                  |  | Fair Value          |   | UnrealizedLosses    |   | Fair Value |  | UnrealizedLosses |             | Fair Value |   | UnrealizedLosses
|Securities of U.S. Government sponsored agencies and corporations |  | $                   | 0 |                     | $ | 0          |  | $                | 47,764,634  |            | $ | 752,835          |  | $ | 47,764,634  |  | $ | 752,835  
|Mortgage-backed securities                                        |  |                     | 0 |                     |   | 0          |  |                  | 103,111,051 |            |   | 2,901,560        |  |   | 103,111,051 |  |   | 2,901,560
|Other debt securities                                             |  |                     | 0 |                     |   | 0          |  |                  | 0           |            |   | 0                |  |   | 0           |  |   | 0        
|                                                                  |  |                     |   |                     |   |            |  |                  |             |            |   |                  |  |   |             |  |   |          
|Total debt securities                                             |  |                     | 0 |                     |   | 0          |  |                  | 150,875,685 |            |   | 3,654,395        |  |   | 150,875,685 |  |   | 3,654,395
|Equity securities                                                 |  |                     | 0 |                     |   | 0          |  |                  | 0           |            |   | 0                |  |   | 0           |  |   | 0        
|                                                                  |  |                     |   |                     |   |            |  |                  |             |            |   |                  |  |   |             |  |   |          
|Total investment securities                                       |  | $                   | 0 |                     | $ | 0          |  | $                | 150,875,685 |            | $ | 3,654,395        |  | $ | 150,875,685 |  | $ | 3,654,395
|                                                                  |  |                     |   |                     |   |            |  |                  |             |            |   |                  |  |   |             |  |   |          

The fair value and unrealized losses on investment securities with unrealized losses at
December 31, 2005 are presented below. The fair value and unrealized losses are presented for those securities that have had unrealized losses for less than 12 months and those that have been in an unrealized loss position for 12 consecutive
months or longer.



|                                                                  |  |                     |             |                     |   |            |  |                  |            |            |   |                  |  |   |             |  |   |          
|----------------------------------------------------------------- |  | ------------------- | ----------- | ------------------- | - | ---------- |  | ---------------- | ---------- | ---------- | - | ---------------- |  | - | ----------- |  | - | ---------
|                                                                  |  | Less than 12 months |             | 12 months or longer |   | Total     
|                                                                  |  | Fair Value          |             | UnrealizedLosses    |   | Fair Value |  | UnrealizedLosses |            | Fair Value |   | UnrealizedLosses
|Securities of U.S. Government sponsored agencies and corporations |  | $                   | 59,602,387  |                     | $ | 804,263    |  | $                | 3,881,000  |            | $ | 106,536          |  | $ | 63,483,387  |  | $ | 910,799  
|Mortgage-backed securities                                        |  |                     | 81,689,531  |                     |   | 1,287,406  |  |                  | 38,017,701 |            |   | 1,204,044        |  |   | 119,707,232 |  |   | 2,491,450
|Other debt securities                                             |  |                     | 0           |                     |   | 0          |  |                  | 0          |            |   | 0                |  |   | 0           |  |   | 0        
|                                                                  |  |                     |             |                     |   |            |  |                  |            |            |   |                  |  |   |             |  |   |          
|Total debt securities                                             |  |                     | 141,291,918 |                     |   | 2,091,669  |  |                  | 41,898,701 |            |   | 1,310,580        |  |   | 183,190,619 |  |   | 3,402,249
|Equity securities                                                 |  |                     | 0           |                     |   | 0          |  |                  | 0          |            |   | 0                |  |   | 0           |  |   | 0        
|                                                                  |  |                     |             |                     |   |            |  |                  |            |            |   |                  |  |   |             |  |   |          
|Total investment securities                                       |  | $                   | 141,291,918 |                     | $ | 2,091,669  |  | $                | 41,898,701 |            | $ | 1,310,580        |  | $ | 183,190,619 |  | $ | 3,402,249
|                                                                  |  |                     |             |                     |   |            |  |                  |            |            |   |                  |  |   |             |  |   |          

The above securities are considered temporarily impaired and no loss has been recognized. We have
the ability and intent to hold these securities until such time as the value recovers or the securities mature. We believe, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market
interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.



17



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



NOTE 4LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at December 31 are comprised of the following:



|                                        |  |      |             |   |      |   |             |  
|--------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                        |  | 2006 |             |   | 2005 |  
|Commercial, financial, and agricultural |  | $    | 127,268,666 |   |      | $ | 125,508,057 |  
|Real estate-construction                |  |      | 290,876,262 |   |      |   | 186,128,578 |  
|Real estate-mortgage                    |  |      | 139,634,491 |   |      |   | 151,883,652 |  
|Installment loans to individuals        |  |      | 14,539,865  |   |      |   | 16,926,398  |  
|Home equity lines of credit             |  |      | 33,200,177  |   |      |   | 34,302,363  |  
|Lease financing receivables             |  |      | 294,298     |   |      |   | 658,757     |  
|Other loans                             |  |      | 139,609     |   |      |   | 165,780     |  
|                                        |  |      |             |   |      |   |             |  
|Gross Loans                             |  |      | 605,953,368 |   |      |   | 515,573,585 |  
|Unearned income                         |  |      | (147        | ) |      |   | (397        | )
|                                        |  |      |             |   |      |   |             |  
|Total Loans                             |  |      | 605,953,221 |   |      |   | 515,573,188 |  
|Allowance for loan losses               |  |      | (7,411,803  | ) |      |   | (6,466,714  | )
|                                        |  |      |             |   |      |   |             |  
|Net Loans                               |  | $    | 598,541,418 |   |      | $ | 509,106,474 |  
|                                        |  |      |             |   |      |   |             |  

Included in loans net of unearned income at December 31, 2006 and 2005 were $113,905 and
$126,741, respectively of net deferred loan costs.

The following table presents selected loan maturities and interest rate sensitivity at
December 31, 2006:



|                                       |  |                  |             |                   |   |                 |  |       |             |  |   |            
|-------------------------------------- |  | ---------------- | ----------- | ----------------- | - | --------------- |  | ----- | ----------- |  | - | -----------
|                                       |  | One Year or Less |             | One to Five Years |   | Over Five Years |  | Total
|Types of loans:                        |  |                  |             |                   |   |                 |  |       |             |  |   |            
|Commercial, financial and agricultural |  | $                | 31,769,740  |                   | $ | 31,103,797      |  | $     | 64,395,129  |  | $ | 127,268,666
|Real estateconstruction               |  |                  | 168,551,569 |                   |   | 120,588,114     |  |       | 1,736,579   |  |   | 290,876,262
|Real estatemortgage                   |  |                  | 46,043,554  |                   |   | 70,788,452      |  |       | 22,802,485  |  |   | 139,634,491
|Installment loans to individuals       |  |                  | 4,281,212   |                   |   | 6,752,997       |  |       | 3,505,656   |  |   | 14,539,865 
|Home equity lines of credit            |  |                  | 65,033      |                   |   | 925,000         |  |       | 32,210,144  |  |   | 33,200,177 
|Lease financing receivables            |  |                  | 294,298     |                   |   | 0               |  |       | 0           |  |   | 294,298    
|Other loans                            |  |                  | 139,609     |                   |   | 0               |  |       | 0           |  |   | 139,609    
|                                       |  |                  |             |                   |   |                 |  |       |             |  |   |            
|Total loans                            |  | $                | 251,145,015 |                   | $ | 230,158,360     |  | $     | 124,649,993 |  | $ | 605,953,368
|                                       |  |                  |             |                   |   |                 |  |       |             |  |   |            
|Total of loans above with:             |  |                  |             |                   |   |                 |  |       |             |  |   |            
|Fixed interest rates                   |  | $                | 38,526,858  |                   | $ | 56,457,092      |  | $     | 2,376,312   |  | $ | 97,360,262 
|Variable interest rates                |  |                  | 212,618,157 |                   |   | 173,701,268     |  |       | 122,273,681 |  |   | 508,593,106
|                                       |  |                  |             |                   |   |                 |  |       |             |  |   |            
|Total loans                            |  | $                | 251,145,015 |                   | $ | 230,158,360     |  | $     | 124,649,993 |  | $ | 605,953,368
|                                       |  |                  |             |                   |   |                 |  |       |             |  |   |            

---

|(1) | Loan balances include unearned income
|--- | -------------------------------------

Our directors and
executive officers are loan and deposit customers and have other transactions with us in the ordinary course of business. Total loans to these persons were $1,009,000 and $1,043,000 at December 31, 2006 and 2005, respectively. These loans were
made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and involve no unusual risk or collectibility.



18



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Activity in the allowance for loan losses is summarized as follows:



|                                           |  |      |           |   |      |   |           |      |  |   |           |  
|------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                           |  | 2006 |           |   | 2005 |   |           | 2004 | 
|Balance at beginning of year               |  | $    | 6,466,714 |   |      | $ | 4,911,819 |      |  | $ | 4,102,626 |  
|Provision for loan losses                  |  |      | 1,600,000 |   |      |   | 1,870,000 |      |  |   | 1,115,000 |  
|Recoveries on loans previously charged off |  |      | 9,385     |   |      |   | 23,653    |      |  |   | 34,981    |  
|Loans charged off                          |  |      | (664,296  | ) |      |   | (338,758  | )    |  |   | (340,788  | )
|                                           |  |      |           |   |      |   |           |      |  |   |           |  
|Balance at end of year                     |  | $    | 7,411,803 |   |      | $ | 6,466,714 |      |  | $ | 4,911,819 |  
|                                           |  |      |           |   |      |   |           |      |  |   |           |  

Our nonperforming assets (including cash basis loans) at December 31, are summarized below:



|                                                                                              |  |      |           |      |   |           |  |   |          
|--------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                                                              |  | 2006 |           | 2005 |   | 2004     
|Nonaccrual loans                                                                              |  | $    | 513,920   |      | $ | 2,651,025 |  | $ | 1,811,446
|Loans past due 90 days or more                                                                |  |      | 0         |      |   | 0         |  |   | 0        
|Other real estate owned                                                                       |  |      | 4,742,400 |      |   | 1,500,000 |  |   | 82,000   
|                                                                                              |  |      |           |      |   |           |  |   |          
|Total nonperforming assets                                                                    |  | $    | 5,256,320 |      | $ | 4,151,025 |  | $ | 1,893,446
|                                                                                              |  |      |           |      |   |           |  |   |          
|Interest income which would have been recorded on nonaccrual loans pursuant to original terms |  | $    | 20,766    |      | $ | 47,839    |  | $ | 76,683   
|Interest income recorded on nonaccrual loans                                                  |  | $    | 10,393    |      | $ | 0         |  |   | 0        

Impaired loans are loans for which it is probable that all amounts, including principal and
interest, will not be collected in accordance with the contractual terms of the loan agreement. At December 31, 2006 and 2005, we had $513,920 and $2,651,025, respectively, in loans considered impaired. Impaired loans had a related specific
allowance for loan losses of $0 and $600,000 at December 31, 2006 and 2005, respectively. There were no material commitments to lend additional funds to customers whose loans were classified as impaired at December 31, 2006 and 2005. The
average investment in impaired loans for 2006, 2005, and 2004 was $803,250, $713,750, and $1.4 million, respectively.

At December 31,
2006 and 2005, we did not have any loans for which terms had been modified in troubled debt restructurings.

NOTE 5PREMISES AND EQUIPMENT

Premises and equipment at December 31, consist of the following:



|                           |  |      |            |   |      |   |            |  
|-------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                           |  | 2006 |            |   | 2005 |  
|Leasehold improvements     |  | $    | 169,894    |   |      | $ | 167,006    |  
|Furniture and equipment    |  |      | 3,911,223  |   |      |   | 3,660,939  |  
|Construction in progress   |  |      | 19,162     |   |      |   | 1,283      |  
|                           |  |      |            |   |      |   |            |  
|Total                      |  |      | 4,100,279  |   |      |   | 3,829,228  |  
|Accumulated depreciation   |  |      | (3,122,727 | ) |      |   | (2,622,347 | )
|                           |  |      |            |   |      |   |            |  
|Net premises and equipment |  | $    | 977,552    |   |      | $ | 1,206,881  |  
|                           |  |      |            |   |      |   |            |  

Provision for depreciation included in noninterest expense in 2006, 2005, and 2004 was $508,300,
$451,227, and $454,540, respectively. We have entered into various noncancellable operating leases for buildings and equipment used in its operations. Certain leases have various renewal options, which include increased rentals under cost of living
escalation clauses. Rental expenses charged to occupancy and equipment expense in 2006, 2005, and 2004 were $582,332, $518,338, and $451,172, respectively.



19



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



At December 31, 2006, future minimum rental commitments under noncancellable operating leases
that have a remaining life in excess of one year are summarized as follows:



|                         |  |   |        
|------------------------ |  | - | -------
|2007                     |  | $ | 143,089
|2008                     |  |   | 139,837
|2009                     |  |   | 117,206
|2010                     |  |   | 120,815
|2011 and thereafter      |  |   | 38,531 
|                         |  |   |        
|Total minimum obligation |  | $ | 559,478
|                         |  |   |        

NOTE 6INTANGIBLE ASSETS

Upon the adoption of SFAS No. 142, Goodwill and Other Intangible Assets on January 1, 2002, the Corporation ceased amortizing other intangible assets. The Corporation has had no changes in the
carrying amount of intangible assets during the years ended December 31, 2006 and 2005.

NOTE 7OTHER ASSETS AND OTHER LIABILITIES

Accrued interest receivable and other assets at December 31 are comprised of the following:



|                                         |  |      |            |      |   |           
|---------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                         |  | 2006 |            | 2005
|Accrued interest on loans and securities |  | $    | 4,871,245  |      | $ | 4,194,474 
|Cash surrender value life insurance      |  |      | 6,767,338  |      |   | 5,358,266 
|Other real estate                        |  |      | 4,742,400  |      |   | 1,500,000 
|Prepaid expenses                         |  |      | 484,874    |      |   | 586,631   
|Software                                 |  |      | 516,657    |      |   | 390,719   
|Other                                    |  |      | 273,850    |      |   | 308,040   
|                                         |  |      |            |      |   |           
|Total other assets                       |  | $    | 17,656,364 |      | $ | 12,338,130
|                                         |  |      |            |      |   |           

Accrued expenses and other liabilities at December 31 are comprised of the following:



|                                             |  |      |            |      |   |          
|-------------------------------------------- |  | ---- | ---------- | ---- | - | ---------
|                                             |  | 2006 |            | 2005
|Accrued interest on deposits                 |  | $    | 7,389,912  |      | $ | 4,202,649
|Accrued interest on borrowings               |  |      | 416,665    |      |   | 357,011  
|Accrued salaries and employee benefits       |  |      | 521,957    |      |   | 680,007  
|Accounts Payable                             |  |      | 527,270    |      |   | 509,102  
|Accrued income taxes                         |  |      | 151,939    |      |   | 239,640  
|Other                                        |  |      | 1,078,874  |      |   | 655,535  
|                                             |  |      |            |      |   |          
|Total accrued expenses and other liabilities |  | $    | 10,086,617 |      | $ | 6,643,944
|                                             |  |      |            |      |   |          

NOTE 8DEPOSITS

The aggregate amount of time deposits of $100,000 or more at December 31, 2006 was $140,145,532. At December 31, 2006, the aggregate maturities of time deposits are summarized as follows:



|      |  |   |            
|----- |  | - | -----------
|2007  |  | $ | 380,411,971
|2008  |  |   | 22,917,116 
|2009  |  |   | 7,705,085  
|      |  |   |            
|Total |  | $ | 411,034,172
|      |  |   |            



20



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



NOTE 9INCOME TAXES

The components of consolidated income tax expense for the years ended December 31, 2006, 2005, and 2004 are as follows:



|                            |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                            |  | 2006 |           |   | 2005 |   |           | 2004 | 
|Current:                    |  |      |           |   |      |   |           |      |  |   |           |  
|Federal                     |  | $    | 3,598,185 |   |      | $ | 2,825,906 |      |  | $ | 971,758   |  
|State                       |  |      | 350,796   |   |      |   | 215,151   |      |  |   | 239,254   |  
|                            |  |      |           |   |      |   |           |      |  |   |           |  
|Total                       |  |      | 3,948,981 |   |      |   | 3,041,057 |      |  |   | 1,211,012 |  
|                            |  |      |           |   |      |   |           |      |  |   |           |  
|Deferred:                   |  |      |           |   |      |   |           |      |  |   |           |  
|Federal                     |  |      | (455,300  | ) |      |   | (565,674  | )    |  |   | (671,293  | )
|State                       |  |      | (8,138    | ) |      |   | (230,303  | )    |  |   | (266,073  | )
|                            |  |      |           |   |      |   |           |      |  |   |           |  
|Total                       |  |      | (463,438  | ) |      |   | (795,977  | )    |  |   | (937,366  | )
|                            |  |      |           |   |      |   |           |      |  |   |           |  
|Provisions for income taxes |  | $    | 3,485,543 |   |      | $ | 2,245,080 |      |  | $ | 273,646   |  
|                            |  |      |           |   |      |   |           |      |  |   |           |  

The significant components of the Corporations deferred tax liabilities and assets recorded
pursuant to SFAS No. 109 and included in the Consolidated Balance Sheets at December 31, 2006 and 2005 are as follows:



|                                |  |      |           |   |      |   |           |  
|------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                |  | 2006 |           |   | 2005 |  
|Deferred tax liabilities:       |  |      |           |   |      |   |           |  
|Tax depreciation over book      |  | $    | (208,687  | ) |      | $ | (178,884  | )
|Loan loss recapture             |  |      | 0         |   |      |   | (155,950  | )
|Other                           |  |      | (42,145   | ) |      |   | (46,894   | )
|                                |  |      |           |   |      |   |           |  
|Total deferred tax liabilities  |  | $    | (250,832  | ) |      | $ | (381,728  | )
|                                |  |      |           |   |      |   |           |  
|Deferred tax assets:            |  |      |           |   |      |   |           |  
|Allowance for loan losses       |  |      | 2,742,367 |   |      |   | 2,392,684 |  
|Unrealized lossAFS securities  |  |      | 1,066,546 |   |      |   | 1,212,113 |  
|Net operating loss carryforward |  |      | 114,920   |   |      |   | 146,914   |  
|Accrued bonuses                 |  |      | 93,296    |   |      |   | 93,296    |  
|Nonaccrual loan interest        |  |      | 7,683     |   |      |   | 15,977    |  
|OREO Write-offs                 |  |      | 68,394    |   |      |   | 65,759    |  
|Stock option expense            |  |      | 23,116    |   |      |   | 0         |  
|Other                           |  |      | 66,087    |   |      |   | 68,691    |  
|                                |  |      |           |   |      |   |           |  
|Total deferred tax assets       |  |      | 4,182,409 |   |      |   | 3,995,434 |  
|                                |  |      |           |   |      |   |           |  
|Net deferred tax assets         |  | $    | 3,931,577 |   |      | $ | 3,613,706 |  
|                                |  |      |           |   |      |   |           |  

The realization of deferred tax assets will be based on future taxable income.

The net operating loss carry-forwards available to us as of December 31, 2006 totaled $3.8 million and expire in various years through 2011 for Alabama
state excise taxes.



21



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Total income tax expense differs from the amount of income tax determined by applying the U.S.
statutory federal income tax rate (34%) to pretax income as a result of the following differences for the years ended December 31, 2006, 2005 and 2004:



|                                             |  |      |           |   |      |   |           |      |  |   |            |  
|-------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ---------- | -
|                                             |  | 2006 |           |   | 2005 |   |           | 2004 | 
|Tax expense at statutory rate                |  | $    | 3,257,235 |   |      | $ | 2,307,373 |      |  | $ | 1,920,542  |  
|Increase (decrease) in taxes resulting from: |  |      |           |   |      |   |           |      |  |   |            |  
|Change in valuation allowance                |  |      | 0         |   |      |   | (267,157  | )    |  |   | (1,746,249 | )
|Other non-deductible expenses                |  |      | (42,738   | ) |      |   | (37,884   | )    |  |   | (29,011    | )
|State income taxes                           |  |      | 226,154   |   |      |   | 185,799   |      |  |   | (17,700    | )
|Tax contingency reserve                      |  |      | 31,800    |   |      |   | (31,800   | )    |  |   | 150,000    |  
|Other, net                                   |  |      | 13,092    |   |      |   | 88,749    |      |  |   | (3,936     | )
|                                             |  |      |           |   |      |   |           |      |  |   |            |  
|Total                                        |  | $    | 3,485,543 |   |      | $ | 2,245,080 |      |  | $ | 273,646    |  
|                                             |  |      |           |   |      |   |           |      |  |   |            |  

NOTE 10SHORT-TERM BORROWINGS

Short-term borrowings at December 31 include the following:



|                                               |  |      |            |   |      |   |            |  
|---------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                               |  | 2006 |            |   | 2005 |  
|Federal funds purchased                        |  | $    | 35,000,000 |   |      | $ | 560,000    |  
|Weighted average interest rate at December 31  |  |      | 5.37       | % |      |   | 3.95       | %
|Weighted average interest rate during the year |  |      | 5.09       |   |      |   | 2.99       |  
|Maximum amount outstanding at any month-end    |  | $    | 35,000,000 |   |      | $ | 17,481,000 |  
|Average amount outstanding during the year     |  |      | 3,233,621  |   |      |   | 3,980,698  |  

We have unsecured federal funds lines of credit with correspondent banks totaling $10.0 million.
We have a secured federal funds line of credit with a correspondent bank totaling $10.0 million. We are a member of the FHLB and may borrow short-term and long-term funds up to thirty percent of the Banks total assets. Pursuant to collateral
agreements with the FHLB, advances are secured by Federal Home Loan Bank stock (carried at cost of $6.5 million) and U.S. Treasury, Government sponsored agency securities, and mortgage-backed securities.

We provide clearing and cash management services to community banks. As part of this program we may retain a portion of these funds as unsecured federal
funds purchased up to the limit established by the community bank. We typically sell a significant portion of these funds to upstream correspondent banks. At December 31, 2006 and 2005, our total federal funds purchased through this program
were $35,000,000 and $560,000, respectively.

NOTE 11LONG-TERM DEBT

Advances from the FHLB with an initial maturity of more than one year totaled $110,000,000 and $105,000,000 at December 31, 2006 and 2005,
respectively. These advances are collateralized by the same collateral agreements as short-term funds from the FHLB (See Note 10). Fixed interest rates on these advances ranged from 2.99% to 4.80%, payable monthly or quarterly, with principal due at
various maturities ranging from 2007 to 2016.

The FHLB has the option to convert $35,000,000 in advances to three month LIBOR-based
floating rate advances in 2007, $40,000,000 in 2008, $10,000,000 in 2009, $5,000,000 in 2010, and $5,000,000 in 2011.



22



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Principal maturities on long-term debt are summarized below:



|                    |  |   |            
|------------------- |  | - | -----------
|2007                |  | $ | 10,000,000 
|2008                |  |   | 0          
|2009                |  |   | 10,000,000 
|2010                |  |   | 5,000,000  
|2011 and thereafter |  |   | 85,000,000 
|                    |  |   |            
|Total               |  | $ | 110,000,000
|                    |  |   |            

NOTE 12JUNIOR SUBORDINATED DEBENTURES OWED TO UNCONSOLIDATED
SUBSIDIARY TRUSTS

We formed Nexity Capital Trust II, a Delaware statutory trust, of which 100% of the common equity is owned by the
Corporation. The trust was formed for the purpose of issuing Corporation-obligated mandatory redeemable trust preferred securities to third-party investors and investing the proceeds for the sale of such trust preferred securities solely in junior
subordinated debt securities of the Corporation (the debentures). The debentures held by the trust are the sole assets of the trust. Distributions on the trust preferred securities issued by the trust are payable quarterly at a rate per annum equal
to three-month LIBOR plus 280 basis points.

We have fully and unconditionally guaranteed all obligations of Nexity Capital Trust II on a
subordinated basis with respect to the trust preferred securities. The trust preferred securities and subordinated debentures have 30-year lives with a call option on July 23, 2009 and each interest date thereafter, subject to regulatory
approval, or earlier, depending upon certain changes in tax or investment company laws, or regulatory capital requirements.

Subject to
certain limitations, the trust preferred securities qualify as Tier 1 capital for the Corporation under Federal Reserve Board guidelines.

As a result of applying the provisions of FIN 46, governing when an equity interest should be consolidated, we were required to deconsolidate the subsidiary trust from its financial statements in 2005 and 2006. The deconsolidation of the
net assets and results of operations of the trust had virtually no impact on our financial statements or liquidity position, since we continue to be obligated to repay the debentures held by the trust and guarantees repayment of the trust preferred
securities issued by the trust.

Our consolidated debt obligations related to subsidiary trust holding solely debentures of the Corporation follows:



|                                                                                                          |  |              |            |      |   |           
|--------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---- | - | ----------
|                                                                                                          |  | December 31,
|                                                                                                          |  | 2006         |            | 2005
|3-month LIBOR plus 2.80% junior subordinated debentures owed to Nexity Capital Trust II due July 23, 2034 |  | $            | 12,372,000 |      | $ | 12,372,000



23



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



NOTE 13OTHER OPERATING EXPENSE

Other operating expense for the years ended December 31, includes the following:



|                                   |  |      |           |      |   |           |  |   |          
|---------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                   |  | 2006 |           | 2005 |   | 2004     
|Director fees                      |  | $    | 356,500   |      | $ | 339,500   |  | $ | 333,250  
|Travel and lodging                 |  |      | 516,391   |      |   | 336,870   |  |   | 239,253  
|Telephone and data communications  |  |      | 408,031   |      |   | 302,294   |  |   | 256,729  
|Software maintenance contracts     |  |      | 358,868   |      |   | 257,549   |  |   | 191,596  
|Advertising                        |  |      | 390,002   |      |   | 245,491   |  |   | 184,509  
|Write down of other real estate    |  |      | 7,121     |      |   | 227,664   |  |   | 76,128   
|Accounting                         |  |      | 254,852   |      |   | 217,403   |  |   | 138,045  
|Postage and courier service        |  |      | 231,287   |      |   | 195,365   |  |   | 164,088  
|Investment seminars                |  |      | 135,567   |      |   | 170,954   |  |   | 206,599  
|Consulting fees                    |  |      | 111,037   |      |   | 80,069    |  |   | 211,373  
|Franchise taxes                    |  |      | 220,150   |      |   | 165,000   |  |   | 165,000  
|Bankers blanket bond and insurance |  |      | 179,431   |      |   | 136,428   |  |   | 123,577  
|Other                              |  |      | 1,831,690 |      |   | 1,595,606 |  |   | 1,295,979
|                                   |  |      |           |      |   |           |  |   |          
|Total                              |  | $    | 5,000,927 |      | $ | 4,270,193 |  | $ | 3,586,126
|                                   |  |      |           |      |   |           |  |   |          



24



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



NOTE 14PER SHARE INFORMATION

SFAS No. 128, Earnings Per Share, requires dual presentation of basic and diluted EPS on the face of the Consolidated Statement of Income
and requires a reconciliation of the numerator and denominator of the diluted EPS calculation.

Net income per sharebasic is computed
by dividing net income by the weighted average number of common shares outstanding. Net income per sharediluted is computed by dividing net income by the weighted average number of common shares outstanding and dilutive common share
equivalents using the treasury stock method. Dilutive common share equivalents include common shares issuable upon exercise of outstanding stock options.

In accordance with SFAS No. 128, the calculation of net income per sharebasic and net income per sharediluted for the years ended December 31 are presented below:



|                                                                        |  |      |           |   |      |   |           |  |   |           |  
|----------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- |  | - | --------- | -
|                                                                        |  | 2006 |           |   | 2005 |   | 2004      | 
|Net income per sharebasic computation                                  |  |      |           |   |      |   |           |  |   |           |  
|Net income                                                              |  | $    | 6,094,561 |   |      | $ | 4,541,311 |  | $ | 5,375,006 |  
|Income applicable to common stockholders                                |  | $    | 6,094,561 |   |      | $ | 4,541,311 |  | $ | 5,375,006 |  
|                                                                        |  |      |           |   |      |   |           |  |   |           |  
|Weighted average common shares outstandingbasic                        |  |      | 8,720,929 |   |      |   | 7,415,241 |  |   | 6,941,062 | *
|Less: Weighted average treasury shares                                  |  |      | (224,472  | ) |      |   | 0         |  |   | 0         |  
|                                                                        |  |      |           |   |      |   |           |  |   |           |  
|Weighted average common shares outstanding-basic net of treasury shares |  |      | 8,496,457 |   |      |   | 7,415,241 |  |   | 6,941,062 |  
|                                                                        |  |      |           |   |      |   |           |  |   |           |  
|Net income per sharebasic                                              |  | $    | 0.72      |   |      | $ | 0.61      |  | $ | 0.77      | *
|                                                                        |  |      |           |   |      |   |           |  |   |           |  
|Net income per sharediluted computation                                |  |      |           |   |      |   |           |  |   |           |  
|Income applicable to common stockholders                                |  | $    | 6,094,561 |   |      | $ | 4,541,311 |  | $ | 5,375,006 |  
|                                                                        |  |      |           |   |      |   |           |  |   |           |  
|Weighted average common shares outstandingbasic net of treasury shares |  |      | 8,496,457 |   |      |   | 7,415,241 |  |   | 6,941,062 | *
|Incremental shares from assumed conversions:                            |  |      |           |   |      |   |           |  |   |           |  
|Stock options                                                           |  |      | 550,352   |   |      |   | 602,817   |  |   | 560,508   | *
|                                                                        |  |      |           |   |      |   |           |  |   |           |  
|Weighted average common shares outstandingdiluted                      |  |      | 9,046,809 |   |      |   | 8,018,058 |  |   | 7,501,570 |  
|                                                                        |  |      |           |   |      |   |           |  |   |           |  
|Net income per sharediluted                                            |  | $    | 0.67      |   |      | $ | 0.57      |  | $ | 0.72      | *
|                                                                        |  |      |           |   |      |   |           |  |   |           |  

Options to purchase 1,846,518, 1,917,949, and 1,925,911*, shares of common stock at a price range
of $4* to $20* per share were outstanding at December 31, 2006, 2005 and 2004, respectively.

---

|* | Adjusted for one-for-four reverse stock split effected on September 1, 2005.
|- | ----------------------------------------------------------------------------

NOTE 15EMPLOYEE BENEFIT PLANS

We adopted a pre-tax savings plan (401(k) Plan), which covers substantially
all employees of the Corporation effective January 1, 2000. The 401(k) Plan allows for employer matching contributions and discretionary profit sharing contributions. The Board of Directors approved a discretionary employer matching
contribution and a profit sharing contribution to the 401(k) Plan in 2006, 2005 and 2004. Total expenses of the 401(k) Plan, including amounts contributed, which are included in employee benefits expense for the years ended December 31, 2006,
2005 and 2004 were $293,979, $261,229, and $200,952, respectively.



25



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



In 2004, we began maintaining Supplementary Executive Retirement Plans (SERPs) for
certain officers. These plans provide salary continuation benefits after the participant reaches normal retirement age and continue for 15 years. The SERPs also provide limited benefits in the event of early termination, death, or disability while
employed by the Corporation. The officers vest in the benefits over a ten-year period as defined by the SERPs. In the event of a change of control of the Corporation as defined in the SERPs, the officers become 100% vested in the total benefit. We
have purchased life insurance policies on these officers, the earnings from which offset the expense of the SERPs. For the years ended December 31, 2006, 2005, and 2004, $69,481, $61,644 and $47,487, respectively were charged to operations
related to these SERPs.

NOTE 16STOCK OPTION PLAN

During 1999, we adopted a stock option plan covering certain officers, employees and directors. The maximum number of shares issuable under the plan is 2,250,000, adjusted for the one-for-four reverse stock split
effected on September 1, 2005. Options granted under the plan become exercisable generally over a three-year period. Some of the options granted under the plan became exercisable immediately while other options granted under the plan expire in
periods of five to ten years from the date of grant.

Activity under the plan is summarized below and is adjusted for the one-for-four
reverse stock split effected on September 1, 2005:



|                                                 |  |        |           |   |                               |   |        |        |  |   |                               |   |  |         |        |   |                                |   |            |   |  |   |        |  
|------------------------------------------------ |  | ------ | --------- | - | ----------------------------- | - | ------ | ------ |  | - | ----------------------------- | - |  | ------- | ------ | - | ------------------------------ | - | ---------- | - |  | - | ------ | -
|                                                 |  | 2006   |           |   | 2005                          |   |        | 2004   | 
|                                                 |  | Shares |           |   | Weighted-AverageExercisePrice |   |        | Shares |  |   | Weighted-AverageExercisePrice |   |  | Shares* |        |   | Weighted-AverageExercisePrice* |  
|Outstanding at beginning of period               |  |        | 1,917,949 |   |                               | $ | 7.58   |        |  |   | 1,925,911                     |   |  | $       | 7.56   |   |                                |   | 1,878,474  |   |  | $ | 7.44   |  
|Granted                                          |  |        | 5,000     |   |                               |   | 13.00  |        |  |   | 51,500                        |   |  |         | 13.69  |   |                                |   | 54,125     |   |  |   | 13.00  |  
|Exercised                                        |  |        | (29,505   | ) |                               |   | (4.20  | )      |  |   | (46,356                       | ) |  |         | (11.74 | ) |                                |   | (250       | ) |  |   | (4.00  | )
|Expired                                          |  |        | (46,926   | ) |                               |   | (18.40 | )      |  |   | (13,106                       | ) |  |         | (12.62 | ) |                                |   | (6,438     | ) |  |   | (18.44 | )
|                                                 |  |        |           |   |                               |   |        |        |  |   |                               |   |  |         |        |   |                                |   |            |   |  |   |        |  
|Outstanding at end of period                     |  |        | 1,846,518 |   |                               | $ | 7.37   |        |  |   | 1,917,949                     |   |  | $       | 7.58   |   |                                |   | 1,925,911  |   |  | $ | 7.56   |  
|                                                 |  |        |           |   |                               |   |        |        |  |   |                               |   |  |         |        |   |                                |   |            |   |  |   |        |  
|Options exercisable at end of period             |  |        | 1,815,865 |   |                               | $ | 7.27   |        |  |   | 1,830,379                     |   |  | $       | 7.32   |   |                                |   | 1,802,935  |   |  | $ | 7.20   |  
|Aggregate Intrinsic value of outstanding options |  | $      | 8,623,239 |   |                               |   |        |        |  | $ | 11,162,463                    |   |  |         |        |   |                                | $ | 12,422,094 |   |  |   |        |  
|Aggregate Intrinsic value of exercisable options |  | $      | 8,661,676 |   |                               |   |        |        |  | $ | 11,128,704                    |   |  |         |        |   |                                | $ | 12,259,985 |   |  |   |        |  

---

|* | Adjusted for one-for-four reverse stock split effected on September 1, 2005.
|- | ----------------------------------------------------------------------------

Grant-date fair value is measured on the date of grant using an option-pricing model with market assumptions. The grant-date fair value is amortized into expense on a straight-line basis over the vesting period. We
used the minimum value option pricing method until we began trading as a public company on NASDAQ on September 21, 2005. After this date we applied the Black-Scholes-Merton option-pricing model. Our option pricing models require the use of
highly subjective assumptions, including but not limited to, expected stock price volatility, term, dividend rates, forfeiture rates, and risk-free interest rates, which if changed can materially affect fair value estimates. Accordingly the model
does not necessarily provide a reliable single measure of the fair value of our stock options.



26



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



The following is a summary of our weighted average assumptions used to estimate the weighted-average
per share fair value of options granted on the date of grant using the Black-Scholes-Merton option pricing model since September 21, 2005 and the minimum value option-pricing model the remainder of 2005 and 2004:



|                                                                 |  |      |       |   |      |   |       |      |  |   |      |  
|---------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ---- | -
|                                                                 |  | 2006 |       |   | 2005 |   |       | 2004 | 
|Expected life (in years)                                         |  |      | 5.00  |   |      |   | 4.50  |      |  |   | 4.10 |  
|Expected volatility                                              |  |      | 27.39 | % |      |   | 26.00 | %    |  |   | N/A  |  
|Risk-free interest rate                                          |  |      | 4.65  | % |      |   | 4.07  | %    |  |   | 3.07 | %
|Expected dividend yield                                          |  |      | N/A   |   |      |   | N/A   |      |  |   | N/A  |  
|Weighted-average fair value of options granted during the period |  | $    | 4.32  |   |      | $ | 3.32  |      |  | $ | 1.68 |  

At December 31, 2006, 1,815,865 optioned shares were exercisable at prices between $4.00 and
$20.00 per share for a total of $13,203,047. When options are exercised, par value of the shares issued is recorded as an addition to common stock, and the remainder of the proceeds (including any tax benefit, if applicable) is credited to capital
surplus. No income or expense has been recognized in connection with the exercise of these stock options and any tax benefit earned in 2006, 2005 and 2004 has been deferred. The following table summarizes information about stock options outstanding
at December 31, 2006.



|                         |  |                                 |  |                                           |  |                               |       |                                 |           |                               |   |      
|------------------------ |  | ------------------------------- |  | ----------------------------------------- |  | ----------------------------- | ----- | ------------------------------- | --------- | ----------------------------- | - | -----
|                         |  | Options Outstanding             |  | Options Exercisable                      
|Range of Exercise Prices |  | NumberOutstandingat December 31 |  | Weighted-AverageRemainingContractual Life |  | Weighted-AverageExercisePrice |       | NumberExercisableat December 31 |           | Weighted-AverageExercisePrice
|$  4.00                  |  | 1,320,120                       |  | 2.41 Years                                |  | $                             | 4.00  |                                 | 1,320,120 |                               | $ | 4.00 
|12.00                    |  | 220,250                         |  | 5.44 Years                                |  |                               | 12.00 |                                 | 217,750   |                               |   | 12.00
|13.00                    |  | 5,000                           |  | 9.84 Years                                |  |                               | 13.00 |                                 | 0         |                               |   | 13.00
|13.50                    |  | 31,500                          |  | 8.95 Years                                |  |                               | 13.50 |                                 | 16,502    |                               |   | 13.50
|14.00                    |  | 32,000                          |  | 8.05 Years                                |  |                               | 14.00 |                                 | 23,845    |                               |   | 14.00
|20.00                    |  | 237,648                         |  | 3.55 Years                                |  |                               | 20.00 |                                 | 237,648   |                               |   | 20.00
|                         |  |                                 |  |                                           |  |                               |       |                                 |           |                               |   |      
|                         |  | 1,846,518                       |  | 3.15 Years                                |  | $                             | 7.58  |                                 | 1,815,865 |                               | $ | 7.27 
|                         |  |                                 |  |                                           |  |                               |       |                                 |           |                               |   |      

Total intrinsic value of options exercised was $231,319, $76,951 and $2,500 for the years ended
December 31, 2006, 2005 and 2004, respectively. The total fair value of options vested during the years ended December 31, 2006, 2005 and 2004 was $61,276, $137,321, and $118,041, respectively.

The compensation cost related to our stock option plan charged against income for the years ended December 31, 2006, 2005 and 2004 were $62,476, $0
and $0, respectively. Income tax benefits recognized for the respective years were $21,242, $0 and $0.

Cash received from the exercise of
options was $124,020 for the year ended December 31, 2006. The tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $96,551 for the year ended December 31, 2006.

As of December 31, 2006, there was $85,227 of total unrecognized compensation cost related to the nonvested share based compensation arrangements granted
under the option plan. That cost is expected to be recognized over a weighted-average period of 2 years.



27



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



NOTE 17DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, Disclosure About Fair Value of Financial Instruments, requires entities to disclose the fair value of financial
instruments, both assets and liabilities recognized and not recognized (See Note 18).

Many of our financial instruments lack an available
trading market as characterized by a willing buyer and a willing seller engaging in an exchange transaction. Further, our general practice is to hold our financial instruments to maturity and not to engage in trading activities. Therefore, we used
significant estimates and present value calculations for the purpose of this disclosure. Such estimates involve judgments as to economic conditions, risk characteristics, and future expected loss experience of various financial instruments and other
factors that cannot be determined with precision. The fair value estimates presented herein are based on information available to management as of December 31, 2006 and 2005.

The following is a description of the methods and assumptions used to estimate the fair value of each class of the Corporations financial
instruments:

Cash and short-term investments: The carrying amount is a reasonable estimate of fair value.

Investment securities: For securities available-for-sale and trading securities, fair value equals the carrying amount which is generally the quoted
market price. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans:
For certain categories of loans, such as variable rate loans and other lines of credit, the carrying amount, adjusted for credit risk, is a reasonable estimate of fair value because there is no contractual maturity and/or we have the ability to
reprice the loan as interest rate shifts occur. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities. As the discount rates are based on current loan rates as well as management estimates, the fair values presented may not necessarily be indicative of the value negotiated in an actual sale.

Other financial assets: Include bank-owned life insurance for which the carrying value is a reasonable estimate of fair value and is included in accrued
interest receivable and other assets on the Consolidated Balance Sheets.

Deposit liabilities: The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for
deposits of similar remaining maturities.

Short-term borrowings: The carrying amount is a reasonable estimate of fair value.

Long-term borrowings and subordinated debentures: The fair value of long-term borrowings and subordinated debentures is estimated using discounted
cash flow analyses, based on the Corporations estimated borrowing rates for similar types of borrowing arrangements.

Standby letters
of credit: The fair value of standby letters of credit are generally based upon fees charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties credit standing.

Commitments to extend credit: For certain categories of commitments, and variable rate lines of credit, a reasonable estimate of fair value would be
nominal because we have the ability to reprice the commitment as



28



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



interest rate shifts occur. The fair value of other types of commitments to extend credit is estimated by discounting the potential future cash flows using
the current rate at which similar commitments would be made to borrowers with similar credit ratings. As the discount rates are based on current loan rates as well as management estimates, the fair values presented may not necessarily be indicative
of the value negotiated in an actual sale.

The estimated fair values (in thousands) of the Corporations financial instruments at
December 31 are as follows:



|                                         |  |                |         |                     |      |         |                |  |                     |         |  |   |         |  
|---------------------------------------- |  | -------------- | ------- | ------------------- | ---- | ------- | -------------- |  | ------------------- | ------- |  | - | ------- | -
|                                         |  | 2006           |         |                     | 2005 |        
|                                         |  | CarryingAmount |         | EstimatedFair Value |      |         | CarryingAmount |  | EstimatedFair Value |        
|Financial Assets:                        |  |                |         |                     |      |         |                |  |                     |         |  |   |         |  
|Cash and short-term investments          |  | $              | 27,473  |                     | $    | 27,473  |                |  | $                   | 48,324  |  | $ | 48,324  |  
|Investment securities                    |  |                | 239,533 |                     |      | 239,533 |                |  |                     | 209,018 |  |   | 209,018 |  
|Trading securities                       |  |                | 1,999   |                     |      | 1,999   |                |  |                     | 0       |  |   | 0       |  
|Loans                                    |  |                | 598,541 |                     |      | 598,399 |                |  |                     | 509,106 |  |   | 509,205 |  
|Other financial assets                   |  |                | 6,767   |                     |      | 6,767   |                |  |                     | 5,358   |  |   | 5,358   |  
|Financial Liabilities:                   |  |                |         |                     |      |         |                |  |                     |         |  |   |         |  
|Deposits                                 |  |                | 658,392 |                     |      | 652,863 |                |  |                     | 596,670 |  |   | 587,555 |  
|Long-term borrowings                     |  |                | 110,000 |                     |      | 108,763 |                |  |                     | 105,000 |  |   | 103,540 |  
|Subordinated debentures                  |  |                | 12,372  |                     |      | 12,372  |                |  |                     | 12,372  |  |   | 12,372  |  
|Standby letters of credit                |  |                | 44      |                     |      | 44      |                |  |                     | 34      |  |   | 34      |  
|                                         |  |               
|                                         |  | 2006           |         |                     | 2005 |        
|                                         |  | NotionalAmount |         | EstimatedFair Value |      |         | NotionalAmount |  | EstimatedFair Value |        
|Off-Balance Sheet Financial Instruments: |  |                |         |                     |      |         |                |  |                     |         |  |   |         |  
|Commitments to extend credit             |  | $              | 177,662 |                     | $    | (40     | )              |  | $                   | 212,593 |  | $ | (116    | )

NOTE 18COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK

We have various claims, commitments, and contingent liabilities arising from the normal conduct of our business
which are not reflected in the accompanying consolidated financial statements and are not expected to have any material adverse effect on our financial position or results of operations.

We are defendants in litigation and claims arising from the normal course of business. Based on consultation with legal counsel, management is of the
opinion that the outcome of pending and threatened litigation will not have a material impact on our consolidated financial statements.

We
are party to financial instruments with off-balance sheet risk (See Note 17) in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. The notional value of those instruments reflect the extent of involvement we have in each class of financial
instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Generally, we do not charge a fee to customers to extend a



29



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



commitment. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a
third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to customers. The amount of collateral obtained if deemed necessary by us upon extension of credit is based on
managements credit evaluation of the counterparty.

Our exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters of credit is represented by the notional value of those instruments. We use the same credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. We require collateral or other security to support certain financial instruments with credit risk. The notional and estimated fair value of these financial instruments at December 31, 2006 and 2005 are presented in
Note 17.

NOTE 19REGULATORY MATTERS

The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must
meet specific capital guidelines that involve quantitative measures of the Corporations and the Banks assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporations
and the Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Bank holding companies are not subject to prompt corrective action provisions.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets as defined in the regulations. Management believes, as of December 31, 2006, that the Corporation and
the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2006 and 2005, the Bank was well
capitalized under this regulatory framework. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since
December 31, 2006 that management believes have changed either the Corporations or the Banks capital classifications.



30



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



The Corporations and the Banks actual capital amounts and ratios are also presented in
the table.



|                                         |  |        |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ------ | ------ | ----- | ---------------------------- | - | ------ | -------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | Actual |        |       | For CapitalAdequacy Purposes |   |        | To Be Well CapitalizedUnder Prompt CorrectiveAction Provisions |       
|(Dollars in thousands)                   |  | Amount |        | Ratio |                              |   | Amount |                                                                | Ratio  |  |      | Amount |  | Ratio |       
|As of December 31, 2006:                 |  |        |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|                                         |  |        |        |       |                              |  
|Total Capital (to Risk-Weighted Assets)  |  |        |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Nexity Financial Corporation             |  | $      | 85,655 |       | 11.79                        | % |        | $                                                              | 58,132 |  | 8.00 | %      |  |       | N/A    |  | N/A   |  
|Nexity Bank                              |  |        | 81,540 |       | 11.22                        |   |        |                                                                | 58,114 |  | 8.00 |        |  | $     | 72,643 |  | 10.00 | %
|                                         |  |        |        |       |                              |  
|Tier 1 Capital (to Risk-Weighted Assets) |  |        |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Nexity Financial Corporation             |  |        | 78,243 |       | 10.77                        |   |        |                                                                | 29,066 |  | 4.00 |        |  |       | N/A    |  | N/A   |  
|Nexity Bank                              |  |        | 74,128 |       | 10.20                        |   |        |                                                                | 29,057 |  | 4.00 |        |  |       | 43,586 |  | 6.00  |  
|                                         |  |        |        |       |                              |  
|Tier 1 Capital (to Average Assets)       |  |        |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Nexity Financial Corporation             |  |        | 78,243 |       | 9.26                         |   |        |                                                                | 33,800 |  | 4.00 |        |  |       | N/A    |  | N/A   |  
|Nexity Bank                              |  |        | 74,128 |       | 8.77                         |   |        |                                                                | 33,800 |  | 4.00 |        |  |       | 42,250 |  | 5.00  |  
|                                         |  |        |        |       |                              |  
|As of December 31, 2005:                 |  |        |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|                                         |  |        |        |       |                              |  
|Total Capital (to Risk-Weighted Assets)  |  |        |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Nexity Financial Corporation             |  | $      | 82,892 |       | 12.77                        | % |        | $                                                              | 51,942 |  | 8.00 | %      |  |       | N/A    |  | N/A   |  
|Nexity Bank                              |  |        | 76,083 |       | 11.73                        |   |        |                                                                | 51,909 |  | 8.00 |        |  | $     | 64,886 |  | 10.00 | %
|                                         |  |        |        |       |                              |  
|Tier 1 Capital (to Risk-Weighted Assets) |  |        |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Nexity Financial Corporation             |  |        | 76,425 |       | 11.77                        |   |        |                                                                | 25,971 |  | 4.00 |        |  |       | N/A    |  | N/A   |  
|Nexity Bank                              |  |        | 69,616 |       | 10.73                        |   |        |                                                                | 25,954 |  | 4.00 |        |  |       | 38,931 |  | 6.00  |  
|                                         |  |        |        |       |                              |  
|Tier 1 Capital (to Average Assets)       |  |        |        |       |                              |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Nexity Financial Corporation             |  |        | 76,425 |       | 10.24                        |   |        |                                                                | 29,860 |  | 4.00 |        |  |       | N/A    |  | N/A   |  
|Nexity Bank                              |  |        | 69,616 |       | 9.33                         |   |        |                                                                | 29,860 |  | 4.00 |        |  |       | 37,325 |  | 5.00  |  

NOTE 20NEXITY FINANCIAL CORPORATION (PARENT COMPANY ONLY)

The Parents principal assets are its investments in the Bank, and the principal source of income for the Parent will be dividends from the Bank.
Certain regulatory and legal requirements restrict payment of dividends and lending of funds between the Bank and the Parent.



31



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



The Parents condensed balance sheets at December 31, 2006 and 2005, and condensed
statements of income and of cash flows for the years ended December 31 are presented below:

CONDENSED BALANCE SHEETS



|                                           |  |      |            |      |   |           
|------------------------------------------ |  | ---- | ---------- | ---- | - | ----------
|                                           |  | 2006 |            | 2005
|Assets:                                    |  |      |            |      |   |           
|Cash and cash equivalents                  |  | $    | 4,067,697  |      | $ | 6,804,040 
|Investment in bank subsidiary              |  |      | 73,056,119 |      |   | 68,500,635
|Other investments                          |  |      | 447,000    |      |   | 372,000   
|Other assets                               |  |      | 427,153    |      |   | 109,576   
|                                           |  |      |            |      |   |           
|Total assets                               |  | $    | 77,997,969 |      | $ | 75,786,251
|                                           |  |      |            |      |   |           
|Liabilities and Stockholders Equity:      |  |      |            |      |   |           
|Subordinated debentures                    |  | $    | 12,372,000 |      | $ | 12,372,000
|Long-term borrowings                       |  |      | 0          |      |   | 0         
|Other liabilities                          |  |      | 455,547    |      |   | 142,046   
|                                           |  |      |            |      |   |           
|Total liabilities                          |  |      | 12,827,547 |      |   | 12,514,046
|                                           |  |     
|Stockholders equity                       |  |      | 65,170,422 |      |   | 63,272,205
|                                           |  |      |            |      |   |           
|Total liabilities and stockholders equity |  | $    | 77,997,969 |      | $ | 75,786,251
|                                           |  |      |            |      |   |           

CONDENSED STATEMENTS OF INCOME



|                                                                              |  |      |           |   |      |   |           |      |  |   |           |  
|----------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                              |  | 2006 |           |   | 2005 |   |           | 2004 | 
|Income:                                                                       |  |      |           |   |      |   |           |      |  |   |           |  
|Dividend income                                                               |  | $    | 2,279,823 |   |      | $ | 22,986    |      |  | $ | 10,017    |  
|Other interest income                                                         |  |      | 119,526   |   |      |   | 81,556    |      |  |   | 28,092    |  
|                                                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Total income                                                                  |  |      | 2,399,349 |   |      |   | 104,542   |      |  |   | 38,109    |  
|                                                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Expense:                                                                      |  |      |           |   |      |   |           |      |  |   |           |  
|Interest on notes payable                                                     |  |      | 0         |   |      |   | 43,813    |      |  |   | 68,056    |  
|Interest on subordinated debentures                                           |  |      | 1,002,588 |   |      |   | 776,464   |      |  |   | 734,127   |  
|Salaries and employee benefits                                                |  |      | 62,476    |   |      |   | 0         |      |  |   | 0         |  
|Other operating expense                                                       |  |      | 47,581    |   |      |   | 54,348    |      |  |   | 15,559    |  
|                                                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Total expense                                                                 |  |      | 1,112,645 |   |      |   | 874,625   |      |  |   | 817,742   |  
|                                                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Income (loss) before equity in undistributed income of subsidiaries and taxes |  |      | 1,286,704 |   |      |   | (770,083  | )    |  |   | (779,633  | )
|Equity in undistributed income of subsidiaries                                |  |      | 4,474,630 |   |      |   | 5,054,145 |      |  |   | 5,942,075 |  
|                                                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Income before taxes                                                           |  |      | 5,761,334 |   |      |   | 4,284,062 |      |  |   | 5,162,442 |  
|Income tax benefit                                                            |  |      | (333,227  | ) |      |   | (257,249  | )    |  |   | (212,564  | )
|                                                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Net income                                                                    |  | $    | 6,094,561 |   |      | $ | 4,541,311 |      |  | $ | 5,375,006 |  
|                                                                              |  |      |           |   |      |   |           |      |  |   |           |  



32



---

Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



CONDENSED STATEMENTS OF CASH FLOWS



|                                                                                            |  |      |            |   |      |   |             |      |  |   |            |  
|------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------- | ---- |  | - | ---------- | -
|                                                                                            |  | 2006 |            |   | 2005 |   |             | 2004 | 
|Cash flows from operating activities:                                                       |  |      |            |   |      |   |             |      |  |   |            |  
|Net income                                                                                  |  | $    | 6,094,561  |   |      | $ | 4,541,311   |      |  | $ | 5,375,006  |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |      |            |   |      |   |             |      |  |   |            |  
|Equity in undistributed income of subsidiaries                                              |  |      | (4,474,630 | ) |      |   | (5,054,145  | )    |  |   | (5,942,075 | )
|Stock based compensation                                                                    |  |      | 62,476     |   |      |   | 0           |      |  |   | 0          |  
|Change in other assets                                                                      |  |      | (317,577   | ) |      |   | 96,704      |      |  |   | 425,489    |  
|Change in other liabilities                                                                 |  |      | 313,501    |   |      |   | 127,341     |      |  |   | (9,451     | )
|                                                                                            |  |      |            |   |      |   |             |      |  |   |            |  
|Net cash provided by (used in) operating activities                                         |  |      | 1,678,331  |   |      |   | (288,789    | )    |  |   | (151,031   | )
|                                                                                            |  |      |            |   |      |   |             |      |  |   |            |  
|Cash flows from investing activities:                                                       |  |      |            |   |      |   |             |      |  |   |            |  
|Investment in bank subsidiary                                                               |  |      | 0          |   |      |   | (20,000,000 | )    |  |   | 0          |  
|Investment in nonbank subsidiary                                                            |  |      | 0          |   |      |   | 0           |      |  |   | (84,371    | )
|Net change in equity investments                                                            |  |      | (75,000    | ) |      |   | 0           |      |  |   | 0          |  
|                                                                                            |  |      |            |   |      |   |             |      |  |   |            |  
|Net cash used for investing activities                                                      |  |      | (75,000    | ) |      |   | (20,000,000 | )    |  |   | (84,371    | )
|                                                                                            |  |      |            |   |      |   |             |      |  |   |            |  
|Cash flows from financing activities:                                                       |  |      |            |   |      |   |             |      |  |   |            |  
|Net change in subordinated debentures                                                       |  |      | 0          |   |      |   | 0           |      |  |   | 3,072,000  |  
|Repayment of long-term debt                                                                 |  |      | 0          |   |      |   | 0           |      |  |   | (1,750,000 | )
|Proceeds from issuance of common stock                                                      |  |      | 220,571    |   |      |   | 25,579,541  |      |  |   | 1,000      |  
|Redemption of common stock (treasury stock)                                                 |  |      | (4,560,245 | ) |      |   | 0           |      |  |   | 0          |  
|                                                                                            |  |      |            |   |      |   |             |      |  |   |            |  
|Net cash provided by (used in) financing activities                                         |  |      | (4,339,674 | ) |      |   | 25,579,541  |      |  |   | 1,323,000  |  
|                                                                                            |  |      |            |   |      |   |             |      |  |   |            |  
|Net change in cash and cash equivalents                                                     |  |      | (2,736,343 | ) |      |   | 5,290,752   |      |  |   | 1,087,598  |  
|Cash and cash equivalents at January 1                                                      |  |      | 6,804,040  |   |      |   | 1,513,288   |      |  |   | 425,690    |  
|                                                                                            |  |      |            |   |      |   |             |      |  |   |            |  
|Cash and cash equivalents at December 31                                                    |  | $    | 4,067,697  |   |      | $ | 6,804,040   |      |  | $ | 1,513,288  |  
|                                                                                            |  |      |            |   |      |   |             |      |  |   |            |  

The Parent paid interest of $786,910, $768,943, and $689,173, in 2006, 2005, and 2004,
respectively. The Parent paid taxes or received (benefits) of $35,251, ($320,100), and $117,461, in 2006, 2005, and 2004, respectively.



33



---

NOTE 21QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Selected quarterly results of operations, adjusted for the one-for-four reverse stock split effected September 1, 2005, for the four quarters ended
December 31 are as follows:



|                                                 |  |               |            |   |              |   |               |  |              |            |  |   |           
|------------------------------------------------ |  | ------------- | ---------- | - | ------------ | - | ------------- |  | ------------ | ---------- |  | - | ----------
|                                                 |  | 2006         
|                                                 |  | FourthQuarter |            |   | ThirdQuarter |   | SecondQuarter |  | FirstQuarter
|Interest income                                  |  | $             | 15,228,125 |   |              | $ | 15,268,060    |  | $            | 14,169,852 |  | $ | 13,055,677
|Interest expense                                 |  |               | 9,233,327  |   |              |   | 8,548,482     |  |              | 7,935,443  |  |   | 6,890,693 
|                                                 |  |               |            |   |              |   |               |  |              |            |  |   |           
|Net interest income                              |  |               | 5,994,798  |   |              |   | 6,719,578     |  |              | 6,234,409  |  |   | 6,164,984 
|Provision for loan losses                        |  |               | 425,000    |   |              |   | 420,000       |  |              | 285,000    |  |   | 470,000   
|Noninterest income                               |  |               | 440,085    |   |              |   | 377,931       |  |              | 457,998    |  |   | 388,532   
|Gains (losses) on sales of investment securities |  |               | (9,713     | ) |              |   | 0             |  |              | 250,665    |  |   | 0         
|Noninterest expense                              |  |               | 3,520,505  |   |              |   | 4,159,487     |  |              | 4,177,607  |  |   | 3,981,564 
|                                                 |  |               |            |   |              |   |               |  |              |            |  |   |           
|Income before income taxes                       |  |               | 2,479,665  |   |              |   | 2,518,022     |  |              | 2,480,465  |  |   | 2,101,952 
|Provision for income taxes                       |  |               | 865,283    |   |              |   | 908,984       |  |              | 916,276    |  |   | 795,000   
|                                                 |  |               |            |   |              |   |               |  |              |            |  |   |           
|Net income                                       |  | $             | 1,614,382  |   |              | $ | 1,609,038     |  | $            | 1,564,189  |  | $ | 1,306,952 
|                                                 |  |               |            |   |              |   |               |  |              |            |  |   |           
|Net income per sharebasic                       |  | $             | 0.19       |   |              | $ | 0.19          |  | $            | 0.18       |  | $ | 0.15      
|Net income per sharediluted                     |  |               | 0.18       |   |              |   | 0.18          |  |              | 0.17       |  |   | 0.14      
|Weighted average shares outstandingbasic        |  |               | 8,363,513  |   |              |   | 8,383,025     |  |              | 8,529,986  |  |   | 8,714,408 
|Weighted average shares outstandingdiluted      |  |               | 8,898,251  |   |              |   | 8,922,780     |  |              | 9,085,301  |  |   | 9,286,534 
|                                                 | 
|                                                 |  | 2005         
|                                                 |  | FourthQuarter |            |   | ThirdQuarter |   | SecondQuarter |  | FirstQuarter
|Interest income                                  |  | $             | 12,362,413 |   |              | $ | 10,935,126    |  | $            | 9,639,799  |  | $ | 8,201,298 
|Interest expense                                 |  |               | 6,268,728  |   |              |   | 5,479,716     |  |              | 4,733,971  |  |   | 3,781,661 
|                                                 |  |               |            |   |              |   |               |  |              |            |  |   |           
|Net interest income                              |  |               | 6,093,685  |   |              |   | 5,455,410     |  |              | 4,905,828  |  |   | 4,419,637 
|Provision for loan losses                        |  |               | 580,000    |   |              |   | 545,000       |  |              | 660,000    |  |   | 85,000    
|Noninterest income                               |  |               | 381,175    |   |              |   | 359,556       |  |              | 352,007    |  |   | 343,705   
|Gains on sales of investment securities          |  |               | 0          |   |              |   | 0             |  |              | 468,351    |  |   | 0         
|Noninterest expense                              |  |               | 4,042,129  |   |              |   | 3,540,259     |  |              | 3,359,045  |  |   | 3,181,530 
|                                                 |  |               |            |   |              |   |               |  |              |            |  |   |           
|Income before income taxes                       |  |               | 1,852,731  |   |              |   | 1,729,707     |  |              | 1,707,141  |  |   | 1,496,812 
|Provision for income taxes                       |  |               | 677,024    |   |              |   | 649,234       |  |              | 358,822    |  |   | 560,000   
|                                                 |  |               |            |   |              |   |               |  |              |            |  |   |           
|Net income                                       |  | $             | 1,175,707  |   |              | $ | 1,080,473     |  | $            | 1,348,319  |  | $ | 936,812   
|                                                 |  |               |            |   |              |   |               |  |              |            |  |   |           
|Net income per sharebasic                       |  | $             | 0.13       |   |              | $ | 0.15          |  | $            | 0.19       |  | $ | 0.13      
|Net income per sharediluted                     |  |               | 0.13       |   |              |   | 0.14          |  |              | 0.18       |  |   | 0.12      
|Weighted average shares outstandingbasic        |  |               | 8,709,626  |   |              |   | 7,037,434     |  |              | 6,952,284  |  |   | 6,946,397 
|Weighted average shares outstandingdiluted      |  |               | 9,300,260  |   |              |   | 7,650,493     |  |              | 7,554,331  |  |   | 7,551,720 

NOTE 22CORRECTION OF AN ERROR

Correction of Error

In accordance with SFAS No. 154, Accounting Changes and Error
Corrections, the Consolidated Statement of Cash Flows for the year ended December 31, 2006 previously issued has been restated to include the line item Purchase of trading securities as operating activities rather than investing
activities. The effect of the restatement was to decrease cash flows from operating activities by $1,998,500. The restatement had no effect on total changes in cash and cash equivalents. No restatements were required for the years ended December 31,
2005 or 2004. There were no restatements to the Consolidated Statements of Income, net income per share, any component of stockholders equity or total assets for any year presented.



34



---

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this annual
report on Form 10-K/A:

(3) Listing of Exhibits



|            |  |                                                                                                                                                                                                                                    
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                        
|3.1         |  | Certificate of Incorporation, restated, included as Exhibit 3.1 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and incorporated herein by
reference.                                                           
|            | 
|3.2         |  | Bylaws, included as Exhibit 3.2 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and incorporated herein by reference.                                                                                           
|            | 
|3.3         |  | Certificate of Amendment to the Restated Certificate of Incorporation, included as Exhibit 3.3 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and incorporated
herein by reference.                            
|            | 
|10.1        |  | Incentive Stock Compensation Plan, included as Exhibit 10.1 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and incorporated herein by
reference.+                                                              
|            | 
|10.1.1      |  | Amendment to Incentive Stock Compensation Plan, included as Exhibit 10.1.1 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and incorporated herein by
reference.+                                               
|            | 
|10.2        |  | Form of Employee Stock Option Agreement, included as Exhibit 10.2 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and incorporated herein by
reference.+                                                        
|            | 
|10.3        |  | Noncompetition, Severance, and Employment Agreement with Greg L. Lee, dated December 13, 2000, included as Exhibit 10.3 to the Registrants Amendment No. 1 on Form 10 filed
July 8, 2005, and incorporated herein by reference.+  
|            | 
|10.4        |  | Noncompetition, Severance, and Employment Agreement with David E. Long, dated December 13, 2000, included as Exhibit 10.4 to the Registrants Amendment No. 1 on Form 10 filed
July 8, 2005, and incorporated herein by reference.+
|            | 
|10.5        |  | Noncompetition, Severance, and Employment Agreement with John J. Moran, Dated December 13, 2000, included as Exhibit 10.5 to the Registrants Amendment No. 1 on Form 10 filed
July 8, 2005, and incorporated herein by reference.+
|            | 
|10.6        |  | Employment Agreement with Kenneth T. Vassey, dated November 15, 2001, included as Exhibit 10.6 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and
incorporated herein by reference.+                           
|            | 
|10.7        |  | Salary Continuation Agreement with Greg L. Lee, dated July 20, 2004, included as Exhibit 10.7 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and
incorporated herein by reference.+                            
|            | 
|10.8        |  | Salary Continuation Agreement with David E. Long, dated July 20, 2004, included as Exhibit 10.8 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and
incorporated herein by reference.+                          
|            | 
|10.9        |  | Salary Continuation Agreement with John J. Moran, dated July 20, 2004, included as Exhibit 10.9 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and
incorporated herein by reference.+                          
|            | 
|10.10       |  | Loan and Stock Pledge Agreement with Flag Bank, included as Exhibit 10.10 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and incorporated herein by
reference.                                                 
|            | 
|10.11       |  | Trust Preferred Indenture, included as Exhibit 10.11 to the Registrants Amendment No. 1 on Form 10 filed July 8, 2005, and incorporated herein by reference.                                                                      
|            | 
|14          |  | Code of Ethics, included as Exhibit 14 to the Registrants Form 10-K filed March 14, 2007, and incorporated herein by reference.                                                                                                   
|            | 
|21.1        |  | Subsidiaries of the Registrant                                                                                                                                                                                                     
|            |  | (1) Nexity Bank, a state-chartered bank in Alabama                                                                                                                                                                                 





---

|     |  |                                                                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  | (2) Nexity Capital Trust II, a Delaware statutory trust                                                                                                                 
|     | 
|21.2 |  | Subsidiary of Nexity Bank                                                                                                                                               
|     |  | (1) Nexity Financial Services, Inc., an Alabama corporation                                                                                                             
|     |  | (2) Nexity Financial Services of Florida, Inc.                                                                                                                          
|     |  | (3) Nexity Financial Services of New York, Inc.                                                                                                                         
|     | 
|23.1 |  | Consent of Mauldin & Jenkins, LLC*                                                                                                                                      
|     | 
|23.2 |  | Consent of Ernst & Young LLP, included as Exhibit 23.2 to the Registrants Amendment No. 2 on Form 10K/A filed September 17, 2007, and incorporated herein by
reference.
|     | 
|31.1 |  | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*               
|     | 
|31.2 |  | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*               
|     | 
|32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                
|     | 
|32.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                

---

|* | Indicates filed herewith.
|- | -------------------------

|+ | Indicates management contract or compensatory plan.
|- | ---------------------------------------------------

(b)
Exhibits. The exhibits required by this Item are listed under Item 15(a)(3).

Copies of exhibits are available upon written request to
John J. Moran, Executive Vice President and Chief Financial Officer of Nexity Financial Corporation and online at the SECs website, www.sec.gov.



---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this to be signed on its behalf by the undersigned, thereunto duly authorized.



|                         |  |  |  |                                           |  |     |  |                                                                   
|------------------------ |  |  |  | ----------------------------------------- |  | --- |  | ------------------------------------------------------------------
|                         |  |  |  | NEXITY FINANCIAL CORPORATION (Registrant)
|                         |  |  | 
|Dated September 26, 2007 |  |  |  |                                           |  |    
|                         |  |  |  |                                          
|                         |  |  |  |                                           |  | By: |  | /s/ John J. Moran                                                 
|                         |  |  |  |                                           |  |     |  | John J. Moran Executive Vice President and
Chief Financial Officer





---

Exhibit Index



|            |  |                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                            
|            | 
|23.1        |  | Consent of Mauldin & Jenkins, LLC                                                                                                                      
|            | 
|31.1        |  | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|31.2        |  | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|32.1        |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                 
|            | 
|32.2        |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                 

---

|+ | Indicates management contract or compensatory plan
|- | --------------------------------------------------