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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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|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



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NEXITY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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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 March 14,
2007
|Common Stock, $0.01 par value per share |  | 8,740,680 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                     



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##### Table of Contents

INDEX



|         |  |          |  |                                                                                                                   |  |     
|-------- |  | -------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |          |  |                                                                                                                   |  | Page
|PART I   |  |          |  |                                                                                                                   |  |     
|         |  |          | 
|         |  | Item 1.  |  | General Business                                                                                                  |  | 3   
|         |  | Item 1A. |  | Risk Factors                                                                                                      |  | 12  
|         |  | Item 1B. |  | Unresolved Staff Comments                                                                                         |  | 16  
|         |  | Item 2.  |  | Properties                                                                                                        |  | 17  
|         |  | Item 3.  |  | Legal Proceedings                                                                                                 |  | 17  
|         |  | Item 4.  |  | Submission of Matters to a Vote of Shareholders                                                                   |  | 17  
|         |  |          | 
|PART II  |  |          |  |                                                                                                                   |  |     
|         |  |          | 
|         |  | Item 5.  |  | Market for the Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |  | 18  
|         |  | Item 6.  |  | Selected Financial Data                                                                                           |  | 20  
|         |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 21  
|         |  | Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                        |  | 46  
|         |  | Item 8.  |  | Financial Statements and Supplementary Data                                                                       |  | 47  
|         |  | Item 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                              |  | 78  
|         |  | Item 9A. |  | Controls and Procedures                                                                                           |  | 78  
|         |  | Item 9B. |  | Other Information                                                                                                 |  | 81  
|         |  |          | 
|PART III |  |          |  |                                                                                                                   |  |     
|         |  |          | 
|         |  | Item 10. |  | Directors and Executive Officers and Corporate Governance                                                         |  | 82  
|         |  | Item 11. |  | Executive Compensation                                                                                            |  | 82  
|         |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                    |  | 82  
|         |  | Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                         |  | 82  
|         |  | Item 14. |  | Principal Accountant Fees and Services                                                                            |  | 82  
|         |  |          | 
|PART IV  |  |          |  |                                                                                                                   |  |     
|         |  |          | 
|         |  | Item 15. |  | Exhibits and Financial Statement Schedules                                                                        |  | 83  



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Unless this Annual Report on Form 10-K indicates otherwise or the context otherwise requires, the
terms we, our, us, Nexity Financial Corporation or the Corporation as used herein refer to Nexity Financial Corporation and its subsidiary Nexity Bank, which we sometimes refer to as
Nexity, our bank subsidiary, or the Bank and its other subsidiaries. References herein to the fiscal years 2002, 2003, 2004, 2005 and 2006 mean our fiscal years ended December 31, 2002, 2003, 2004, 2005 and
2006 respectively.

PART I

Item 1. General Business

We were incorporated as a Delaware corporation on March 12, 1999, as GIBC,
Inc. and changed our name to Nexity Financial Corporation on March 26, 1999.

We operate a wholly-owned subsidiary bank,
Nexity Bank, which is headquartered in Birmingham, Alabama with additional correspondent banking offices in Atlanta, Georgia; Myrtle Beach and Columbia, South Carolina; Dallas, Texas; and Winston Salem, North Carolina. We acquired all of the
outstanding common stock of Peoples State Bank, Grant, Alabama, on November 1, 1999. On January 5, 2000, we changed the name of Peoples State Bank to Nexity Bank. The branch in Grant continued to operate as a traditional bank under the
name Peoples State Bank until December 31, 2000, when the assets and liabilities of the Grant Branch were sold.

We
compete in two areas of the commercial banking industry: correspondent banking and Internet banking. The correspondent banking business includes providing bank and bank-related services to community banks. The Internet banking business includes
providing consumer and small-business banking services via the Internet without a branch banking network. Correspondent banking services include loan participations, investment services, and clearing and cash management services.

At December 31, 2006, we had total consolidated assets of $891.0 million, total consolidated deposits of approximately $658.4 million, and total
consolidated stockholders equity of approximately $65.2 million.

Banking Operations

Nexity Bank is an Alabama state chartered bank. Its primary regulators are the Federal Deposit Insurance Corporation and the Alabama State Banking
Department. We conduct deposit business in all 50 states in the United States and conduct loan business primarily in the southeastern United States and Texas.

On January 5, 2000, we received approval from the FDIC to initiate Internet banking operations. On February 22, 2000, these operations began from our office in Birmingham, Alabama.

Correspondent Banking

We provide correspondent
banking services to community banks primarily in the southeastern United States and Texas. These services include loan participations, investment services, and clearing and cash management services.

We generate approximately 90% of our loan production through loan participations with community banks. Loan participations are loans purchased from
community banks because the community bank could not make the loan on its own. The primary reasons that a community bank sells loan participations are because the loan exceeds the banks legal lending limit, it wishes to manage liquidity, or
for other special needs. Our correspondent lenders focus primarily on small and medium-sized banks in Alabama, Florida, Georgia, North Carolina, South Carolina, and Texas. Our lenders have a high level of experience purchasing and selling loans with
community banks and analyzing the different types of loans in these market areas.



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The loans generated through community bank loan participations are typically real estate construction
loans, commercial real estate loans, and loans secured by common stock of community banks. Construction and commercial real estate loans typically exceed the community banks legal lending limit, and the size of the loan is usually between $1
million and $5 million. We underwrite each loan participation purchased using standard underwriting policies and procedures. These loans are geographically dispersed through our market areas, resulting in no concentration in one small geographic
region or state. We manage our risk by making loans on owner-occupied or income producing properties and by requiring collateral values that exceed the loan amount, adequate cash flow to service the debt, and in most cases, the personal guarantees
of principals of the borrowers.

We provide investment services to community banks including fixed income securities sales, investment
portfolio management services, including bond accounting and safekeeping, and asset/liability management services. Our investment sales team markets primarily U.S. Treasury and Agency securities, including mortgage-backed securities products and
municipal securities. Investment representatives also provide portfolio management strategies to community banks. We also offer bond portfolio accounting and safekeeping services, as well as asset/liability management services. Our primary
asset/liability management services are interest-rate risk modeling and consulting on strategies for effective balance sheet management.

Our clearing and cash management services allow community banks to outsource their daily funds management. We will automatically invest or borrow federal funds through an account that is linked to their accounts with the Federal Reserve
Bank. Community banks can access their intra-day account information via the Internet. The online system allows them to perform wire transfers, ACH transactions, currency and coin orders, and other important banking operations. This system also
allows access to critical loan participation accounting information and bond accounting and safekeeping reports.

Internet Banking

We provide deposit products and services to consumers and small businesses via the Internet. The Internet provides an efficient distribution channel for
serving deposit customers across the United States. We use the Internet to provide advantages to customers desiring to purchase financial products with typically more attractive rates than are available through traditional banking channels, together
with easy access to account and product information. Customers may access Nexity Bank on a 24/7 basis through any Internet service provider by means of an acceptable secure Web browser or by telephone or U.S. mail. Customers can access funds using
ATM or debit cards. Customers may review account activity, enter transactions into an on-line account register, pay bills electronically and print bank statement reports, all on a real-time basis.

We also market home equity loan products to consumers through the Internet. Home equity loan products account for approximately 5.5% of loans
outstanding. We use credit scoring systems in the underwriting process as well as external service providers for loan documentation and closing processes.

Nexity Investments, Inc.

During 2006, Nexity Bank established Nexity Investments, Inc. to provide investment portfolio
management services.

Nexity Financial Services, Inc.

During 2002, Nexity Bank established Nexity Financial Services, Inc. to offer fixed annuity insurance products to consumers in the states of Alabama, Florida, Georgia, South Carolina, North Carolina, New York,
Illinois, California and Tennessee. Nexity Financial Services of Florida, Inc. and Nexity Financial Services of New York, Inc. were also formed to offer these products. Nexity Financial Services, Inc. began offering services to consumers in June
2003. After interest rates decreased during the latter part of 2003 and several insurance company providers reduced their efforts in the product, Nexity Financial Services, Inc. staff were re-assigned within the company with one staff member
maintaining the licenses and maintaining the minimal number of existing accounts.



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Competition

All aspects of our business are highly competitive. Generally, we compete with other financial institutions including large banks in major financial centers and other financial intermediaries, such as savings and loan associations, credit
unions, consumer finance companies, investment companies, mutual funds, other mortgage companies and financial service operations of major commercial and retail corporations. Competition among financial institutions is based on a variety of factors
including interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality of service rendered, and the convenience of service delivery. We compete in two areas of the commercial banking industry:
correspondent banking and Internet banking.

Correspondent Banking

Bankers banks have a special banking charter and compete with us on loan participations, investment services, and clearing and cash management services. They typically fund their balance sheet primarily with
overnight federal funds purchased from community banks daily. The Bankers Bank in Atlanta, Georgia is our primary competitor in correspondent banking. The Bankers Bank is approximately twice our size with assets of approximately $2.1 billion. We
compete with it in virtually the same geographic market with similar products and services. Regional banks in our geographical area provide correspondent banking services as well, but these banks offer correspondent services that are typically
ancillary to the traditional banking activities they conduct. We attempt to distinguish our services by concentrating our efforts on start-up banks and small to medium-sized community banks and compete in this market segment by offering responsive,
high-quality service.

Internet Banking

There are three primary groups that provide competition for Internet banking: Internet banks, financial institutions that market products and services via the Internet, and financial institutions that only offer products and services via
the Internet to their existing customer base. Because Internet banking is a process that tends to draw deposits nationally based upon attractive deposit rates (as is the case with us), the Internet banking competitive landscape is fragmented, and we
do not believe any one competitor or group of competitors has a dominant market share.

Internet banks typically offer similar deposit
products and services as those we provide. These services are primarily marketed through websites such as bankrate.com. E*Trade Bank, Capital One Bank and NetBank are some of the larger Internet banks. Some financial institutions (including large
money center banks) also market their products and services through this channel. These two groups are our primary competition, given that the third groups strategy is more defensive in nature. We concentrate our Internet banking efforts on
money market accounts, short-term certificates of deposit, and home equity lines of credit and compete in this market segment by attempting to offer responsive, high-quality service with user-friendly technology.

Nexity Bank advertises nationally primarily online on bankrate.com, bankrate monitor and through online search key words. Our competitors include money
center banks and other competitors who are larger than us which have greater resources. We believe we have competed effectively in the Internet market even with our larger competitors. Our funding strategy has effectively provided adequate funding
of our balance sheet growth to date. The attractive rates we offer with the Internet deposits are supported by a seven-day a week customer service call center which assists new and existing customers with questions, concerns and inquiries. We
believe seven-day a week call center support enhances customer loyalty in an online environment of not meeting face to face with the customer base.

Our business model allows us to offer products and services within both the correspondent and Internet banking areas in a branchless banking structure. The branchless banking structure reduces our required investment in physical assets and
employees. The competitors described above typically compete with us in either correspondent or Internet banking.



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Employees

At December 31, 2006, we employed 94 full-time equivalent employees, 65 of which are located in Birmingham, Alabama. We provide a variety of benefit programs including a retirement plan as well as health, life, disability, and other
insurance. We also maintain training, educational, and affirmative action programs designed to prepare employees for positions of increasing responsibility.

Impact of Inflation

The consolidated financial statements and related consolidated financial data presented herein have
been prepared in accordance with accounting principles generally accepted in the United States and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institutions performance than the effects of general levels of inflation.

Supervision And
Regulation

Nexity Financial Corporation is a bank holding company, registered with the Board of Governors of the Federal Reserve System
under the Bank Holding Company Act of 1956, as amended (BHC Act). As such, we and our subsidiaries are subject to the supervision, examination, and reporting requirements of the BHC Act and the regulations of the Federal Reserve.

Acquisition of Banks

The BHC Act
requires every bank holding company to obtain the Federal Reserves prior approval before:



| |  |  | Acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly
own or control more than 5% of the banks voting shares;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Acquiring all or substantially all of the assets of any bank; or
| | - |  | ----------------------------------------------------------------



| |  |  | Merging or consolidating with any other bank holding company.
| | - |  | -------------------------------------------------------------

Additionally, the BHC Act provides that the Federal Reserve may not approve any of these transactions if it would substantially lessen competition or otherwise function as a restraint of trade, or result in or tend to
create a monopoly, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the communities to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the communities to be served. The Federal Reserves consideration of financial resources generally
focuses on capital adequacy, which is discussed below.

Change in Bank Control

Subject to various exceptions, the BHC Act and the federal Change in Bank Control Act, together with related regulations, require Federal Reserve approval
prior to any person or company acquiring control of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control
is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:



| |  |  | The bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934; or
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | No other person owns a greater percentage of that class of voting securities immediately after the transaction.
| | - |  | ---------------------------------------------------------------------------------------------------------------



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Our common stock is registered under the Securities Exchange Act of 1934. The regulations provide a
procedure for challenge of the rebuttable control presumption.

Permitted Activities

The Gramm-Leach-Bliley Act of 1999 amends the BHC Act and expands the activities in which bank holding companies and affiliates of banks are permitted to
engage. The Gramm-Leach-Bliley Act eliminates many federal and state law barriers to affiliations among banks and securities firms, insurance companies, and other financial service providers. Because we have qualified for and have elected to become
a financial holding company, as described below, we may engage in activities that are:



| |  |  | Financial in nature;
| | - |  | --------------------



| |  |  | Incidental to a financial activity; or
| | - |  | --------------------------------------



| |  |  | Complementary to a financial activity and do not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

The Gramm-Leach-Bliley Act expressly lists the following activities as financial in nature:



| |  |  | Lending, trust and other banking activities;
| | - |  | --------------------------------------------



| |  |  | Insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in
any state;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Providing financial, investment, or advisory services;
| | - |  | ------------------------------------------------------



| |  |  | Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Underwriting, dealing in or making a market in securities;
| | - |  | ----------------------------------------------------------



| |  |  | Activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident to banking or
managing or controlling banks;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Activities permitted outside of the United States that the Federal Reserve has determined to be usual in connection with banking or other financial operations
abroad;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Merchant banking through securities or insurance affiliates; and
| | - |  | ----------------------------------------------------------------



| |  |  | Insurance company portfolio investments.
| | - |  | ----------------------------------------

The Gramm-Leach-Bliley Act also authorizes the Federal Reserve, in consultation with the Secretary of the Treasury, to determine activities in addition to those listed above that are financial in nature or incidental to such financial
activity. In determining whether a particular activity is financial in nature or incidental or complementary to a financial activity, the Federal Reserve must consider (1) the purpose of the BHC Act and Gramm-Leach-Bliley Act, (2) changes
or reasonably expected changes in the marketplace in which financial holding companies compete and in the technology for delivering financial services, and (3) whether the activity is necessary or appropriate to allow financial holding
companies to effectively compete with other financial service providers and to efficiently deliver information and services.

To qualify to
become a financial holding company, each of our depository institution subsidiaries must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least satisfactory. Additionally, we must file an
election with the Federal Reserve to become a financial holding company and provide the Federal Reserve with 30 days written notice prior to engaging in a permitted financial activity. We filed an election, which became effective March 5, 2007 to
become a financial holding company.



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Under the BHC Act, a bank holding company, which has not qualified or elected to become a financial
holding company, is generally prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in nonbanking activities unless, prior to the enactment of the Gramm-Leach-Bliley Act, the
Federal Reserve had found those activities to be so closely related to banking as to be a proper incident to the business of banking. Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the
business of banking include:



| |  |  | Acquiring or servicing loans;
| | - |  | -----------------------------



| |  |  | Leasing personal property;
| | - |  | --------------------------



| |  |  | Conducting discount securities brokerage activities;
| | - |  | ----------------------------------------------------



| |  |  | Performing selected data processing services;
| | - |  | ---------------------------------------------



| |  |  | Acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Performing selected insurance underwriting activities.
| | - |  | ------------------------------------------------------

Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable
cause to believe that the bank holding companys continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of any of its bank subsidiaries.

FDIC Insurance

The FDIC has adopted a risk-based
assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to one of three capital categories:
(1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described below, with the undercapitalized category
including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a
supervisory evaluation that the institutions primary federal regulator provides to the FDIC and information that the FDIC determines to be relevant to the institutions financial condition and the risk posed to the deposit insurance
funds.

The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Capital Adequacy

Both Nexity Financial Corporation and Nexity Bank are required to comply with the capital adequacy
standards established by the Federal Reserve Bank, the FDIC and the State Banking Department of Alabama. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. Nexity Bank is also
subject to risk-based and leverage capital requirements adopted by the State Banking Department of Alabama and the FDIC, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk
categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.



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The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital
consists of two components, Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount
of cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 capital must equal at least 4% of risk- weighted assets. Tier 2 capital generally consists of subordinated debt, other preferred stock, and a
limited amount of loan loss reserves. The total amount of Tier 2 capital is limited to 100% of Tier 1 capital.

In addition, the Federal
Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding
companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserves risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a
leverage ratio of at least 4%. The guidelines also provide that bank holding companies experiencing high internal growth, as is our case, or making acquisitions will be expected to maintain strong capital positions substantially above the minimum
supervisory levels. Furthermore, the Federal Reserve has indicated that it will consider a bank holding companys Tier 1 capital leverage ratio, after deducting all intangibles, and other indicators of capital strength in evaluating proposals
for expansion or new activities.

For further information concerning our regulatory ratios at December 31, 2006, please see Note 19,
Regulatory Matters, of our 2006 Consolidated Financial Statements and Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations. Nexity Financial Corporation and Nexity Bank were classified
as well capitalized at December 31, 2006.

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991 established a system of prompt corrective action to resolve the problems of
undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized) into one of which all institutions are placed. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three
undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution
that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.

Restrictions on Transactions with Affiliates

Both Nexity Financial Corporation and Nexity Bank are subject to the
provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:



| |  |  | A banks loans or extensions of credit to affiliates;
| | - |  | -----------------------------------------------------



| |  |  | A banks investment in affiliates;
| | - |  | ----------------------------------



| |  |  | Assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | The amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | A banks guarantee, acceptance or letter of credit issued on behalf of an affiliate.
| | - |  | ------------------------------------------------------------------------------------



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The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a
banks capital and surplus and, as to all affiliates combined, to 20% of a banks capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral
requirements. Nexity Bank must also comply with other provisions designed to avoid the taking of low-quality assets.

Nexity Financial
Corporation and Nexity Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in the above transactions with affiliates unless the transactions are on
terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

Nexity Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal stockholders and their related
interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more
than the normal risk of repayment or present other unfavorable features.

Community Reinvestment

The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the FDIC
and/or the Federal Reserve shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on Nexity Bank. Additionally, banks are required to publicly disclose the terms of various
Community Reinvestment Act-related agreements. Nexity Bank received a satisfactory CRA rating from the FDIC at its last examination.

Privacy

Under the Gramm-Leach-Bliley Act, financial institutions are required to disclose their policies for collecting and
protecting confidential information. Customers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for third parties that market the institutions own products and
services. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing through electronic mail to consumers. Nexity Bank
has established a privacy policy to ensure compliance with federal requirements and is posted on our website, www.nexitybank.com.

Other Consumer
Laws and Regulations

Interest and other charges collected or contracted for by Nexity Bank are subject to state usury laws and federal
laws concerning interest rates. Nexity Banks loan operations are also subject to federal laws applicable to credit transactions, such as the:



| |  |  | Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
| | - |  | ---------------------------------------------------------------------------------------------------------------



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| |  |  | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Bank Secrecy Act, governing how banks and other firms report certain currency transactions which may involve money laundering activities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Soldiers and Sailors Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in
military service; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Rules and regulations of the various federal agencies charged with the responsibility of implementing the federal laws.
| | - |  | -----------------------------------------------------------------------------------------------------------------------

Nexity Banks deposit operations are subject to the:



| |  |  | Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit
accounts and customers rights and liabilities arising from the use of automated teller machines and other electronic banking services.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Anti-Terrorism Legislation

On October 26, 2001, the President of the United States signed the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism USA PATRIOT Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial
transactions and account relationships as well as enhanced due diligence and know your customer standards in their dealings with foreign financial institutions and foreign customers.

In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between
financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any
financial institution complying with these rules will not be deemed to have violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed above. Nexity Bank currently has policies and procedures in place designed to comply with the USA
PATRIOT Act.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nations financial institutions. We cannot
predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies

Our earnings are affected by domestic economic conditions
and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserves monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks
through the Federal Reserves statutory power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The Federal Reserve, through its monetary and fiscal policies, affects the levels of bank
loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are
subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.



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Available Information

We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, and in accordance therewith, file periodic reports, proxy statements, and other information with the SEC.
This Annual Report on Form 10-K and exhibits along with such future periodic reports, proxy statements, and other information may be inspected and copied at the public reference facilities maintained by the SEC at its principal offices at 100 F.
Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference facilities by contacting the SEC at 1-800-SEC-0330. Copies of such materials may also be obtained at prescribed rates by writing to the SEC.
The SEC maintains a website (http://www.sec.gov) that contains registration statements, reports, proxy and information statements and other information regarding registrants that file electronically with the SEC.

We maintain a website at www.nexitybank.com. We will make financial reports available as the reports are filed and distributed to the SEC pursuant
to Section 13 (a) of the Exchange Act. These documents will be made available on our website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. You may also request a copy of these filings,
at no cost, by writing or telephoning us at the following address:



| |  |                                                                                                                                     |  | 
| |  | ----------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | Nexity Financial Corporation 3500 Blue Lake Drive, Suite
330 ATTENTION: Investor Relations Birmingham, Alabama
35243 (205) 298-6391 |  | 

Item 1A. Risk Factors

Our business, operations, and financial condition are subject to various risks. Some
of these risks are described below. This section does not describe all risks that may be applied to our company, our industry, or our business, and it is intended only as a summary of certain material risk factors.

We may experience rapid growth in the future that could strain our limited resources. Our failure to effectively manage such growth could adversely affect our ability
to earn profits.

We have several offices located throughout the southeastern United States and Texas that are thinly staffed. In some
of these offices, we share administrative support staff with other companies. If we fail to anticipate growth in our lending business or are otherwise unable to provide adequate staffing in any of the markets in which we operate, our credit quality,
underwriting functions and risk management could be adversely affected, resulting in a reduced ability to earn profits.

Failure to implement our
business strategy or to manage our growth effectively may adversely affect our financial performance.

Our business strategy is
dependent upon our ability to offer secure, convenient, cost-effective and comprehensive financial services on the Internet and to community banks throughout the southeastern United States and Texas. The growth and expansion of our business model
may place significant demands on our management, operational and financial resources. Successful implementation of our business strategy will require continued growth of the Internet banking market and correspondent services market and will depend
on our ability to: (i) implement and grow the earning asset strategy; (ii) develop new strategic alliances for products and services; (iii) increase significantly the number of customers using the Internet for their financial service
requirements; (iv) implement and improve the banks operational, financial and management information systems; (v) hire and train qualified personnel; and (vi) satisfy regulatory requirements related to our expansion plans.



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Our business model contains inherent risk because we rely on third-party information in making lending decisions. If
this information is inadequate, we may fail to realize risks in loans that we make, which could adversely affect our credit quality and ability to earn profits.

We are primarily engaged in the business of correspondent banking. We buy loan participations that smaller banks originate and then sell to the secondary market, and we fund loans smaller banks cannot fully fund due
to their low lending limits. As part of this process, we often rely on information provided to us by independent, third-party banks that are more familiar than we are with the markets in which the loans are originated. If such third-party
information is incomplete or inaccurate, or if we fail to adequately review such information, we may fail to realize risks in the loans we make, which could adversely affect our credit quality, resulting in a reduced ability to earn profits.

Our business model contains inherent lending and regulatory risk because we have significant Internet bank operations and often have little personal
interaction with our customers.

A particular risk associated with Internet banking generally is the absence of personal contact with
customers, which may make it difficult to verify the creditworthiness of customers and collateral for home equity loans, especially with out-of-area borrowers. Lack of personal contact with our customers could lead us to underestimate risks in the
home equity loans we make or deposit accounts opened, which could adversely affect our credit quality or fraud account experience, resulting in a reduced ability to earn profits. It also requires that we maintain heightened safeguards against
identity theft, fraud and Bank Secrecy Act violations, and we may design or administer these safeguards in a manner that does not protect us adequately against these issues.

Our deposit customers are likely to be sensitive to price fluctuations for products and may have limited loyalty to us.

The market for Internet banking continues to evolve. Therefore, we are unable to predict whether customers will continue to use the Internet to an extent necessary to support our business. Attractive rates offered by
Nexity Bank may attract a segment of short-term depositors who could close their accounts in pursuit of higher rates elsewhere. We expect that some customer attrition will occur especially within the first few months after a new customer begins to
use the Banks services. We believe that customers who experience difficulty in accessing our bank or in conducting transactions early in their relationship with the Bank could terminate their relationship. In addition, one aspect of the
current Internet banking business is that while many customers use an Internet bank for interest bearing deposit accounts, they are sometimes reluctant to use an Internet bank for other banking services such as loans. Customer attrition, or
reluctance of customers to use the full range of services offered by Nexity Bank in a totally online environment, could have a material adverse effect on our business, operating results and financial condition.

Our operations could be interrupted if our third-party service providers experience difficulty or terminate their services.

We outsource certain operational functions to third parties. If our third-party service providers experience difficulties or terminate their services and
we are unable to replace them with another service provider, our operations could be adversely affected. We depend significantly, and will continue to depend, on a number of relationships with third-party service providers.

Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our
capital resources following this offering will satisfy our current capital requirements. We may, however, need to raise additional capital to support our continued future growth.



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Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at
that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us or you. If we cannot raise additional capital when needed,
our ability to further expand our operations could be materially impaired.

We do not plan to pay dividends for the foreseeable future.

We do not intend to pay cash dividends in the foreseeable future, and any earnings are expected to be retained for use in developing and expanding our
business.

Our business is subject to the success of the local economies where we operate.

Our success significantly depends upon the growth in population, income levels, and housing starts in the local economies where we operate. If the
principal communities in which we operate (Birmingham, Alabama; Atlanta, Georgia; Myrtle Beach and Columbia, South Carolina; Winston-Salem, North Carolina; Dallas, Texas; and the southeastern United States generally) do not grow or if prevailing
economic conditions are unfavorable, our business may not succeed. Adverse economic conditions in our specific market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us, and generally affect our
financial condition and results of operations. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

Adverse market or economic conditions in any of the local communities where we operate may disproportionately increase the risk that our borrowers will
be unable to make their loan payments. An economic downturn could cause our interest income and net interest margin to decrease and our loan loss provision to increase, resulting in losses that materially adversely affect our business, financial
condition, results of operations and cash flows.

Additionally, the market value of the real estate securing loans as collateral could be
adversely affected by unfavorable changes in market and economic conditions. As of December 31, 2006, approximately 77% of our loans held for investment were secured by real estate. Any sustained period of increased payment delinquencies,
foreclosures or losses caused by adverse market or economic conditions in any of the local communities in which we operate could adversely affect the value of our assets, our revenues, results of operations and financial condition.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be
insufficient to assure repayment. We may experience significant loan losses, which could have a material adverse effect on our operating results. Management makes various assumptions and judgments about the collectibility of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses in an attempt to cover any loan losses that may
occur. In determining the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and
local economic conditions and other pertinent information. As we expand into new markets, our determination of the size of the allowance could be understated due to our lack of familiarity with market-specific factors.

If our assumptions are wrong, our current allowance may not be sufficient to cover our loan losses, and adjustments may be necessary to allow for
different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease our net income. Our allowance for loan losses was $7.4 million as of December 31, 2006 and $6.5 million
as of December 31, 2005. Our allowance for loan losses was $4.9 million and $4.1 million as of December 31, 2004 and 2003, respectively.



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In addition, federal and state regulators periodically review our allowance for loan losses and may
require us to increase our provision for loan losses or recognize further loan charge-offs based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory
agencies could have a negative effect on our operating results.

Unexpected changes in interest rates may decrease our net interest income.

If we are unsuccessful in managing interest rate fluctuations, our net interest income could decrease materially. Our operations depend
substantially on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. Like most depository institutions, our earnings
and net interest income are affected by changes in market interest rates and other economic factors beyond our control. If our interest income and net interest margin decrease and our loan loss provision increases, we could experience losses that
materially adversely affect our business, financial condition and results of operations and cash flows.

Competition from financial institutions and
other financial service providers may adversely affect our profitability.

The banking business is highly competitive and we experience
competition in each of our markets from many other financial institutions. In the correspondent banking area, we compete primarily with The Bankers Bank which is based in Atlanta, Georgia and is approximately twice our size in terms of assets and
has a significant presence in the southeastern United States and a longer operating history than we have. We also compete with Internet, commercial and correspondent banks, credit unions, savings and loan associations, mortgage banking firms,
consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions that operate offices in our primary market
areas and elsewhere and provide Internet banking services similar to ours.

We compete with these institutions both in attracting deposits
and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions. As a result, we may face a
competitive disadvantage.

Our success is dependent in part on our ability to keep pace with rapid technological change.

The Internet and the online commerce industry are characterized by rapid technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render our existing technology and systems obsolete. Our success will depend, in part, on our ability to
license leading technologies useful in our business, enhance our services, develop new services and technology that address the increasingly sophisticated and varied needs of our prospective customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis. The development of such technology entails significant technical and business risks. There can be no assurance that we will successfully use new technologies effectively
or adapt our transaction-processing systems to customer requirements or emerging industry standards. If we are unable, for technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or
customer requirements, our business, operating results and financial condition could be materially adversely affected.

Failure to introduce new
products and services successfully may cause us to lose market share.

Our success will depend in part upon our ability to offer new
products and provide new financial services that meet changing customer requirements. If we fail to offer financial products and services that appeal to customers more than those offered by our competitors, we may lose market share, which could
adversely affect our ability to earn profits.



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Our operations could be interrupted if our network or computer systems fail or experience a security breach.

Our computer systems and network infrastructure could be vulnerable to unforeseen problems. Our operations in the Internet banking and
correspondent banking markets are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our
operations could result in a loss of customers and, thereby, have a material adverse effect on our business, operating results and financial condition.

Nexity Bank management invested in redundant systems infrastructure for the bank including hardware, software and monitoring tools at the AT&T Co-location facility in Lithia Springs, Georgia. The redundant systems
are securedly housed in this facility including redundant electrical power, air systems and duplicated internet access lines. Nexity Bank also has a Command Center in Birmingham, Alabama on a separate grid for operating the back up
facility in the event of a local building outage of the headquarters office.

In addition, our operations are dependent upon our ability to
protect the computer systems and network infrastructure used by us against damage from physical break-ins, security breaches and other disruptive problems caused by other Internet users. Such computer break-ins and other disruptions would jeopardize
the security of information stored in and transmitted through such computer systems and network infrastructure, which may result in significant liability to us and deter potential customers. There can be no assurance that our security measures will
be successful. A failure of our security measures could have a material adverse effect on our business, operating results and financial condition.

We
are subject to a variety of laws, many of which may be unclear in their application to Internet operations.

Nexity Bank must comply
with both state and federal law as it conducts banking business over the Internet. As an institution conducting business on a multi-state basis, Nexity Bank must comply with the individual laws and regulations of each host state. These laws may
include various state licensing and registration requirements that are generally applicable to banks as well as state laws and regulations that specifically govern electronic commerce. Compliance with electronic commerce laws may present a
particular challenge as these laws are still being developed in many states. In addition to these state laws and regulations, Congress has considered the adoption of laws that may apply to commerce over the Internet, and, thus, future federal laws
and regulations also may significantly affect the way Nexity Bank conducts business.

A widespread security breach on the Internet may adversely affect
our deposits.

We depend on the Internet for our deposits. Widespread security breaches on the Internet may cause people to avoid
conducting business, including banking, on the Internet and may inhibit growth of our deposits and ability to generate profits.

Item 1B. Unresolved Staff Comments

None.



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Item 2. Properties

We lease office space at 3500 Blue Lake Drive, Suite 330, Birmingham, Alabama 35243.
This location is the main office for Nexity Financial Corporation and Nexity Bank. The office space consists of 15,000 square feet and the lease expires on August 30, 2007. We also lease space at 300 Park Brooke Place, Building 300, Suite 350,
Woodstock, Georgia 30189, at 950 48th Avenue North, Suite 203, Myrtle Beach, South Carolina, 29577, at 611 South Main, Box 900, Grapevine, Texas 76051 at 203 South Stratford Road, Suite B, Winston Salem, North Carolina 27103 and at 1122 Lady Street,
Columbia, SC 29201. The annual rentals totaled $499,437 during 2006. At December 31, 2006, future minimum rental commitments under non-cancelable 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 

We maintain adequate insurance on these properties.

Item 3. Legal Proceedings

From time to time, we are involved in legal proceedings and claims that arise in
the ordinary course of business.

Item 4. Submission of Matters to a Vote of Shareholders

No matter was submitted to a vote of security
holders by solicitation of proxies or otherwise during the fourth quarter of 2006.



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##### Table of Contents

PART II

Item 5. Market for the Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities

Market for Common Stock and Related Matters

Nexitys common stock trades on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market under the
symbol NXTY. Nexity began trading on the NASDAQ National Market on September 21, 2005. At December 31, 2006, Nexity had 286 shareholders of record and 8,740,680 shares outstanding. Nexity has made no cash dividends to its stockholders
since its formation and does not expect to do so for the foreseeable future.



|                       |  |                              |           |                              |   |           |  |          |         |  |   |        
|---------------------- |  | ---------------------------- | --------- | ---------------------------- | - | --------- |  | -------- | ------- |  | - | -------
|                       |  | Three Months Ended          
|                       |  | December 31                  |           | September 30                 |   | June 30   |  | March 31
|2006                   |  |                              |           |                              |   |           |  |          |         |  |   |        
|Common stock price:    |  |                              |           |                              |   |           |  |          |         |  |   |        
|High                   |  | $                            | 13.38     |                              | $ | 13.15     |  | $        | 13.60   |  | $ | 14.00  
|Low                    |  |                              | 10.85     |                              |   | 10.76     |  |          | 11.21   |  |   | 12.15  
|Close                  |  |                              | 12.04     |                              |   | 11.06     |  |          | 12.50   |  |   | 12.69  
|Cash dividend declared |  |                              | 0.00      |                              |   | 0.00      |  |          | 0.00    |  |   | 0.00   
|Volume traded          |  |                              | 1,122,400 |                              |   | 947,100   |  |          | 997,200 |  |   | 898,900
|                       |  |                              |           |                             
|                       |  | Three monthsendedDecember 31 |           | Period fromSeptember 21 - 30 |   |           |  |         
|2005                   |  |                              |           |                              |   |           |  |          |         |  |   |        
|Common stock price:    |  |                              |           |                              |   |           |  |          |         |  |   |        
|High                   |  | $                            | 16.27     |                              | $ | 18.75     |  |          |         |  |   |        
|Low                    |  |                              | 12.11     |                              |   | 15.22     |  |          |         |  |   |        
|Close                  |  |                              | 13.40     |                              |   | 16.25     |  |          |         |  |   |        
|Cash dividend declared |  |                              | 0.00      |                              |   | 0.00      |  |          |         |  |   |        
|Volume traded          |  |                              | 1,889,905 |                              |   | 1,044,543 |  |          |         |  |   |        

Unregistered Sales of Securities

None.

Securities Authorized for Issuance Under Equity
Compensation Plans

The information required by Item 201(d) of Regulation S-K is provided under Item 12, Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, Securities Authorized for Issuance under Equity Compensation Plans, which is incorporated herein by reference.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

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. We had no stock repurchases during the three months ended December 31, 2006. At December 31, 2006, we had repurchased 365,950 shares or 91.5%
of shares authorized for repurchase.



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Performance Graph

LOGO



|                             |  |               |  |          |  |          |  |          |  |          |  |         
|---------------------------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                             |  | Period Ending
|Index                        |  | 9/21/05       |  | 12/31/05 |  | 03/31/06 |  | 06/30/06 |  | 09/30/06 |  | 12/31/06
|Nexity Financial Corporation |  | 100.00        |  | 82.46    |  | 78.09    |  | 76.92    |  | 68.06    |  | 74.09   
|Russell 2000                 |  | 100.00        |  | 103.97   |  | 118.47   |  | 112.52   |  | 113.01   |  | 123.07  
|SNL NASDAQ Bank Index        |  | 100.00        |  | 103.06   |  | 109.05   |  | 107.81   |  | 110.83   |  | 115.70  



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##### Table of Contents

Item 6. Selected Financial Data

Our summary consolidated financial data is presented below as of and for
the years ended December 31, 2002 through 2006. The financial data below has been adjusted to reflect the one-for-four reverse stock split approved by our stockholders on August 31, 2005, and effective September 1, 2005. On
September 21, 2005, we completed our initial public offering and raised $25.4 million, net of offering costs. The summary consolidated financial data presented below as of December 31, 2006 and 2005 and for each of the years in the
three-year period ended December 31, 2006, are derived from our audited financial statements and related notes included in this report and should be read in conjunction with the consolidated financial statements and related notes, along with
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations. The summary consolidated financial data as of December 31, 2004, 2003 and 2002 and for each of the years in the two-year period
ended December 31, 2003 have been derived from our audited financial statements that are not included in this Annual Report on Form 10-K.



|                                                              |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|------------------------------------------------------------- |  | ----------------------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | - |  | ---- | ----------- | - |  | - | ----------- | -
|                                                              |  | As of and for the Years ended December 31 |            
|                                                              |  | 2006                                      |             |   | 2005 |   |             | 2004 |  |   | 2003        |   |  | 2002 |            
|Summary of Operating Results                                  |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Interest income                                               |  | $                                         | 57,721,714  |   |      | $ | 41,138,636  |      |  | $ | 28,612,182  |   |  | $    | 25,667,198  |   |  | $ | 24,170,160  |  
|Interest expense                                              |  |                                           | 32,607,945  |   |      |   | 20,264,076  |      |  |   | 12,166,829  |   |  |      | 11,169,458  |   |  |   | 12,217,437  |  
|                                                              |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Net interest income                                           |  |                                           | 25,113,769  |   |      |   | 20,874,560  |      |  |   | 16,445,353  |   |  |      | 14,497,740  |   |  |   | 11,952,723  |  
|Provision for loan losses                                     |  |                                           | 1,600,000   |   |      |   | 1,870,000   |      |  |   | 1,115,000   |   |  |      | 1,125,000   |   |  |   | 1,785,000   |  
|                                                              |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Net interest income after provision for loan losses           |  |                                           | 23,513,769  |   |      |   | 19,004,560  |      |  |   | 15,330,353  |   |  |      | 13,372,740  |   |  |   | 10,167,723  |  
|Noninterest income                                            |  |                                           | 1,905,498   |   |      |   | 1,904,794   |      |  |   | 1,704,334   |   |  |      | 1,111,126   |   |  |   | 561,002     |  
|Noninterest expense                                           |  |                                           | 15,839,163  |   |      |   | 14,122,963  |      |  |   | 11,386,035  |   |  |      | 10,322,234  |   |  |   | 9,451,885   |  
|                                                              |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Income before income taxes                                    |  |                                           | 9,580,104   |   |      |   | 6,786,391   |      |  |   | 5,648,652   |   |  |      | 4,161,632   |   |  |   | 1,276,840   |  
|Provision (benefit) for income taxes*                         |  |                                           | 3,485,543   |   |      |   | 2,245,080   |      |  |   | 273,646     |   |  |      | (514,310    | ) |  |   | 70,110      |  
|                                                              |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Net income                                                    |  | $                                         | 6,094,561   |   |      | $ | 4,541,311   |      |  | $ | 5,375,006   |   |  | $    | 4,675,942   |   |  | $ | 1,206,730   |  
|                                                              |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Net income per sharebasic                                    |  | $                                         | 0.72        |   |      | $ | 0.61        |      |  | $ | 0.77        |   |  | $    | 0.67        |   |  | $ | 0.18        |  
|Net income per sharediluted                                  |  | $                                         | 0.67        |   |      | $ | 0.57        |      |  | $ | 0.72        |   |  | $    | 0.62        |   |  | $ | 0.16        |  
|Average common shares outstandingbasic                       |  |                                           | 8,496,457   |   |      |   | 7,415,241   |      |  |   | 6,941,062   |   |  |      | 6,934,518   |   |  |   | 6,879,058   |  
|Average common shares outstandingdiluted                     |  |                                           | 9,046,809   |   |      |   | 8,018,058   |      |  |   | 7,501,570   |   |  |      | 7,494,238   |   |  |   | 7,495,235   |  
|                                                              |  |                                           |             |   |     
|Selected Period-End Balance Sheet Data                        |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Total assets                                                  |  | $                                         | 891,021,501 |   |      | $ | 784,517,793 |      |  | $ | 610,765,668 |   |  | $    | 522,679,049 |   |  | $ | 458,767,322 |  
|Interest-earning assets                                       |  |                                           | 869,366,403 |   |      |   | 770,693,369 |      |  |   | 601,671,293 |   |  |      | 518,111,286 |   |  |   | 454,823,005 |  
|Investment securities                                         |  |                                           | 239,532,759 |   |      |   | 209,018,026 |      |  |   | 200,658,859 |   |  |      | 176,012,083 |   |  |   | 132,064,044 |  
|Loansnet of unearned income                                  |  |                                           | 605,953,221 |   |      |   | 515,573,188 |      |  |   | 387,503,339 |   |  |      | 324,059,297 |   |  |   | 315,360,133 |  
|Deposits                                                      |  |                                           | 658,392,462 |   |      |   | 596,669,644 |      |  |   | 456,691,342 |   |  |      | 388,255,217 |   |  |   | 357,928,631 |  
|Noninterest-bearing deposits                                  |  |                                           | 6,677,509   |   |      |   | 4,300,846   |      |  |   | 3,319,315   |   |  |      | 1,724,487   |   |  |   | 4,997,969   |  
|Interest-bearing deposits                                     |  |                                           | 651,714,953 |   |      |   | 592,368,798 |      |  |   | 453,372,027 |   |  |      | 386,530,730 |   |  |   | 352,930,662 |  
|Interest-bearing liabilities                                  |  |                                           | 809,086,953 |   |      |   | 710,300,798 |      |  |   | 568,008,027 |   |  |      | 487,580,730 |   |  |   | 423,980,662 |  
|Long-term borrowings                                          |  |                                           | 110,000,000 |   |      |   | 105,000,000 |      |  |   | 95,000,000  |   |  |      | 86,750,000  |   |  |   | 61,750,000  |  
|Stockholders equity                                          |  |                                           | 65,170,422  |   |      |   | 63,272,205  |      |  |   | 35,558,306  |   |  |      | 30,582,669  |   |  |   | 26,439,688  |  
|                                                              |  |                                           |             |   |     
|Selected Ratios                                               |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Return on average assets                                      |  |                                           | 0.75        | % |      |   | 0.67        | %    |  |   | 0.96        | % |  |      | 0.95        | % |  |   | 0.31        | %
|Return on average stockholders equity                        |  |                                           | 9.78        |   |      |   | 10.38       |      |  |   | 16.40       |   |  |      | 16.10       |   |  |   | 4.87        |  
|Net yield on average interest-earning assets (tax equivalent) |  |                                           | 3.15        |   |      |   | 3.13        |      |  |   | 2.97        |   |  |      | 2.98        |   |  |   | 3.07        |  
|Average loans to average deposits                             |  |                                           | 88.07       |   |      |   | 86.60       |      |  |   | 83.09       |   |  |      | 81.79       |   |  |   | 90.97       |  
|Total loans to interest-earning assets                        |  |                                           | 69.70       |   |      |   | 66.90       |      |  |   | 64.40       |   |  |      | 62.55       |   |  |   | 69.34       |  
|Noninterest-bearing deposits to total deposits                |  |                                           | 1.01        |   |      |   | 0.72        |      |  |   | 0.73        |   |  |      | 0.44        |   |  |   | 1.40        |  
|Net loan losses to average loans                              |  |                                           | 0.12        |   |      |   | 0.07        |      |  |   | 0.09        |   |  |      | 0.29        |   |  |   | 0.45        |  
|Nonperforming assets to total loans                           |  |                                           | 0.87        |   |      |   | 0.80        |      |  |   | 0.49        |   |  |      | 0.27        |   |  |   | 0.33        |  
|Allowance for loan losses to total loans                      |  |                                           | 1.22        |   |      |   | 1.25        |      |  |   | 1.27        |   |  |      | 1.27        |   |  |   | 1.23        |  
|Allowance for loan losses to nonperforming loans              |  |                                           | 1,442.21    |   |      |   | 243.93      |      |  |   | 271.15      |   |  |      | 1,365.09    |   |  |   | 574.93      |  
|Average stockholders equity to average assets                |  |                                           | 7.70        |   |      |   | 6.44        |      |  |   | 5.83        |   |  |      | 5.92        |   |  |   | 6.30        |  
|Tier 1 risk-based capital ratio                               |  |                                           | 10.77       |   |      |   | 11.77       |      |  |   | 9.66        |   |  |      | 9.84        |   |  |   | 9.09        |  
|Total risk-based capital ratio                                |  |                                           | 11.79       |   |      |   | 12.77       |      |  |   | 10.74       |   |  |      | 10.89       |   |  |   | 10.43       |  
|Tier 1 leverage ratio                                         |  |                                           | 9.26        |   |      |   | 10.24       |      |  |   | 7.62        |   |  |      | 7.45        |   |  |   | 7.60        |  
|Efficiency ratio                                              |  |                                           | 59.15       |   |      |   | 63.30       |      |  |   | 63.46       |   |  |      | 67.74       |   |  |   | 76.45       |  
|Dividend payout ratio                                         |  |                                           | 0.00        |   |      |   | 0.00        |      |  |   | 0.00        |   |  |      | 0.00        |   |  |   | 0.00        |  

---

|* | Our effective tax rates were 36.4% for 2006, 33.1% for 2005, 4.8% for 2004, (12.4%) for 2003, and 5.5% for 2002. In 2004 and 2003, we realized substantially all of our loss
carryforwards from previous years and expect our tax expense to more closely reflect statutory federal and state income tax rates going forward.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

The
discussion and tabular data presented below analyze major factors and trends regarding our financial condition and results of operations for each of the three years in the period ended December 31, 2006. Unless otherwise noted, these numbers
have been adjusted to reflect the one-for-four reverse stock split effective September 1, 2005.

The following discussion and analysis
should be read in conjunction with the financial information and the Consolidated Financial Statements (including the notes thereto) contained elsewhere in this annual report on Form 10-K. To the extent that any statement below (or elsewhere in this
document) is not a statement of historical fact and could be considered a forward-looking statement, actual results could differ materially from those in the forward-looking statement.

Forward-Looking Statements

Some of our statements in this annual report on Form 10-K are
forward-looking statements. The words expect, anticipate, intend, consider, plan, believe, seek, should, estimate, and similar expressions
are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made
based upon managements belief as well as assumptions made by, and information currently available to, management. Our actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors
including various risks to which our business is subject. Such risks are described further above at Item 1A, Risk Factors, and include, without limitation:



| | (i) | unanticipated deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses,
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | increased competition with other financial institutions,
| | ---- | --------------------------------------------------------



| | (iii) | lack of sustained growth in the economy in the southeastern United States and the Dallas, Texas area,
| | ----- | -----------------------------------------------------------------------------------------------------



| | (iv) | rapid fluctuations or unanticipated changes in interest rates,
| | ---- | --------------------------------------------------------------



| | (v) | the inability of our bank subsidiary, Nexity Bank, to satisfy regulatory requirements,
| | --- | --------------------------------------------------------------------------------------



| | (vi) | our ability to keep pace with technological changes, and
| | ---- | --------------------------------------------------------



| | (vii) | changes in the legislative and regulatory environment, including compliance with the various provisions of the Sarbanes Oxley Act of 2002.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------

Many of such factors are beyond our ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking
statements. Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future
results. We do not intend to update or reissue any forward-looking statements contained in this report as a result of new information or other circumstances that may become known to us.

Overview

We were founded in 1999 and operate as a bank holding company that competes in two
areas of the commercial banking industry: correspondent banking and Internet banking. Our correspondent banking division markets to community banks primarily in the southeastern United States and Texas. Our Internet banking division provides banking
services to consumers and small businesses across the United States.

Correspondent banking services include loan participations,
investment services, and clearing and cash management services. Income from loan participations was 72.4% of total revenue for the year ended



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##### Table of Contents

December 31, 2006. For the years ended December 31, 2005, and 2004 loan participation income was 68.6%, and 62.1%, respectively, of total revenue.
No other product or service accounts for 15% or more of total consolidated revenue. Our asset growth is dependent on our ability to grow loans outstanding and we generate approximately 90% of our loan production through loan participations with
community banks. We fund this loan production primarily with deposit products and services offered to consumers and small businesses via the Internet. The Internet provides an efficient distribution channel for serving deposit customers without the
costly investment in a branch banking network.

Our primary source of revenue is net interest income. Our net interest income accounted for
92.9% of total revenue for the year ended December 31, 2006 and 91.6%, and 90.6%, for the years ended December 31, 2005 and 2004, respectively. Interest income on loans accounted for 78.6% of total interest income for the year ended
December 31, 2006 and 75.7% and 69.3%, for the years ended 2005, and 2004 respectively.

Our net interest income increased to $25.1
million for the year ended December 31, 2006 from $20.9 million for the year ended December 31, 2005. This increase was primarily attributable to increased volume of earning assets and improvements in the net interest margin. Average
earning assets increased 19.3% to $797.3 million in 2006, compared with $668.4 million in 2005. The net interest margin improved to 3.15% in 2006 from 3.13% in 2005. An analysis of net interest income is provided in the Results of
Operations section of managements discussion and analysis.

Our earnings performance is dependent on our ability to generate
net interest income and the primary source of net interest income is interest income on loans. The primary risks associated with our income generation are credit risk and interest rate risk.

Noninterest income totaled $1.9 million in 2006 and in 2005, and $1.7 million in 2004. The increase in noninterest income in 2006 was mostly due to
higher service charge income, commissions and fees, brokerage and investment services income, and other operating income.

Noninterest
expense increased $1.7 million or 12.2% and totaled $15.8 million in 2006 compared with $14.1 million in 2005. Noninterest expense was higher primarily due to higher salaries and employee benefits and expenses related to the expansion of our
correspondent banking business.

In 2006 we continued to have favorable credit quality as net charge-offs and nonperforming assets have
remained at a satisfactory level. We manage credit risk with underwriting procedures prior to originating loans and ongoing review systems during the life of the loan. These procedures are discussed in more detail in the section entitled
Loans in this managements discussion and analysis. At December 31, 2006, nonperforming assets as a percent of total loans and other real estate owned increased to 0.87% from 0.80% at December 31, 2005. Net charge-offs as
a percent of average loans increased to 0.12% for the year ended December 31, 2006 from 0.07% in 2005.

While short-term interest
rates, including the prime lending rate have increased dramatically over the last year, longer term interest rates have declined or remained relatively stable. This flattening of the yield curve creates a challenge for financial institutions in
managing interest rate risk. During this period of changing interest rates, our net interest margin has improved slightly or remained stable. We manage interest rate risk with monthly analysis of trends related to our net interest margin and the
impact of changing interest rates. We also model future performance expectations based on changing interest rates with a simulation model for asset/liability management. These procedures are discussed in more detail in the section entitled
Market Risk and Asset/Liability Management in this managements discussion and analysis.

Total assets were $891.0 million
at December 31, 2006, up 13.6% from $784.5 million at December 31, 2005. Loans increased $90.4 million or 17.5% in 2006. Deposits were up $61.7 million or 10.3% at December 31, 2006.



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Our strategy is to continue to focus on growing our correspondent bank business by developing existing
relationships with community banks in the southeastern United States and Texas and aggressively pursuing new relationships in these market areas. We will also focus on cross-selling our correspondent bank products and services to our community bank
customers which will stimulate growth and supplement our revenue generation. We will continue to research new products and services as well as enhancements to our existing offerings to meet the changing needs of community banks.

We seek to maintain a safe and secure environment for our business transacted via the Internet. We will continue to invest in new technologies and
systems to protect our information and enhance our Internet banking products and services. We intend to position our deposit product offerings to provide the necessary funding growth for our balance sheet by monitoring the competitive landscape for
interest rates and marketing channels for new customers. We will also continue to develop cross-selling opportunities to our Internet banking customers, which will stimulate deposit growth and supplement our revenue generation.

Critical Accounting Policies and Estimates

Our
accounting policies are in accordance with accounting principles generally accepted in the United States and with general practice within the banking industry. Management makes a number of estimates and assumptions relating to reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during periods presented. Different assumptions in the application
of these methods or policies could result in material changes in our consolidated financial statements. As such, the following policies are considered critical accounting policies for us.

Allowance for Loan Losses

Managements determination of the adequacy of the allowance for loan losses, which is based on the factors and risk identification procedures discussed in the following pages, requires the use of judgments and estimates that may change
in the future. Changes in the factors used by management to determine the adequacy of the allowance, or the availability of new information, could cause the allowance for loan losses to be increased or decreased in future periods. Bank regulatory
agencies, as part of their examination process, may also require that additions be made to the allowance for loan losses based on their judgments and estimates.

Deferred Tax Assets

Managements determination of the realization of the deferred tax asset is
based upon managements judgment of various future events and uncertainties, including the timing and amount of future income earned by certain subsidiaries and the implementation of various tax plans to maximize realization of the deferred tax
asset. Management believes that Nexity Bank will generate sufficient operating earnings to realize the deferred tax benefits. Our 2003 to 2005 consolidated income tax returns are open for examination by governmental authorities. Examination of our
income tax returns or changes in tax law may impact our tax liabilities and resulting provisions for income taxes. See the section below entitled Income Taxes.

Results of Operations

The primary factors affecting the increase in net income for 2006 were a $4.2
million or 20.3% increase in net interest income and a $270,000 decrease in the provision for loan losses. These favorable changes were partially offset by a $1.7 million or 12.2% increase in noninterest expense and a $1.2 million or 55.3% increase
in taxes.

Return on average assets and return on average stockholders equity are key measures of earnings performance. Return on
average assets increased from 0.67% in 2005 to 0.75% in 2006. Return on average stockholders equity decreased from 10.38% in 2005 to 9.78% in 2006.



23



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##### Table of Contents

Net Interest Income

Net interest income, the major component of our income, is the amount by which interest and fees generated by earning assets exceed the total interest costs of the funds used to carry them. Changes in the level of
interest rates and the change in the amount and composition of earning assets and interest-bearing liabilities affect net interest income. Table 1, Comparative Average Balance SheetsYields and Costs, compares average balance sheet items
and analyzes net interest income on a tax equivalent basis for the three years ended December 31, 2006, 2005 and 2004.

Table 1

Comparative Average Balance SheetsYields and Costs



|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|-------------------------------------------------------------------------- |  | -------------- | ----------- | --------------- | ---- | ---------- |  | ---- | -------------- |  | --------------- | ----------- | ---------- | - | ---------- |  | ---- | -
|                                                                           |  | 2006           |             |                 | 2005 |           
|                                                                           |  | AverageBalance |             | Revenue/Expense |      | Yield/Rate |  |      | AverageBalance |  | Revenue/Expense |             | Yield/Rate |  
|Interest-earning assets:                                                   |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Loans (1)                                                                  |  | $              | 543,788,897 |                 | $    | 45,388,240 |  | 8.35 | %              |  | $               | 444,138,333 |            | $ | 31,143,523 |  | 7.01 | %
|Investment securities, taxable (2)                                         |  |                | 229,869,324 |                 |      | 11,055,872 |  | 4.81 |                |  |                 | 202,902,757 |            |   | 9,224,681  |  | 4.55 |  
|Interest-bearing balances due from banks                                   |  |                | 2,310,095   |                 |      | 208,179    |  | 9.01 |                |  |                 | 3,728,643   |            |   | 158,105    |  | 4.24 |  
|Trading securities                                                         |  |                | 270,314     |                 |      | 16,915     |  | 6.26 |                |  |                 | 548         |            |   | 0          |  | 0    |  
|Federal funds sold and securities purchased under agreements to resell     |  |                | 21,050,596  |                 |      | 1,052,508  |  | 5.00 |                |  |                 | 17,653,463  |            |   | 612,327    |  | 3.47 |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Total interest-earning assets                                              |  |                | 797,289,226 |                 |      | 57,721,714 |  | 7.24 | %              |  |                 | 668,423,744 |            |   | 41,138,636 |  | 6.15 | %
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Noninterest-earning assets:                                                |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Cash and due from banks                                                    |  |                | 4,384,703   |                 |      |            |  |      |                |  |                 | 3,161,663   |            |   |            |  |      |  
|Premises and equipment                                                     |  |                | 1,113,868   |                 |      |            |  |      |                |  |                 | 969,852     |            |   |            |  |      |  
|Other, less allowance for loan losses                                      |  |                | 5,989,976   |                 |      |            |  |      |                |  |                 | 7,115,775   |            |   |            |  |      |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Total noninterest-earning assets                                           |  |                | 11,488,547  |                 |      |            |  |      |                |  |                 | 11,247,290  |            |   |            |  |      |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|TOTAL ASSETS                                                               |  | $              | 808,777,773 |                 |      |            |  |      |                |  | $               | 679,671,034 |            |   |            |  |      |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Interest-bearing liabilities:                                              |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Interest-bearing deposits:                                                 |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Interest checking                                                          |  | $              | 4,057,924   |                 | $    | 49,125     |  | 1.21 | %              |  | $               | 4,173,805   |            | $ | 39,013     |  | 0.93 | %
|Savings                                                                    |  |                | 357,457     |                 |      | 4,366      |  | 1.22 |                |  |                 | 486,699     |            |   | 6,008      |  | 1.23 |  
|Money market                                                               |  |                | 224,588,489 |                 |      | 9,522,635  |  | 4.24 |                |  |                 | 227,564,626 |            |   | 6,869,144  |  | 3.02 |  
|Time deposits                                                              |  |                | 382,943,647 |                 |      | 17,864,797 |  | 4.67 |                |  |                 | 276,425,470 |            |   | 9,111,147  |  | 3.30 |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Total interest-bearing deposits                                            |  |                | 611,947,517 |                 |      | 27,440,923 |  | 4.48 |                |  |                 | 508,650,600 |            |   | 16,025,312 |  | 3.15 |  
|Federal funds purchased and securities sold under agreements to repurchase |  |                | 3,233,621   |                 |      | 164,745    |  | 5.09 |                |  |                 | 3,980,698   |            |   | 119,103    |  | 2.99 |  
|Long-term debt                                                             |  |                | 104,328,767 |                 |      | 3,999,689  |  | 3.83 |                |  |                 | 101,101,370 |            |   | 3,343,197  |  | 3.31 |  
|Subordinated debentures                                                    |  |                | 12,372,000  |                 |      | 1,002,588  |  | 8.10 |                |  |                 | 12,372,000  |            |   | 776,464    |  | 6.28 |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Total interest-bearing liabilities                                         |  |                | 731,881,905 |                 |      | 32,607,945 |  | 4.46 | %              |  |                 | 626,104,668 |            |   | 20,264,076 |  | 3.24 | %
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Noninterest-bearing liabilities:                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Demand deposits                                                            |  |                | 5,500,135   |                 |      |            |  |      |                |  |                 | 4,237,220   |            |   |            |  |      |  
|Other liabilities                                                          |  |                | 9,091,984   |                 |      |            |  |      |                |  |                 | 5,568,524   |            |   |            |  |      |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Total noninterest-bearing liabilities                                      |  |                | 14,592,119  |                 |      |            |  |      |                |  |                 | 9,805,744   |            |   |            |  |      |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Stockholders equity                                                       |  |                | 62,303,749  |                 |      |            |  |      |                |  |                 | 43,760,622  |            |   |            |  |      |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                 |  | $              | 808,777,773 |                 |      |            |  |      |                |  | $               | 679,671,034 |            |   |            |  |      |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Net interest income                                                        |  |                |             |                 | $    | 25,113,769 |  |      |                |  |                 |             |            | $ | 20,874,560 |  |      |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Interest income/earning assets                                             |  |                |             |                 |      |            |  | 7.24 | %              |  |                 |             |            |   |            |  | 6.15 | %
|Interest expense/earning assets                                            |  |                |             |                 |      |            |  | 4.09 |                |  |                 |             |            |   |            |  | 3.02 |  
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  
|Net interest income/earning assets                                         |  |                |             |                 |      |            |  | 3.15 | %              |  |                 |             |            |   |            |  | 3.13 | %
|                                                                           |  |                |             |                 |      |            |  |      |                |  |                 |             |            |   |            |  |      |  

---

|(1) | Average loan balances are stated net of unearned income and include nonaccrual loans.
|--- | -------------------------------------------------------------------------------------

|(2) | The weighted average yields on securities are calculated on the basis of the yield to maturity based on the book value of each security.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------



24



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|                                                                           |  |                |             |                 |   |            |  |      |  
|-------------------------------------------------------------------------- |  | -------------- | ----------- | --------------- | - | ---------- |  | ---- | -
|                                                                           |  | 2004           |            
|                                                                           |  | AverageBalance |             | Revenue/Expense |   | Yield/Rate | 
|Interest-earning assets:                                                   |  |                |             |                 |   |            |  |      |  
|Loans (1)                                                                  |  | $              | 347,935,675 |                 | $ | 19,819,683 |  | 5.70 | %
|Investment securities, taxable (2)                                         |  |                | 186,312,794 |                 |   | 8,488,963  |  | 4.56 |  
|Interest-bearing balances due from banks                                   |  |                | 5,449,854   |                 |   | 104,870    |  | 1.92 |  
|Trading securities                                                         |  |                | 157,779     |                 |   | 11,262     |  | 7.14 |  
|Federal funds sold and securities purchased under agreements to resell     |  |                | 12,965,748  |                 |   | 187,404    |  | 1.45 |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|Total interest-earning assets                                              |  |                | 552,821,850 |                 |   | 28,612,182 |  | 5.18 | %
|                                                                           |  |                |             |                 |   |            |  |      |  
|Noninterest-earning assets:                                                |  |                |             |                 |   |            |  |      |  
|Cash and due from banks                                                    |  |                | 2,503,588   |                 |   |            |  |      |  
|Premises and equipment                                                     |  |                | 889,923     |                 |   |            |  |      |  
|Other, less allowance for loan losses                                      |  |                | 6,118,064   |                 |   |            |  |      |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|Total noninterest-earning assets                                           |  |                | 9,511,575   |                 |   |            |  |      |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|TOTAL ASSETS                                                               |  | $              | 562,333,425 |                 |   |            |  |      |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|Interest-bearing liabilities:                                              |  |                |             |                 |   |            |  |      |  
|Interest-bearing deposits:                                                 |  |                |             |                 |   |            |  |      |  
|Interest checking                                                          |  | $              | 6,452,829   |                 | $ | 59,027     |  | 0.91 | %
|Savings                                                                    |  |                | 535,678     |                 |   | 6,467      |  | 1.21 |  
|Money market                                                               |  |                | 211,415,498 |                 |   | 3,903,701  |  | 1.85 |  
|Time deposits                                                              |  |                | 197,774,546 |                 |   | 4,621,625  |  | 2.34 |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|Total interest-bearing deposits                                            |  |                | 416,178,551 |                 |   | 8,590,820  |  | 2.06 |  
|Federal funds purchased and securities sold under agreements to repurchase |  |                | 3,241,081   |                 |   | 46,323     |  | 1.43 |  
|Long-term debt                                                             |  |                | 92,168,716  |                 |   | 2,795,559  |  | 3.03 |  
|Subordinated debentures                                                    |  |                | 11,265,213  |                 |   | 734,127    |  | 6.52 |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|Total interest-bearing liabilities                                         |  |                | 522,853,561 |                 |   | 12,166,829 |  | 2.33 | %
|                                                                           |  |                |             |                 |   |            |  |      |  
|Noninterest-bearing liabilities:                                           |  |                |             |                 |   |            |  |      |  
|Demand deposits                                                            |  |                | 2,584,897   |                 |   |            |  |      |  
|Other liabilities                                                          |  |                | 4,129,707   |                 |   |            |  |      |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|Total noninterest-bearing liabilities                                      |  |                | 6,714,604   |                 |   |            |  |      |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|Stockholders equity                                                       |  |                | 32,765,260  |                 |   |            |  |      |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                 |  | $              | 562,333,425 |                 |   |            |  |      |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|Net interest income                                                        |  |                |             |                 | $ | 16,445,353 |  |      |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|Interest income/earning assets                                             |  |                |             |                 |   |            |  | 5.18 | %
|Interest expense/earning assets                                            |  |                |             |                 |   |            |  | 2.21 |  
|                                                                           |  |                |             |                 |   |            |  |      |  
|Net interest income/earning assets                                         |  |                |             |                 |   |            |  | 2.97 | %
|                                                                           |  |                |             |                 |   |            |  |      |  

---

|(1) | Average loan balances are stated net of unearned income and include nonaccrual loans.
|--- | -------------------------------------------------------------------------------------

|(2) | The weighted average yields on securities are calculated on the basis of the yield to maturity based on the book value of each security.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

Net interest income on a tax equivalent basis increased $4.2 million or 20.3% from $20.9 million in 2005 to $25.1 million in 2006. This increase was
attributable to the increased volume of earning assets, and a stronger net interest margin, which improved from 3.13% in 2005 to 3.15% in 2006. Net interest income on a tax equivalent basis was $16.4 million in 2004, which resulted in a net interest
margin of 2.97%.

Interest income on a tax equivalent basis increased $16.6 million or 40.3% in 2006 due to increased volume of earning
assets and increased yield on earning assets. Average earning assets increased 19.3% to $797.3 million or 98.6% of average total assets in 2006, compared with $668.4 million or 98.4% in 2005. The yield on earning assets increased 109 basis points
from 6.15% in 2005 to 7.24% in 2006. The two primary types of earning assets are loans and investment securities. The income generated from these assets is a function of their quality, growth, and yield. The growth in these earning assets was
primarily the result of improved quality loan demand as average loans increased $99.7 million or 22.4%. Average investment securities increased $27.0 million or 13.3%. The yield on earning assets for the year ended December 31, 2004 was 5.18%.



25



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##### Table of Contents

During 2006, loans, which are typically our highest yielding earning asset, increased as a percentage of
earning assets. Average loans were 68.2% of average earning assets in 2006 versus 66.5% in 2005. The yield on loans increased 134 basis points from 7.01% in 2005 to 8.35% in 2006 largely due to higher loan rates during 2006. The yield on loans for
2004 was 5.70%. The yield on investment securities increased from 4.55% in 2005 to 4.81% in 2006. The yield on Federal funds sold and securities purchased under agreements to resell, collectively, increased 153 basis points from 3.47% in 2005 to
5.00% in 2006. The yield on interest-bearing deposits with banks increased 477 basis points from 4.24% in 2005 to 9.01% in 2006.

Our cost
of funds increased $12.3 million or 60.9% in 2006 due to the increased volume of interest-bearing liabilities and the increased rate paid on interest-bearing liabilities. Average interest-bearing liabilities increased $105.8 million or 16.9% in 2006
to $731.9 million or 91.8% of average earning assets compared to $626.1 million or 93.7% average earning assets in 2005. Interest-bearing liabilities decreased as a percentage of average earning assets primarily due to the additional capital raised
in the third quarter of 2005. Interest-bearing deposits were up $103.3 million or 20.3%, primarily driven by growth in time deposits. Average long-term debt increased $3.2 million from $101.1 million in 2005 to $104.3 million in 2006. The average
rate paid on interest-bearing liabilities increased 122 basis points from 3.24% in 2005 to 4.46% in 2006, primarily due to the increased interest rate environment. The average rate paid on interest-bearing liabilities was 2.33% in 2004. Average
certificates of deposit were 52.3% of interest-bearing liabilities in 2006 versus 44.1% in 2005. Average long-term debt was 14.3% of interest-bearing liabilities in 2006 versus 16.2% in 2005.

The Federal Reserve increased the federal funds target rate four times by 100 basis points in 2006 in increments of 25 basis points and 200 basis points
in 2005. The prime lending rate increased by the same amount at each of these time periods.

The net interest margin, computed by dividing
net interest income by average earning assets, reflects the impact of noninterest-bearing funds on net interest income. Noninterest bearing funds increased as a percent of earning assets in 2006 to 8.2% from 6.3% in 2005 primarily due to the
additional capital raised in the third quarter of 2005. The improved percentage of noninterest bearing funds as a percent of earning assets improved the net interest margin by fifteen basis points. Table 2, Analysis of Net Interest Income
Changes, shows the impact of balance sheet changes, which occurred during 2006, and the changes in interest rate levels.



26



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##### Table of Contents

Table 2

Analysis of Net Interest Income Changes



|                                                                           |  |                       |           |   |                       |   |           |       |  |   |                     |   |  |               |           |   |       |   |           |   |  |   |            |  
|-------------------------------------------------------------------------- |  | --------------------- | --------- | - | --------------------- | - | --------- | ----- |  | - | ------------------- | - |  | ------------- | --------- | - | ----- | - | --------- | - |  | - | ---------- | -
|                                                                           |  | 2006 compared to 2005 |           |   | 2005 compared to 2004 |  
|                                                                           |  | Change inVolume (1)   |           |   | Change inRate         |   |           | Total |  |   | Change inVolume (1) |   |  | Change inRate |           |   | Total |  
|Interest income:                                                           |  |                       |           |   |                       |   |           |       |  |   |                     |   |  |               |           |   |       |   |           |   |  |   |            |  
|Loans (2)                                                                  |  | $                     | 7,707,156 |   |                       | $ | 6,537,561 |       |  | $ | 14,244,717          |   |  | $             | 6,169,713 |   |       | $ | 5,154,127 |   |  | $ | 11,323,840 |  
|Investment securities, taxable                                             |  |                       | 1,275,446 |   |                       |   | 555,745   |       |  |   | 1,831,191           |   |  |               | 754,278   |   |       |   | (18,560   | ) |  |   | 735,718    |  
|Interest-bearing balancesdue from banks                                    |  |                       | (77,252   | ) |                       |   | 127,326   |       |  |   | 50,074              |   |  |               | (41,407   | ) |       |   | 94,642    |   |  |   | 53,235     |  
|Trading securities                                                         |  |                       | 16,915    |   |                       |   | 0         |       |  |   | 16,915              |   |  |               | (11,262   | ) |       |   | 0         |   |  |   | (11,262    | )
|Federal funds sold and securities purchased under agreements to resell     |  |                       | 133,624   |   |                       |   | 306,557   |       |  |   | 440,181             |   |  |               | 87,223    |   |       |   | 337,700   |   |  |   | 424,923    |  
|                                                                           |  |                       |           |   |                       |   |           |       |  |   |                     |   |  |               |           |   |       |   |           |   |  |   |            |  
|Total interest- earning assets                                             |  | $                     | 9,055,889 |   |                       | $ | 7,527,189 |       |  | $ | 16,583,078          |   |  | $             | 6,958,545 |   |       | $ | 5,567,909 |   |  | $ | 12,526,454 |  
|                                                                           |  |                       |           |   |                       |   |           |       |  |   |                     |   |  |               |           |   |       |   |           |   |  |   |            |  
|Interest expense:                                                          |  |                       |           |   |                       |   |           |       |  |   |                     |   |  |               |           |   |       |   |           |   |  |   |            |  
|Interest checking                                                          |  | $                     | (1,111    | ) |                       | $ | 11,223    |       |  | $ | 10,112              |   |  | $             | (21,276   | ) |       | $ | 1,262     |   |  | $ | (20,014    | )
|Savings                                                                    |  |                       | (1,579    | ) |                       |   | (63       | )     |  |   | (1,642              | ) |  |               | (602      | ) |       |   | 143       |   |  |   | (459       | )
|Money market                                                               |  |                       | (90,974   | ) |                       |   | 2,744,465 |       |  |   | 2,653,491           |   |  |               | 318,518   |   |       |   | 2,646,925 |   |  |   | 2,965,443  |  
|Time deposits                                                              |  |                       | 4,212,714 |   |                       |   | 4,540,936 |       |  |   | 8,753,650           |   |  |               | 2,209,173 |   |       |   | 2,280,349 |   |  |   | 4,489,522  |  
|Federal funds purchased and securities sold under agreements to repurchase |  |                       | (25,664   | ) |                       |   | 71,306    |       |  |   | 45,642              |   |  |               | 12,567    |   |       |   | 60,213    |   |  |   | 72,780     |  
|Long-term debt                                                             |  |                       | 109,561   |   |                       |   | 546,931   |       |  |   | 656,492             |   |  |               | 283,596   |   |       |   | 264,042   |   |  |   | 547,638    |  
|Subordinated debentures                                                    |  |                       | 0         |   |                       |   | 226,124   |       |  |   | 226,124             |   |  |               | 70,190    |   |       |   | (27,853   | ) |  |   | 42,337     |  
|                                                                           |  |                       |           |   |                       |   |           |       |  |   |                     |   |  |               |           |   |       |   |           |   |  |   |            |  
|Total interest-bearingliabilities                                          |  |                       | 4,202,947 |   |                       |   | 8,140,922 |       |  |   | 12,343,869          |   |  |               | 2,872,166 |   |       |   | 5,225,081 |   |  |   | 8,097,247  |  
|                                                                           |  |                       |           |   |                       |   |           |       |  |   |                     |   |  |               |           |   |       |   |           |   |  |   |            |  
|Net interest income                                                        |  | $                     | 4,852,942 |   |                       | $ | (613,733  | )     |  | $ | 4,239,209           |   |  | $             | 4,086,379 |   |       | $ | 342,828   |   |  | $ | 4,429,207  |  
|                                                                           |  |                       |           |   |                       |   |           |       |  |   |                     |   |  |               |           |   |       |   |           |   |  |   |            |  

---

|(1) | Volume-rate changes have been allocated to each category based on the percentage of the total change.
|--- | -----------------------------------------------------------------------------------------------------

|(2) | Balances of nonaccrual loans have been included for computational purposes.
|--- | ---------------------------------------------------------------------------

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an allowance
for loan losses that, in managements evaluation, should be adequate to absorb the inherent losses on outstanding loans. The provision for loan losses was $1,600,000, $1,870,000, and $1,115,000 in 2006, 2005, and 2004, respectively. The
provision for loan losses was $270,000 lower in 2006 primarily because of slower loan growth in 2006. The provision for loan losses was $755,000 higher in 2005 primarily because of strong loan growth in 2005.

Net loan charge-offs were $654,912, or 0.12% of average loans in 2006 compared to $315,105, or 0.07% of average loans in 2005 and $305,807, or 0.09% of
average loans in 2004. The allowance for loan losses totaled 1.22% of total loans as of December 31, 2006 compared to 1.25% of loans as of December 31, 2005, and 1.27% as of December 31, 2004. See the sections entitled
Loans, Nonperforming Assets, and Allowance for Loan Losses below for additional information.



27



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##### Table of Contents

Noninterest Income

Noninterest income consists of service charges on deposit accounts, gains on investment securities transactions, brokerage and investment services income, and other commissions and fees generated from various banking
activities. We anticipate noninterest income becoming a more important contributing factor to our overall profitability. Noninterest income totaled $1.9 million in 2006 and 2005 compared to $1.7 million in 2004.

The largest component of noninterest income is brokerage and investment services income. Brokerage and investment services income is generated through
our correspondent banking services, which began operations in 2002. The bulk of the fees generated are through fixed income investment sales to correspondent bank customers. Fees are also generated from the facilitation of brokered CDs and trust
preferred securities offerings for these same customers. Brokerage and investment services income was $851,987 in 2006 compared to $691,632 in 2005 and $877,365 in 2004. The increase in 2006 was primarily due to the continued growth of correspondent
bank customers.

Commissions and fees include revenues from debit card services and loan participation fees. Commissions and fees increased
by $30,807 in 2006 compared to 2005 primarily due to higher loan participation fee income.

Gains on sales of investment securities were
$240,952 in 2006, down $227,399 from $468,351 in 2005 and $207,690 in 2004. The net gains in all three years resulted primarily from investment strategies used to take advantage of current market conditions to provide liquidity for anticipated loan
demand.

Service charges on deposit accounts were up $20,205 to $110,119 in 2006 compared to $89,914 in 2005 and $52,464 in 2004 due to
higher correspondent banking analysis service charges.

Other operating income was up $16,736 to $383,964 in 2006 compared to $367,228 in
2005 and $240,370 in 2004 due primarily to increases in income from our federal funds agent program and cash surrender value life insurance.

Table 3

Other operating income



|                                                |  |      |         |      |   |         |  |   |        
|----------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                |  | 2006 |         | 2005 |   | 2004   
|Earnings on cash surrender value life insurance |  | $    | 235,904 |      | $ | 220,315 |  | $ | 169,554
|Incomefederal funds agent program              |  |      | 135,627 |      |   | 91,783  |  |   | 15,214 
|Gain on sale of other real estate               |  |      | 0       |      |   | 48,000  |  |   | 0      
|Other                                           |  |      | 12,433  |      |   | 7,130   |  |   | 55,602 
|                                                |  |      |         |      |   |         |  |   |        
|Total                                           |  | $    | 383,964 |      | $ | 367,228 |  | $ | 240,370
|                                                |  |      |         |      |   |         |  |   |        

Noninterest Expense

Noninterest expense increased $1.7 million or 12.2% and totaled $15.8 million in 2006 compared with $14.1 million in 2005. In 2005, noninterest expense increased $2.7 million or 24.0% from $11.4 million in 2004.
Noninterest expense was higher primarily due to higher salaries and employee benefits and expenses related to the expansion of our correspondent banking business.

Salaries and employee benefits, the largest component of noninterest expense, totaled $9.5 million in 2006, $8.6 million in 2005, and $6.6 million in 2004. The increases during 2006 and 2005 were primarily due to
investment in new personnel and increased incentive pay as our performance improved. Merit increases also contributed to this increase. At the end of 2006, we employed 94 full time equivalent employees, compared to 87.5 at the end of 2005 and 77.5
at the end of 2004.



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##### Table of Contents

Net occupancy expense increased 9.7% in 2006, largely due to the expansion of our offices in Atlanta and
Winston-Salem. Equipment expense increased $45,195 or 6.7% in 2006 largely due to increased depreciation expense related to investments in computer hardware bank-wide.

Other operating expense increased 17.1% in 2006 largely due to higher travel and lodging expense, advertising costs, software maintenance expense, and telephone and data communications expense. Travel and lodging
expense increased $179,521 or 53.3% in 2006 largely due to the expansion of our correspondent banking business. Advertising costs increased $144,511 or 58.9% in 2006 mostly due to higher internet advertising costs. Software maintenance expense
increased $101,319 or 39.3% in 2006 largely due to our redundant backup site, which began operations in 2005. Telephone and data communications expense increased $105,737 or 35.0% in 2006 again primarily due to our redundant backup site operations.
Other operating expense increased 19.1% in 2005 largely due to higher write-downs on other real estate, travel and lodging expense, software maintenance expense, and accounting fees. Write-downs on other real estate increased $151,536 or 199.05% in
2005 mostly due to writing down the fair value of a medical office building by $162,000 to its appraised value. Travel and lodging expense increased $97,617 or 40.8% in 2005 largely due to the expansion of our correspondent banking business. Table
4, Other operating expense, shows operating expense by category for the years ended December 31, 2006, 2005, and 2004.

Table 4

Other operating expense



|                                   |  |      |           |      |   |           |  |   |          
|---------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                   |  | 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
|                                   |  |      |           |      |   |           |  |   |          

Our overhead efficiency ratio improved to 59.2% in 2006 compared to 63.3% in 2005 and 63.5% in
2004. The efficiency ratio measures the amount of expense incurred to generate a dollar of revenue. Our efficiency ratio improved in 2006 because growth in revenue outpaced growth in overhead. The efficiency ratio remained flat in 2005 because of
higher overhead related to our expansion efforts. We anticipate further improvement in this ratio as we continue to grow.

Income Taxes

Nexity Financial Corporation and its subsidiaries file a consolidated federal income tax return. We account for income taxes using the liability method
pursuant to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, our deferred tax assets and liabilities were determined by applying federal and state tax rates currently in effect to
our cumulative temporary book/tax differences. 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.



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##### Table of Contents

Total income tax expense included in the Consolidated Statements of Income was $3,485,543 in 2006,
compared to $2,245,080 in 2005. Our effective income tax rates were 36.4% in 2006, 33.1% in 2005, and 4.8% for 2004. The effective tax rate increased in 2006 compared to 2005 primarily due to the recognition of valuation allowances in 2005 related
to loss carryforwards.

We monitor relevant income tax laws for changes in laws or court rulings that may affect on our accrued income
taxes and income tax planning. We consider the impact on estimates and judgments used in our income tax calculations and make necessary adjustment.

Our federal and state income tax returns for the years 2003 through 2005 are open for review and examination by governmental authorities. In the normal course of these examinations, we are subject to challenges from governmental authorities
regarding amounts of taxes due. We believe adequate provision for income taxes has been recorded for all years open for review.

Managements determination of the realization of the deferred tax asset is based upon managements judgment of various future events and uncertainties, including the timing, nature and amount of future income earned by certain
subsidiaries and the implementation of various plans to maximize realization of the deferred tax asset. Management believes that the subsidiaries will generate sufficient operating earnings to realize the deferred tax benefits. At December 31,
2006 we had a net operating loss carryforward for state tax purposes of $2,678,799 compared with $3,534,132 at December 31, 2005. We had no valuation allowance at December 31, 2006 and 2005.

For further information concerning income tax expense, refer to Note 9, Income Taxes, of our 2006 Consolidated Financial Statements.



30



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##### Table of Contents

Balance Sheet Review

Investment Securities

The investment securities portfolio serves as a vehicle to generate interest and dividend income from
the investment of funds, provide liquidity to meet funding requirements, manage interest rate risk, and provide collateral for public deposits and borrowed money. All investment securities are generally classified as available-for-sale and are
recorded at fair value. We primarily invest in securities of U.S. government sponsored agencies and corporations and mortgage related securities with average lives approximating five years.

Table 5

Investment Securities Portfolio Composition



|                                                                  |  |             |             |   |      |   |             |      |  |   |             |  
|----------------------------------------------------------------- |  | ----------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                  |  | December 31 |            
|                                                                  |  | 2006        |             |   | 2005 |   |             | 2004 | 
|Available for Sale(at fair value)                                 |  |             |             |   |      |   |             |      |  |   |             |  
|Securities of U.S. Government sponsored agencies and corporations |  | $           | 95,860,607  |   |      | $ | 63,483,387  |      |  | $ | 55,317,008  |  
|Mortgage-backed securities                                        |  |             | 133,666,652 |   |      |   | 134,295,214 |      |  |   | 131,084,626 |  
|Other debt securities                                             |  |             | 3,040,000   |   |      |   | 4,570,400   |      |  |   | 8,215,300   |  
|                                                                  |  |             |             |   |      |   |             |      |  |   |             |  
|Total debt securities                                             |  |             | 232,567,259 |   |      |   | 202,349,001 |      |  |   | 194,616,934 |  
|Equity securities                                                 |  |             | 6,965,500   |   |      |   | 6,669,025   |      |  |   | 6,041,925   |  
|                                                                  |  |             |             |   |      |   |             |      |  |   |             |  
|Total                                                             |  | $           | 239,532,759 |   |      | $ | 209,018,026 |      |  | $ | 200,658,859 |  
|                                                                  |  |             |             |   |      |   |             |      |  |   |             |  
|Total securities as a percentage of total assets                  |  |             | 26.9        | % |      |   | 26.6        | %    |  |   | 32.9        | %
|                                                                  |  |             |            
|Percentage of Total Securities Portfolio                          |  |             |             |   |      |   |             |      |  |   |             |  
|Securities of U.S. Government sponsored agencies and corporations |  |             | 40.0        | % |      |   | 30.4        | %    |  |   | 27.6        | %
|Mortgage-backed securities                                        |  |             | 55.8        |   |      |   | 64.2        |      |  |   | 65.3        |  
|Other debt securities                                             |  |             | 1.3         |   |      |   | 2.2         |      |  |   | 4.1         |  
|                                                                  |  |             |             |   |      |   |             |      |  |   |             |  
|Total debt securities                                             |  |             | 97.1        |   |      |   | 96.8        |      |  |   | 97.0        |  
|Equity securities                                                 |  |             | 2.9         |   |      |   | 3.2         |      |  |   | 3.0         |  
|                                                                  |  |             |             |   |      |   |             |      |  |   |             |  
|Total                                                             |  |             | 100.00      | % |      |   | 100.0       | %    |  |   | 100.0       | %
|                                                                  |  |             |             |   |      |   |             |      |  |   |             |  

Investment securities were $239.5 million at December 31, 2006, compared with $209.0 million
at December 31, 2005. At December 31, 2006, investment securities represented 26.9% of total assets compared with 26.6% at December 31, 2005. The reason for the slight increase in the mix of investment securities was slower loan
growth in 2006. We had a net unrealized loss on investment securities available-for-sale, net of tax, of $2.0 million at December 31, 2006, compared with a $2.1 million at the same time last year. 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. The amortized cost, fair value, tax equivalent yield, and contractual maturity schedule of debt securities at December 31, 2006 are shown in Table 6.
Actual maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.



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##### Table of Contents

Table 6

Investment Securities Maturity Schedule

(December 31, 2006)

(Dollars in thousands)



|                                    |  |               |         |            |   |                    |  |      |  
|----------------------------------- |  | ------------- | ------- | ---------- | - | ------------------ |  | ---- | -
|                                    |  | AmortizedCost |         | Fair Value |   | TaxEquivalentYield | 
|U.S. government sponsored agencies: |  |               |         |            |   |                    |  |      |  
|Within one year                     |  | $             | 0       |            | $ | 0                  |  | 0.00 | %
|One to five years                   |  |               | 81,263  |            |   | 80,819             |  | 4.89 |  
|Five to ten years                   |  |               | 15,039  |            |   | 15,042             |  | 5.66 |  
|Over ten years                      |  |               | 0       |            |   | 0                  |  | 0.00 |  
|                                    |  |               |         |            |   |                    |  |      |  
|Total                               |  |               | 96,302  |            |   | 95,861             |  | 5.01 |  
|                                    |  |               |         |            |   |                    |  |      |  
|Mortgage-backed securities:         |  |               |         |            |   |                    |  |      |  
|Within one year                     |  |               | 0       |            |   | 0                  |  | 0.00 |  
|One to five years                   |  |               | 1,698   |            |   | 1,632              |  | 3.48 |  
|Five to ten years                   |  |               | 5,613   |            |   | 5,498              |  | 4.61 |  
|Over ten years                      |  |               | 129,004 |            |   | 126,537            |  | 4.90 |  
|                                    |  |               |         |            |   |                    |  |      |  
|Total                               |  |               | 136,315 |            |   | 133,667            |  | 4.87 |  
|                                    |  |               |         |            |   |                    |  |      |  
|Other debt securities:              |  |               |         |            |   |                    |  |      |  
|Within one year                     |  |               | 0       |            |   | 0                  |  | 0.00 |  
|One to five years                   |  |               | 0       |            |   | 0                  |  | 0.00 |  
|Five to ten years                   |  |               | 0       |            |   | 0                  |  | 0.00 |  
|Over ten years                      |  |               | 3,000   |            |   | 3,040              |  | 8.83 |  
|                                    |  |               |         |            |   |                    |  |      |  
|Total                               |  |               | 3,000   |            |   | 3,040              |  | 8.83 |  
|                                    |  |               |         |            |   |                    |  |      |  
|Equity securities (1)               |  |               | 6,965   |            |   | 6,965              |  | N/A  |  
|                                    |  |               |         |            |   |                    |  |      |  
|Total portfolio                     |  | $             | 242,582 |            | $ | 239,533            |  | 4.97 | %
|                                    |  |               |         |            |   |                    |  |      |  

---

|(1) | Equity securities have no contractual maturity or yield and accordingly are excluded from the yield calculation.
|--- | ----------------------------------------------------------------------------------------------------------------

Average investment securities excluding the net unrealized gain or loss on available-for-sale securities were $229.9 million in 2006, an increase of
13.3% from $202.9 million in 2005. The increase in average investment securities was due to the overall growth in the balance sheet and securities purchased to leverage available capital. The average tax equivalent portfolio yield increased 26 basis
points in 2006 due to the higher interest rate environment in 2006.

The duration of the debt securities portfolio increased to
approximately 5.0 years at December 31, 2006 from approximately 4.3 years at December 31, 2005. If interest rates continue to rise, the duration of the portfolio may extend.

We realized $240,952 in gains from the sale of $15.8 million of available-for-sale securities during 2006 versus $468,351 in gains from the sale of $4.6
million of available-for-sale securities during 2005. We realized $207,690 in gains from the sale of $6.9 million of available-for-sale securities during 2004.

We had no investment securities held-to-maturity and recorded at amortized cost at December 31, 2006 and 2005.

At December 31, 2006, we had $2.0 million in trading securities that were marked to market and held short-term. There were no trading securities held at December 31, 2005.



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Loans

Loans, the largest component of earning assets, totaled $606.0 million and represented 68.0% of total assets and 92.0% of total deposits at December 31, 2006, compared with $515.6 million and 65.7% of total assets and 86.4% of total
deposits at December 31, 2005. In 2006, average loans grew 22.4% to $543.8 million from $444.1 million in 2005. The primary strategy for loan generation is buying loan participations from community banks. Community banks sell loan
participations primarily due to legal lending limitations, liquidity purposes, and other special needs. Our correspondent lenders focus primarily on small and medium-sized banks in Alabama, Georgia, Florida, North Carolina, South Carolina, and
Texas. Our lenders have a high level of experience dealing with community banks and analyzing the different types of loans in these market areas.

Loan policies and procedures provide the overall direction for administration of the loan portfolio. The lending strategy focuses on quality growth in each of our market areas. Our loan underwriting process is intended to ensure that sound
and consistent credit decisions are made.

The loans generated through community bank loan participations are typically real estate
construction loans, commercial real estate loans, and loans secured by common stock of community banks. Construction and commercial real estate loans are typically participated because they exceed the community banks legal lending limit, and
the size of the loan is usually between $1 million and $5 million. We use standard underwriting policies and procedures for each loan participation purchased. These loans are geographically dispersed through our market areas and are not concentrated
in one small geographic region or state. We attempt to minimize the risk by generally making a significant amount of these type loans only on owner-occupied properties, by requiring collateral values that exceed the loan amount, adequate cash flow
to service the debt, and in most cases, the personal guarantees of principals of the borrowers.

We have established concentration limits
on real estate construction loans of 350.0% of total capital and at December 31, 2006, these loans totaled $290.9 million or 352.8% of total capital. This exception was deemed temporary and approved by our Board of Directors. We also have
established concentration limits on loans secured by common stock of community banks of 125.0% of total capital and at December 31, 2006 these loans totaled $76.7 million or 93.1% of total capital. This limitation includes loans to stockholders
of community banks and not loans made directly to bank holding companies.

Even though loan policies and procedures may provide the basis
for a quality loan portfolio with minimal risk, at times individual borrowers do encounter problems, which result in lower credit quality and higher risk of loss. Additionally, general deterioration of loan quality may result from weaknesses in
specific industries or the economy in general. During 2006, we did not experience credit deterioration attributable to adverse trends in specific markets or changes in the economy.

The composition of the loan portfolio at December 31 for the last five years is presented in Table 7, Loan Portfolio Composition, below.
Commercial, financial, and agricultural loans increased 1.4% from 2005 and represent 21.0% of gross loans at December 31, 2006. Real estate-construction loans, which were 48.0% of gross loans at December 31, 2006, increased 56.3% compared
to the previous year. The increase in construction loans is due to strong loan production in each of our primary market areas. Real estate-mortgage or commercial real estate loans decreased 8.1% from 2005 and represent 23.0% of gross loans at
December 31, 2006. Commercial real estate loans were lower due to weaker loan demand and paydowns of existing loans. Installment loans to individuals, which include residential real estate loans, represent 2.4% of gross loans and decreased 14.1%
during 2006. Home equity lines of credit decreased 3.2% from 2005 and represent 5.5% of gross loans at December 31, 2006. Lease financing receivables, which represent less than 0.1% of gross loans at December 31, 2006, decreased 55.3%
compared to the previous year. Lease financing receivables were lower in 2006 because we discontinued this product due to credit quality concerns with this product line in 2003. Other loans decreased 15.8% from 2005 and represent less than 0.1% of
gross loans at December 31, 2006.



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##### Table of Contents

Table 7

Loan
Portfolio Composition



|                                        |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|--------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | - |  | ---- | ----------- | - |  | - | ----------- | -
|                                        |  | 2006 |             |   | 2005 |   |             | 2004 |  |   | 2003        |   |  | 2002 |            
|Commercial, financial, and agricultural |  | $    | 127,268,666 |   |      | $ | 125,508,057 |      |  | $ | 86,660,894  |   |  | $    | 70,748,448  |   |  | $ | 63,465,840  |  
|Real estateconstruction                |  |      | 290,876,262 |   |      |   | 186,128,578 |      |  |   | 108,000,807 |   |  |      | 77,648,068  |   |  |   | 77,032,373  |  
|Real estatemortgage                    |  |      | 139,634,491 |   |      |   | 151,883,652 |      |  |   | 140,520,747 |   |  |      | 131,512,411 |   |  |   | 119,593,912 |  
|Installment loans to individuals        |  |      | 14,539,865  |   |      |   | 16,926,398  |      |  |   | 20,664,146  |   |  |      | 14,840,957  |   |  |   | 16,844,788  |  
|Home equity lines of credit             |  |      | 33,200,177  |   |      |   | 34,302,363  |      |  |   | 29,501,006  |   |  |      | 23,838,617  |   |  |   | 30,063,964  |  
|Lease financing receivables             |  |      | 294,298     |   |      |   | 658,757     |      |  |   | 1,952,843   |   |  |      | 5,420,936   |   |  |   | 8,344,864   |  
|Other                                   |  |      | 139,609     |   |      |   | 165,780     |      |  |   | 208,147     |   |  |      | 107,071     |   |  |   | 220,222     |  
|                                        |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Gross loans                             |  |      | 605,953,368 |   |      |   | 515,573,585 |      |  |   | 387,508,590 |   |  |      | 324,116,508 |   |  |   | 315,565,963 |  
|Unearned income                         |  |      | (147        | ) |      |   | (397        | )    |  |   | (5,251      | ) |  |      | (57,211     | ) |  |   | (205,830    | )
|                                        |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Total loans, net of unearned income     |  | $    | 605,953,221 |   |      | $ | 515,573,188 |      |  | $ | 387,503,339 |   |  | $    | 324,059,297 |   |  | $ | 315,360,133 |  
|                                        |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|                                        |  |      |             |   |     
|                                        |  | 2006 |             |   | 2005 |   |             | 2004 |  |   | 2003        |   |  | 2002 |            
|Commercial, financial, and agricultural |  |      | 21.1        | % |      |   | 24.3        | %    |  |   | 22.3        | % |  |      | 21.8        | % |  |   | 20.1        | %
|Real estateconstruction                |  |      | 48.0        |   |      |   | 36.1        |      |  |   | 27.9        |   |  |      | 24.0        |   |  |   | 24.5        |  
|Real estatemortgage                    |  |      | 23.0        |   |      |   | 29.5        |      |  |   | 36.3        |   |  |      | 40.6        |   |  |   | 37.9        |  
|Installment loans to individuals        |  |      | 2.4         |   |      |   | 3.3         |      |  |   | 5.3         |   |  |      | 4.6         |   |  |   | 5.3         |  
|Home equity lines of credit             |  |      | 5.5         |   |      |   | 6.7         |      |  |   | 7.6         |   |  |      | 7.3         |   |  |   | 9.5         |  
|Lease financing receivables             |  |      | 0.0         |   |      |   | 0.1         |      |  |   | 0.5         |   |  |      | 1.7         |   |  |   | 2.6         |  
|Other                                   |  |      | 0.0         |   |      |   | 0.0         |      |  |   | 0.1         |   |  |      | 0.0         |   |  |   | 0.1         |  
|                                        |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Gross loans                             |  |      | 100.0       | % |      |   | 100.0       | %    |  |   | 100.0       | % |  |      | 100.0       | % |  |   | 100.0       | %
|                                        |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  

Table 8 presents maturities of certain loan classifications based on collateral type at
December 31, 2006. The table also provides the breakdown between those loans with a fixed interest rate and those loans with a variable interest rate.

Table 8

Selected Loan Maturities and Interest Rate Sensitivity (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
|                                       |  |                  |             |                   |   |                 |  |       |             |  |   |            



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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 (excluding loans which in the aggregate do not exceed $60,000 to any such person) at December 31, 2006, 2005 and 2004, were approximately $995,000, $1.0 million, and $3.8 million,
respectively. During 2006, $150,000 in new loans were made, and repayments totaled $183,950. 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 same time for comparable transactions with other persons and involve no unusual risk of collectibility.

Risk Characteristics of Loan Portfolio

In order to assess the risk characteristics of the loan portfolio, we consider the three major categories of loans: Commercial, Real
Estate Construction and Commercial Real Estate. These three categories made up 92.0% of the total loan portfolio, as of December 31, 2006.

Commercial. Our commercial loan portfolio primarily consists of holding company loans, loans secured by common stock of community banks, and various other loans. Commercial loans increased $1.8 million in 2006 to $127.3 million or
21.0% of the total loan portfolio, as of December 31, 2006.

Geographically, over 80% of the loans in the commercial portfolio are in
three states: Georgia (57.82%), South Carolina (12.83%) and Alabama (9.55%).

From 2002 through 2006, net commercial loan losses as a
percent of average commercial loans outstanding ranged from a low of 0.20% in 2005 to a high of 1.73% in 2002. Commercial loan losses in 2006 totaled $76,738 down from $198,196 in 2005.

Real Estate Construction. Our construction portfolio primarily consists of loans for residential property lot development, single family
residential and condominium developments. Real estate construction loans increased $104.7 million in 2006 to $290.9 million or 48.0% of the total loan portfolio as of December 31, 2006. The growth in construction loans was primarily due to
strong demand in South Carolina and Georgia. These loans are normally secured by land, buildings, and personal guarantees and are generally pre-sold. Geographically, 70% of the loans are in three states: South Carolina (32.28%), Georgia
(21.27%) and Florida (16.64%).

Management closely monitors real estate construction loans, since these loans are generally considered
riskier than other types of loans and are particularly vulnerable in economic downturns and periods of high interest rates. We attempt to mitigate this risk by following underwriting standards that generally include: requiring an equity investment,
sufficient presales with nonrefundable earnest money to pay off the loan, bonded contracts and personal guarantees from the principals.

In
2006, we experienced our first loss in our real estate construction portfolio, a $64,896 charge off.

Commercial Real Estate. The
commercial real estate portfolio primarily consists of loans with maturities of less than five years with amortization schedules typically ranging from 15 to 25 years. Commercial real estate loans decreased $12.2 million in 2006 to $139.6 million or
23.0% of the total loan portfolio as of December 31, 2006. Land, buildings, and personal guarantees normally secure these loans. Geographically, 67% of the loans are in three states: South Carolina (27.96%), North Carolina (20.28%) and
Georgia (18.42%). Although some risk is inherent in this type of lending, we manage our risk by following underwriting standards that include adequate cash flow to service the debt, collateral values that exceed the loan amount, and in most cases
personal guarantees from the principals.

From 2002 through 2006, net commercial real estate loan losses as a percent of average commercial
real estate outstanding ranged from a low of less than 0.05% in 2003 to a high of 0.38% in 2006. Net losses in 2006 totaled $473,428 or 0.38% of average commercial real estate outstanding, up from $92,405 or 0.06% in 2005.



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##### Table of Contents

The higher commercial real estate losses 2006 compared to 2005 resulted from a charge off of an apartment complex that was carried as nonaccrual at
December 31, 2005.

Nonperforming Assets

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 any
subsequent interest is recognized on the cash basis. 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, we measure 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 our policy to apply the provisions of SFAS No. 114 to all impaired
commercial, commercial real estate, and real estate construction loans on a loan-by-loan basis.

Nonperforming assets consist of nonaccrual
loans on which the ultimate collection of the full amount of principal and/or interest is uncertain, restructured loans, loans past due 90 days or more as to principal or interest, and other real estate owned. We do not have any foreign loans or
loans for highly leveraged transactions.

Table 9

Nonperforming Assets



|                                                                |  |             |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |           |  
|--------------------------------------------------------------- |  | ----------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | ------- | - |  | - | --------- | -
|                                                                |  | December 31 |          
|                                                                |  | 2006        |           |   | 2005 |   |           | 2004 |  |   | 2003      |   |  | 2002 |        
|Nonaccrual loans                                                |  | $           | 513,920   |   |      | $ | 2,651,025 |      |  | $ | 1,811,446 |   |  | $    | 229,137 |   |  | $ | 672,754   |  
|Loans past due ninety days or more                              |  |             | 0         |   |      |   | 0         |      |  |   | 0         |   |  |      | 71,402  |   |  |   | 0         |  
|Other real estate owned                                         |  |             | 4,742,400 |   |      |   | 1,500,000 |      |  |   | 82,000    |   |  |      | 580,316 |   |  |   | 362,000   |  
|                                                                |  |             |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |           |  
|Total nonperforming assets                                      |  | $           | 5,256,320 |   |      | $ | 4,151,025 |      |  | $ | 1,893,446 |   |  | $    | 880,855 |   |  | $ | 1,034,754 |  
|                                                                |  |             |           |   |      |   |           |      |  |   |           |   |  |      |         |   |  |   |           |  
|Nonperforming assets to total loans and other real estate owned |  |             | 0.86      | % |      |   | 0.80      | %    |  |   | 0.49      | % |  |      | 0.27    | % |  |   | 0.33      | %
|Nonperforming assets to total assets                            |  |             | 0.59      | % |      |   | 0.53      | %    |  |   | 0.31      | % |  |      | 0.17    | % |  |   | 0.23      | %

During 2006, nonperforming assets increased $1,105,295 to $5,256,320, compared with $4,151,025
reported in 2005. The increase in nonperforming assets was primarily due to a convenience store loan being placed in other real estate owned and a rental house loan being moved to nonaccrual. There were no loans past due 90 days or more at
December 31, 2006. The nonperforming assets to total loans and other real estate owned ratio was 0.86% in 2006, compared to 0.80% in 2005.

Allowance for Loan Losses

An analysis of activity in the allowance for loan losses is presented in Tables 10 and 11. The
allowance for loan losses is established and maintained through charges to expense in the form of a provision for loan losses. Losses on loans are charged to and recoveries are credited to the allowance at the time the loss or recovery occurs.



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##### Table of Contents

Our provision for loan losses is a reflection of actual losses experienced during the year and
managements judgment as to the adequacy of the allowance for loan losses. Some of the factors considered by management in determining the amount of the provision and resulting allowance include: (1) detailed reviews of individual loans;
(2) gross and net loan charge-offs in the current year; (3) the current level of the allowance in relation to total loans and to historical loss levels; (4) past due and non-accruing loans; (5) collateral values of properties
securing loans; (6) the composition of the loan portfolio (types of loans) and risk profiles; and (7) managements analysis of economic conditions and the resulting impact on our loan portfolio.

A coordinated effort is undertaken to identify credit losses in the loan portfolio for management purposes and to establish the loan loss provision and
resulting allowance for accounting purposes. A regular, formal and ongoing loan review is conducted to identify loans with unusual risks or possible losses. The primary responsibility for this review rests with the management of the loan origination
staff. Their work is supplemented with reviews by our internal audit staff and loan review staff. This process provides information that helps in assessing the quality of the portfolio, assists in the prompt identification of problems and potential
problems, and aids in deciding if a loan represents a probable loss that should be recognized or a risk for which an allowance should be maintained.

We determine our allowance for loan losses in accordance with SFAS No. 114 and Statement of Financial Accounting Standards No. 5 (Statement 5). In determining the amount of the allowance for loan losses,
management uses information from its ongoing loan review process to stratify the loan portfolio into risk grades. The higher-risk-graded loans in the portfolio are assigned estimated amounts of loss based on several factors, including current and
historical loss experience of each higher-risk category, regulatory guidelines for losses in each higher-risk category and managements judgment of economic conditions and the resulting impact on the higher-risk-graded loans.

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
vast majority of our impaired loans are dependent upon collateral for repayment. For these loans, impairment is measured by evaluating estimated net realizable value of collateral as compared to the current investment in the loan. For all other
impaired loans, we compare the amount of estimated discounted cash flows to the investment in the loan. In the event a particular loans collateral value or discounted cash flows are not sufficient to support the collection of the investment in
the loan, the loan is specifically considered in the determination of the allowance for loan losses or a charge is immediately taken against the allowance for loan losses.



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Table 10

Summary
of Loan Loss Experience



|                                                                                      |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|------------------------------------------------------------------------------------- |  | ----------------------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | - |  | ---- | ----------- | - |  | - | ----------- | -
|                                                                                      |  | As of and for the years ended December 31 |            
|                                                                                      |  | 2006                                      |             |   | 2005 |   |             | 2004 |  |   | 2003        |   |  | 2002 |            
|Allowance for loan losses at beginning of year                                        |  | $                                         | 6,466,714   |   |      | $ | 4,911,819   |      |  | $ | 4,102,626   |   |  | $    | 3,867,872   |   |  | $ | 3,416,090   |  
|                                                                                      |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Amounts charged off during year:                                                      |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Commercial, financial and agricultural                                                |  |                                           | 76,738      |   |      |   | 198,196     |      |  |   | 240,286     |   |  |      | 789,956     |   |  |   | 1,000,387   |  
|Real estateconstruction                                                              |  |                                           | 64,896      |   |      |   | 0           |      |  |   | 0           |   |  |      | 0           |   |  |   | 0           |  
|Real estatecommercial                                                                |  |                                           | 473,428     |   |      |   | 92,405      |      |  |   | 64,446      |   |  |      | 0           |   |  |   | 70,000      |  
|Installment loans to individuals and other loans                                      |  |                                           | 49,234      |   |      |   | 5,908       |      |  |   | 2,000       |   |  |      | 0           |   |  |   | 403         |  
|Lease financing receivables                                                           |  |                                           | 0           |   |      |   | 42,249      |      |  |   | 34,056      |   |  |      | 162,119     |   |  |   | 290,772     |  
|                                                                                      |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Total loans charged off                                                               |  |                                           | 664,296     |   |      |   | 338,758     |      |  |   | 340,788     |   |  |      | 952,075     |   |  |   | 1,361,562   |  
|                                                                                      |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Amount of recoveries during year:                                                     |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Commercial, financial and agricultural                                                |  |                                           | 9,385       |   |      |   | 18,638      |      |  |   | 3,815       |   |  |      | 9,114       |   |  |   | 23,939      |  
|Real estateconstruction                                                              |  |                                           | 0           |   |      |   | 0           |      |  |   | 0           |   |  |      | 0           |   |  |   | 0           |  
|Real estatecommercial                                                                |  |                                           | 0           |   |      |   | 0           |      |  |   | 0           |   |  |      | 0           |   |  |   | 0           |  
|Installment loans to individuals and other loans                                      |  |                                           | 0           |   |      |   | 5,015       |      |  |   | 19,544      |   |  |      | 30,472      |   |  |   | 463         |  
|Lease financing receivables                                                           |  |                                           | 0           |   |      |   | 0           |      |  |   | 11,622      |   |  |      | 22,243      |   |  |   | 3,942       |  
|                                                                                      |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Total recoveries                                                                      |  |                                           | 9,385       |   |      |   | 23,653      |      |  |   | 34,981      |   |  |      | 61,829      |   |  |   | 28,344      |  
|                                                                                      |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Net loans charged off                                                                 |  |                                           | 654,911     |   |      |   | 315,105     |      |  |   | 305,807     |   |  |      | 890,246     |   |  |   | 1,333,218   |  
|                                                                                      |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Provision for loan losses                                                             |  |                                           | 1,600,000   |   |      |   | 1,870,000   |      |  |   | 1,115,000   |   |  |      | 1,125,000   |   |  |   | 1,785,000   |  
|                                                                                      |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Allowance for loan losses at end of year                                              |  | $                                         | 7,411,803   |   |      | $ | 6,466,714   |      |  | $ | 4,911,819   |   |  | $    | 4,102,626   |   |  | $ | 3,867,872   |  
|                                                                                      |  |                                           |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Ratio of net charge-offs during the year to average loans outstanding during the year |  |                                           | 0.12        | % |      |   | 0.07        | %    |  |   | 0.09        | % |  |      | 0.29        | % |  |   | 0.45        | %
|Average Loans Outstanding                                                             |  | $                                         | 543,788,897 |   |      | $ | 444,138,333 |      |  | $ | 347,935,675 |   |  | $    | 302,651,532 |   |  | $ | 298,376,496 |  

The ratio of net charge-offs to average loans was 0.12% in 2006 and 0.07% in 2005. A $1,600,000
provision for loans losses was made in 2006, compared with $1,870,000 in 2005.

The lower level of the provision for loan losses during
2006 was primarily attributable to slower loan growth. Net charge-offs were higher in 2006 than 2005, mostly due to one commercial real estate loan that was carried in nonaccrual loans at December 31, 2005. Net charge-offs were higher in 2003
and 2002 primarily because of charges related to Internet originated small business lines of credit that were offered briefly during late 2000 and early 2001. Marketing of this product stopped in May 2001.

The provision for loan losses was made to reflect losses inherent in the loan portfolio at the balance sheet date. Specific reserves are provided on
individual loans for which management believed specific reserves were necessary. The specific reserves are determined on loan-by-loan basis based on managements evaluation of our exposure for each credit, given the current payment status of
the loan and the value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance calculations described above to prevent redundant reserves.



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Although it is our policy to immediately charge off as a loss all loan amounts judged to be
uncollectible, historical experience indicates that certain losses exist in the loan portfolio that have not been specifically identified. To anticipate and provide for these unidentifiable losses, the allowance for loan losses is established by
charging the provision for loan losses expense against current earnings. No portion of the resulting allowance is in any way allocated or restricted to any individual loan or group of loans. The entire allowance is available to absorb losses from
any and all loans.

Table 11

Composition of
Allowance for Loan Losses



|                                        |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|--------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                        |  | 2006 |           | 2005 |   | 2004      |  | 2003 |           | 2002
|Commercial, financial, and agricultural |  | $    | 2,558,989 |      | $ | 2,616,497 |  | $    | 2,044,860 |      | $ | 2,227,757 |  | $ | 1,470,514
|Real estateconstruction                |  |      | 1,195,588 |      |   | 433,041   |  |      | 1,178,557 |      |   | 310,687   |  |   | 582,755  
|Real estatecommercial                  |  |      | 978,157   |      |   | 1,602,142 |  |      | 1,195,511 |      |   | 1,099,751 |  |   | 578,881  
|Installment loans to individuals        |  |      | 99,482    |      |   | 49,448    |  |      | 117,383   |      |   | 161,278   |  |   | 56,791   
|Home equity lines of credit             |  |      | 49,837    |      |   | 51,454    |  |      | 44,252    |      |   | 35,758    |  |   | 75,160   
|Lease financing receivables             |  |      | 38,654    |      |   | 60,746    |  |      | 248,676   |      |   | 261,419   |  |   | 297,808  
|Other                                   |  |      | 50        |      |   | 12        |  |      | 5,496     |      |   | 9         |  |   | 78       
|Unallocated                             |  |      | 2,491,046 |      |   | 1,653,374 |  |      | 77,084    |      |   | 5,967     |  |   | 805,885  
|                                        |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total                                   |  | $    | 7,411,803 |      | $ | 6,466,714 |  | $    | 4,911,819 |      | $ | 4,102,626 |  | $ | 3,867,872
|                                        |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          

The unallocated amount represents estimated inherent credit losses in our portfolio as of the
balance sheet date. The unallocated amount is subjective and based on primarily qualitative factors and to a lesser extent quantitative factors. In addition, it represents the inherent impressions related to the allowance estimation process.
Qualitative factors include recent economic stresses that have occurred and impact our portfolio (increased commodity prices, energy prices and borrowing cost). The trends in the qualitative factors present in 2006 support the unallocated portion of
the reserve.

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 evaluates the adequacy of the allowance on a quarterly basis and it is based on a review of individual loans, recent loss experience, current economic conditions, risk identification procedures previously
discussed, underlying collateral values, and other relevant factors. Changes in the factors used by management to determine the adequacy of the allowance or the availability of new information could cause the allowance for loan losses to be
increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require that additions be made to the allowance for loan losses based on their judgments and estimates.

Funding Sources

Total deposits were $658.4 million
and represented 73.9% of total assets at December 31, 2006, compared with $596.7 million and 76.0% of total assets at December 31, 2005. In 2006, deposits grew $61.7 million or 10.3% from 2005, primarily due to our competitive rates
offered to commercial and consumer customers. In 2006, the mix of interest-bearing deposits changed as certificates of deposit increased 20.2%, and money market deposits decreased 3.5%, while interest-bearing checking increased 18.4%, and savings
accounts decreased 22.9%. Certificates of deposit represented 62.4% of total deposits in 2006 and 57.3% in 2005. Money market accounts represented 35.9% of total deposits in 2006 and 41.0% in 2005. Interest checking accounts represented 0.6% of
total deposits in 2006 and 0.9% in 2005. Savings accounts represented less than 0.1% of deposits in 2006 and 2005. Demand deposits increased 55.3% to $6.7 million from 2005 to 2006 and represented 1.0% of total deposits in 2006 and 0.7% of total
deposits in 2005.



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Table 12

Types of
Deposits



|                                    |  |             |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|----------------------------------- |  | ----------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | - |  | ---- | ----------- | - |  | - | ----------- | -
|                                    |  | December 31 |            
|                                    |  | 2006        |             |   | 2005 |   |             | 2004 |  |   | 2003        |   |  | 2002 |            
|Noninterest-bearing demand deposits |  | $           | 6,677,509   |   |      | $ | 4,300,846   |      |  | $ | 3,319,315   |   |  | $    | 1,724,487   |   |  | $ | 4,997,969   |  
|Interest-bearing checking           |  |             | 4,079,170   |   |      |   | 4,998,265   |      |  |   | 4,368,349   |   |  |      | 10,862,690  |   |  |   | 4,628,068   |  
|Money market accounts               |  |             | 236,289,435 |   |      |   | 244,907,863 |      |  |   | 218,949,539 |   |  |      | 207,604,883 |   |  |   | 206,907,380 |  
|Savings accounts                    |  |             | 312,176     |   |      |   | 404,779     |      |  |   | 518,158     |   |  |      | 477,613     |   |  |   | 368,969     |  
|Brokered deposits                   |  |             | 33,325,000  |   |      |   | 41,918,000  |      |  |   | 34,698,000  |   |  |      | 28,932,000  |   |  |   | 16,706,000  |  
|Time deposits under $100,000        |  |             | 237,563,640 |   |      |   | 188,326,181 |      |  |   | 133,361,315 |   |  |      | 89,770,275  |   |  |   | 85,281,084  |  
|Time deposits of $100,000 or more   |  |             | 140,145,532 |   |      |   | 111,813,710 |      |  |   | 61,476,666  |   |  |      | 48,883,269  |   |  |   | 39,039,161  |  
|                                    |  |             |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Total Deposits                      |  | $           | 658,392,462 |   |      | $ | 596,669,644 |      |  | $ | 456,691,342 |   |  | $    | 388,255,217 |   |  | $ | 357,928,631 |  
|                                    |  |             |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|                                    | 
|                                    |  | December 31 |            
|                                    |  | 2006        |             |   | 2005 |   |             | 2004 |  |   | 2003        |   |  | 2002 |            
|Noninterest-bearing demand deposits |  |             | 1.0         | % |      |   | 0.7         | %    |  |   | 0.7         | % |  |      | 0.4         | % |  |   | 1.4         | %
|Interest-bearing checking           |  |             | 0.6         |   |      |   | 0.9         |      |  |   | 1.0         |   |  |      | 2.8         |   |  |   | 1.3         |  
|Money market accounts               |  |             | 35.9        |   |      |   | 41.0        |      |  |   | 47.9        |   |  |      | 53.5        |   |  |   | 57.8        |  
|Savings accounts                    |  |             | 0.0         |   |      |   | 0.1         |      |  |   | 0.1         |   |  |      | 0.1         |   |  |   | 0.1         |  
|Brokered deposits                   |  |             | 5.1         |   |      |   | 7.0         |      |  |   | 7.6         |   |  |      | 7.5         |   |  |   | 4.7         |  
|Time deposits under $100,000        |  |             | 36.1        |   |      |   | 31.6        |      |  |   | 29.2        |   |  |      | 23.1        |   |  |   | 23.8        |  
|Time deposits of $100,000 or more   |  |             | 21.3        |   |      |   | 18.7        |      |  |   | 13.5        |   |  |      | 12.6        |   |  |   | 10.9        |  
|                                    |  |             |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  
|Total Deposits                      |  |             | 100.0       | % |      |   | 100.0       | %    |  |   | 100.0       | % |  |      | 100.0       | % |  |   | 100.0       | %
|                                    |  |             |             |   |      |   |             |      |  |   |             |   |  |      |             |   |  |   |             |  

Table 13 shows a maturity schedule for time deposits of $100,000 or more at December 31,
2006.

Table 13

Maturity Distribution of Time
Deposits of $100,000 or More



|                               |  |                   |            
|------------------------------ |  | ----------------- | -----------
|                               |  | December 31, 2006
|Three months or less           |  | $                 | 48,581,021 
|Over three through six months  |  |                   | 34,033,044 
|Over six through twelve months |  |                   | 51,645,140 
|Over twelve months             |  |                   | 5,886,327  
|                               |  |                   |            
|Total outstanding              |  | $                 | 140,145,532
|                               |  |                   |            

We continue to use cost-effective alternative funding sources, including brokered certificates of
deposit and Federal Home Loan Bank (FHLB) advances to support balance sheet growth and manage interest rate risk.

Average
short-term borrowings decreased $747,077 or 18.8% to $3.2 million in 2006 from $4.0 million in 2005. We began providing cash management services to community banks in 2003. As part of this service, we



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manage a pool of overnight federal funds. Most of this pool is invested with upstream correspondent banks and we use a portion as a funding source. At
December 31, 2006, the pool of federal funds totaled $247.9 million of which we used $35 million as a funding source compared with $219.6 million and $560,000 at December 31, 2005.

We are a member of the FHLB and may borrow short-term and long-term funds up to thirty percent of our total assets. Pursuant to collateral agreements
with the FHLB, advances are secured by U.S. Treasury, Government sponsored agency securities, and mortgage-backed securities. Advances from the FHLB with an initial maturity of more than one year totaled $110.0 million at December 31, 2006
versus $105.0 million at December 31, 2005. 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 increase in long-term
borrowings during 2006 and 2005 reflects managements efforts to extend our maturities for interest rate risk management.

Table 14

Type of Borrowings



|                                                                           |  |              |             |      |   |             |  |   |            
|-------------------------------------------------------------------------- |  | ------------ | ----------- | ---- | - | ----------- |  | - | -----------
|                                                                           |  | December 31,
|                                                                           |  | 2006         |             | 2005 |   | 2004       
|Short-Term Borrowings                                                      |  |              |             |      |   |             |  |   |            
|Federal Funds purchased and securities sold under agreements to repurchase |  | $            | 35,000,000  |      | $ | 560,000     |  | $ | 7,264,000  
|                                                                           |  |              |            
|Long-Term Borrowings                                                       |  |              |             |      |   |             |  |   |            
|FHLB Advances                                                              |  |              | 110,000,000 |      |   | 105,000,000 |  |   | 95,000,000 
|Subordinated notes                                                         |  |              | 12,372,000  |      |   | 12,372,000  |  |   | 12,372,000 
|                                                                           |  |              |             |      |   |             |  |   |            
|Total Long-Term Borrowings                                                 |  |              | 122,372,000 |      |   | 117,372,000 |  |   | 107,372,000
|                                                                           |  |              |             |      |   |             |  |   |            
|Total Borrowings                                                           |  | $            | 157,372,000 |      | $ | 117,932,000 |  | $ | 114,636,000
|                                                                           |  |              |             |      |   |             |  |   |            

We have a line of credit with RBC Centura of $7,000,000 of which none was outstanding at
December 31, 2006 and 2005. Under the terms of the loan agreement, the loan is secured by 100% of the common stock of Nexity Bank. This line matures on June 29, 2010, and has a floating rate equal to the Prime Rate, appearing in the Wall
Street Journal, less 50 basis points (0.50%).

Capital Resources

We maintain a strong level of capital as a margin of safety for our depositors and stockholders, as well as to provide for future growth. On September 21, 2005, we completed our initial public offering and raised
$25.4 million, net of offering costs. At December 31, 2006, stockholders equity was $65.2 million versus $63.3 million at December 31, 2005. The increase in stockholders equity was primarily the result of the retention of
earnings. We have not paid any cash dividends.

On March 3, 2006 we announced that our Board of Directors authorized a stock
repurchase program to acquire up to 400,000 shares, or approximately 4.6% of the total common shares currently outstanding. The program is dependent upon market conditions and other factors. There is no guarantee as to the exact number of shares to
be repurchased by the Company. Repurchases under this program will be made using our own cash resources. The repurchases are made in either privately negotiated transactions or through the open market. In 2006, we repurchased 365,950 shares or
$4,560,245 in treasury stock.

Book value per share at December 31, 2006 and 2005 was $7.78 and $7.26, respectively. Tangible book
value per share at December 31, 2006 and 2005 was $7.67 and $7.16, respectively. Tangible book value was below book value as a result of an intangible asset related to our banking charter. Note 19, Regulatory Matters, of our 2006
Consolidated Financial Statements sets forth various capital ratios for us. Due to the adoption of



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FIN 46, we report debt associated with trust preferred securities on our consolidated balance sheets as subordinated debentures. Under current
regulatory guidelines, these securities continue to qualify for Tier 1 capital treatment. At December 31, 2006 and 2005, trust preferred securities included in Tier 1 capital totaled $12.0 million. For additional information on these
securities, see Note 12, Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trust, of our 2006 Consolidated Financial Statements.

During 1990, the Federal Reserve Board adopted a minimum leverage ratio of 3.0% for bank holding companies. This ratio (defined as stockholders equity less goodwill and certain other intangibles divided by
average assets) was 9.26% and 10.24% at December 31, 2006 and 2005, respectively. As part of forming the holding company, the Federal Reserve Bank required us to maintain a minimum leverage ratio of 5.0%. The Alabama State Banking Department
required Nexity Bank to maintain a minimum leverage ratio of 7.0%. This ratio for Nexity Bank was 8.77% and 9.33% at December 31, 2006 and 2005 respectively.

The Federal Reserve Board adopted risk-based capital guidelines, which assign risk-weightings to assets and off-balance sheet items. The guidelines define and set minimum capital requirements (risk-based capital
ratios). All banks are required to maintain core capital (Tier 1) of at least 4.0% of risk-adjusted assets and total capital of 8.0% of risk-adjusted assets. Tier 1 capital consists principally of stockholders equity less goodwill and certain
other intangibles, while total capital consists of Tier 1 capital, certain debt instruments, and a portion of the allowance for loan losses. Banks, which meet or exceed a Tier 1 ratio of 6.0%, a total capital to risk-adjusted assets ratio of 10.0%
and a Tier 1 leverage ratio of 5.0% are considered well-capitalized by regulatory standards. We had a Tier 1 capital ratio of 10.77% and 11.77% at December 31, 2006 and 2005, respectively, and a total risk-based capital ratio of 11.79% and
12.77% at December 31, 2006 and 2005, respectively, well above the regulatory requirements for a well-capitalized institution. Note 19, Regulatory Matters, to our 2006 Consolidated Financial Statements presents our actual capital amounts
and ratios at December 31, 2006 and 2005.

Market Risk and Asset/Liability Management

Asset/liability management is the process by which we monitor and attempt to control the mix and maturities of our assets and liabilities in order to
maximize net interest income. The functions of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest-sensitive assets and liabilities. We manage exposure to fluctuations in interest rates
through policies established by our Asset/Liability Management Committee (ALCO) and approved by the Board of Directors. An ALCO report is presented to the Board of Directors on a quarterly basis.

We measure the effects of changes in interest rates through the use of a simulation model. The simulation model is used to analyze the sensitivity of net
interest income to a ratable change in interest rates measured over a 12 month time horizon. The model also measures the sensitivity of the economic value of equity (EVE) to an instantaneous change in interest rates. EVE is a measurement
of the inherent, long-term economic value to us at a given point in time.

The simulation model uses a budgeted balance sheet and takes
into account interest rate changes as well as related assumption changes for various rate scenarios. Factors considered in the model assumptions include contractual maturities, prepayments, repricing characteristics, deposit retention, and the
relative sensitivity of assets and liabilities to changes in market interest rates. The model assumptions are updated each quarter. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions and should
not be relied upon as indicative of actual results. Further, the computations do not contemplate any additional actions we could undertake in response to changes in interest rates.

Interest-sensitive assets and liabilities are those that are subject to repricing in the near term, including floating rate instruments and those with
near-term maturities. The interest-sensitivity gap is the difference between total interest-sensitive assets and liabilities during a given time period. Managements objective is to maintain the difference between interest-sensitive assets and
liabilities at a level that will minimize the effects of significant interest rate shifts on the net interest income.



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In analyzing net interest income, we calculate net interest income under several different rate scenarios
over a twelve-month period. The model reports a case in which interest rates remain flat and reports variations that occur when rates ratably increase 100 and 200 basis points and decrease 100 basis points. These rates assume a shift in all yield
curves as well. The table below shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next twelve months using a budgeted balance sheet for each set of interest rate scenarios, compared
to the flat interest rate scenario at December 31, 2006 levels.

Table 15

Net Interest Income Risk Analysis at December 31, 2006



|                       |  |                                                                  |  
|---------------------- |  | ---------------------------------------------------------------- | -
|Interest Rate Scenario |  | Annualized Hypothetical Percentage Change in Net Interest
Income |  
|2.00%                  |  | 6.52                                                             | %
|1.00                   |  | 3.27                                                             |  
|Flat                   |  |                                                                 |  
|(1.00)                 |  | (3.33                                                            | )

The overall net interest income profile shows positive changes in net interest income if rates
ratably increase 100 or 200 basis points. This increase is primarily attributable to a high level of variable rate loans. The down 100 basis point scenario reflects greater variation also due to the high level of variable rate loans and certain
deposit rates that have reached what management believes to be an acceptable lower limit thus limiting the interest expense reduction from repricing these deposits by the entire 100 basis points.

We also calculate EVE under several different rate scenarios. The model reports a case in which interest rates remain flat and reports variations that
occur when rates immediately increase and decrease 200 basis points. These rates assume an instantaneous shift in all the yield curves. The table below shows the effect that the indicated changes in interest rates would have on economic value of
equity as projected using a static balance sheet for each set of interest rate scenarios compared to the flat interest rate scenario. The economic value of equity represents the fair value of net assets and is in no way indicative of our
stockholders equity.

Table 16

Economic Value
of Equity Risk Analysis at December 31, 2006



|                       |  |                                                                       |   
|---------------------- |  | --------------------------------------------------------------------- | --
|Interest Rate Scenario |  | Annualized Hypothetical Percentage Change in Economic Value of Equity |   
|2.00%                  |  | (19.05                                                                | )%
|Flat                   |  |                                                                      |   
|(2.00)                 |  | 12.10                                                                 |   

Table 17 shows our interest rate sensitivity at December 31, 2006 indicating an
asset-sensitive position in the three months or less period and the four months to six months period and a liability-sensitive position in the seven months to twelve months period. On a cumulative basis through one year, our rate sensitive
liabilities exceed rate sensitive assets, resulting in a liability-sensitive position of $98.6 million or 11.3% of total interest-earning assets. Generally, a liability-sensitive position indicates that declining interest rates would have a positive
impact on net interest income and rising interest rates would adversely affect net interest income. Rising and declining interest rates, respectively, would typically have the opposite effect on net interest income in an asset-sensitive position.
Other factors, including the speed at which assets and liabilities reprice in response to changes in market rates and competitive factors, can influence the ultimate impact on net interest income resulting from changes in interest rates. Although
management actively monitors and reacts to a changing interest rate environment, it is not possible to fully insulate us against interest rate risk. Given the current mix and maturity of our assets and liabilities, it is possible that a rapid,
significant and prolonged increase or decrease in interest rates could have an adverse impact on our net interest margin.



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Table 17

Interest
Rate Sensitivity Analysis

(December 31, 2006 balances in thousands)



|                                            |  |          |         |   |          |   |         |           |  |   |                      |    |  |                   |          |    |                 |   |         |       |  |   |         |   |  |   |         |  
|------------------------------------------- |  | -------- | ------- | - | -------- | - | ------- | --------- |  | - | -------------------- | -- |  | ----------------- | -------- | -- | --------------- | - | ------- | ----- |  | - | ------- | - |  | - | ------- | -
|                                            |  | 0-3 mos. |         |   | 4-6 mos. |   |         | 7-12 mos. |  |   | Totalwithin one year |    |  | One to Five Years |          |    | Over Five Years |   |         | Total | 
|Interest-earning assets:                    |  |          |         |   |          |   |         |           |  |   |                      |    |  |                   |          |    |                 |   |         |       |  |   |         |   |  |   |         |  
|Loans (1)                                   |  | $        | 503,896 |   |          | $ | 17,389  |           |  | $ | 17,888               |    |  | $                 | 539,173  |    |                 | $ | 63,890  |       |  | $ | 2,376   |   |  | $ | 605,439 |  
|Investment securities (2)                   |  |          | 0       |   |          |   | 0       |           |  |   | 0                    |    |  |                   | 0        |    |                 |   | 82,961  |       |  |   | 159,622 |   |  |   | 242,583 |  
|Trading securities                          |  |          | 1,999   |   |          |   | 0       |           |  |   | 0                    |    |  |                   | 1,999    |    |                 |   | 0       |       |  |   | 0       |   |  |   | 1,999   |  
|Federal funds sold                          |  |          | 19,977  |   |          |   | 0       |           |  |   | 0                    |    |  |                   | 19,977   |    |                 |   | 0       |       |  |   | 0       |   |  |   | 19,977  |  
|Interest-bearing balances due from banks    |  |          | 1,905   |   |          |   | 0       |           |  |   | 0                    |    |  |                   | 1,905    |    |                 |   | 0       |       |  |   | 0       |   |  |   | 1,905   |  
|                                            |  |          |         |   |          |   |         |           |  |   |                      |    |  |                   |          |    |                 |   |         |       |  |   |         |   |  |   |         |  
|Total interest-earning assets               |  | $        | 527,777 |   |          | $ | 17,389  |           |  | $ | 17,888               |    |  | $                 | 563,054  |    |                 | $ | 146,851 |       |  | $ | 161,998 |   |  | $ | 871,903 |  
|                                            |  |          |         |   |          |   |         |           |  |   |                      |    |  |                   |          |    |                 |   |         |       |  |   |         |   |  |   |         |  
|Percent of total interest-earning assets    |  |          | 60.7    | % |          |   | 2.0     | %         |  |   | 2.1                  | %  |  |                   | 64.7     | %  |                 |   | 16.9    | %     |  |   | 18.6    | % |  |   | 100.0   | %
|Interest-bearing liabilities:               |  |          |         |   |          |   |         |           |  |   |                      |    |  |                   |          |    |                 |   |         |       |  |   |         |   |  |   |         |  
|Interest checking                           |  | $        | 0       |   |          | $ | 0       |           |  | $ | 0                    |    |  | $                 | 0        |    |                 | $ | 4,079   |       |  | $ | 0       |   |  |   | 4,079   |  
|Savings                                     |  |          | 0       |   |          |   | 0       |           |  |   | 0                    |    |  |                   | 0        |    |                 |   | 312     |       |  |   | 0       |   |  |   | 312     |  
|Money market                                |  |          | 236,290 |   |          |   | 0       |           |  |   | 0                    |    |  |                   | 236,290  |    |                 |   | 0       |       |  |   | 0       |   |  |   | 236,290 |  
|Certificates of deposit of $100,000 or more |  |          | 48,581  |   |          |   | 34,033  |           |  |   | 51,645               |    |  |                   | 134,259  |    |                 |   | 5,886   |       |  |   | 0       |   |  |   | 140,145 |  
|Certificates of deposit less than $100,000  |  |          | 91,521  |   |          |   | 63,570  |           |  |   | 91,062               |    |  |                   | 246,153  |    |                 |   | 24,736  |       |  |   | 0       |   |  |   | 270,889 |  
|Federal funds purchased                     |  |          | 35,000  |   |          |   | 0       |           |  |   | 0                    |    |  |                   | 35,000   |    |                 |   | 0       |       |  |   | 0       |   |  |   | 35,000  |  
|Long-term debt                              |  |          | 0       |   |          |   | 0       |           |  |   | 10,000               |    |  |                   | 10,000   |    |                 |   | 20,000  |       |  |   | 80,000  |   |  |   | 110,000 |  
|Subordinated debentures                     |  |          | 12,372  |   |          |   | 0       |           |  |   | 0                    |    |  |                   | 12,372   |    |                 |   | 0       |       |  |   | 0       |   |  |   | 12,372  |  
|                                            |  |          |         |   |          |   |         |           |  |   |                      |    |  |                   |          |    |                 |   |         |       |  |   |         |   |  |   |         |  
|Total interest-bearing liabilities          |  |          | 423,764 |   |          |   | 97,603  |           |  |   | 152,707              |    |  |                   | 674,074  |    |                 |   | 55,013  |       |  |   | 80,000  |   |  |   | 809,087 |  
|Other sourcesnet                           |  |          | 0       |   |          |   | 0       |           |  |   | 0                    |    |  |                   | 0        |    |                 |   | 0       |       |  |   | 62,816  |   |  |   | 62,816  |  
|                                            |  |          |         |   |          |   |         |           |  |   |                      |    |  |                   |          |    |                 |   |         |       |  |   |         |   |  |   |         |  
|Total sourcesnet                           |  | $        | 423,764 |   |          | $ | 97,603  |           |  | $ | 152,707              |    |  | $                 | 674,074  |    |                 | $ | 55,013  |       |  | $ | 142,816 |   |  | $ | 871,903 |  
|                                            |  |          |         |   |          |   |         |           |  |   |                      |    |  |                   |          |    |                 |   |         |       |  |   |         |   |  |   |         |  
|Percent of total interest-earning assets    |  |          | 48.6    | % |          |   | 11.2    | %         |  |   | 17.5                 | %  |  |                   | 77.3     | %  |                 |   | 6.3     | %     |  |   | 16.4    | % |  |   | 100.00  | %
|Periodic interest-sensitive gap             |  | $        | 104,013 |   |          | $ | (80,214 | )         |  | $ | (134,819             | )  |  | $                 | (111,020 | )  |                 | $ | 91,838  |       |  | $ | 19,182  |   |  |   |        |  
|Cumulative interest-sensitive gap           |  | $        | 104,013 |   |          | $ | 23,799  |           |  | $ | (111,020             | )  |  | $                 | (111,020 | )  |                 | $ | (19,182 | )     |  | $ |        |   |  |   |        |  
|Percent of total interest-earning assets    |  |          | 11.9    | % |          |   | 2.7     | %         |  |   | (12.7                | )% |  |                   | (12.7    | )% |                 |   | (2.2    | )%    |  |   |        | % |  | $ |        |  

---

|(1) | Loan balances do not include nonaccrual loans.
|--- | ----------------------------------------------

|(2) | Investment securities exclude the unrealized loss on available for sale securities of $3,049,559.
|--- | -------------------------------------------------------------------------------------------------

Each of the above analyses may not, on their own, be an accurate indicator of how our net interest income will be affected by changes in interest rates.
Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a
significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain
types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have
features (generally referred to as interest rate caps and floors), which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain
instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as
part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies.



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We may also use derivative financial instruments to improve the balance between interest-sensitive assets
and interest-sensitive liabilities and as one tool to manage our interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. At December 31, 2006, we had not entered into any derivative contracts to assist
managing our interest rate sensitivity.

Liquidity Risk Management

Liquidity management involves meeting our cash flow requirements, which arise primarily from withdrawal of deposits, extensions of credit, and payment of operating expenses. Traditional sources of liquidity for a bank
include asset maturities, growth in core deposits and earnings. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in
marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and
borrowing funds from various other institutions.

Changes in interest rates also affect our liquidity position. We currently price deposits
in response to market rates and our management intends to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.

Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows can fluctuate significantly, being influenced by
interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products
to meet our asset/liability objectives consistent with market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.

Nexity Bank has access to borrowings from the FHLB and maintains short-term lines of credit from correspondent banks. FHLB advances outstanding as of
December 31, 2006 and 2005, totaled $110.0 million and $105.0 million, respectively. At December 31, 2006, we had $157.2 million of unused borrowing capacity from the FHLB. This capacity may be used when we have available collateral to
pledge. Until we make collateral available (other than cash) to secure additional FHLB advances, we will fund our short-term needs principally with deposits, including brokered certificates of deposit, federal funds purchased, and the sale of
securities available for sale. In addition, we may purchase securities to provide additional FHLB-qualifying collateral. At December 31, 2006 and 2005, we had unused short-term lines of credit totaling $20.0 million with correspondent banks. We
began providing cash management services to community banks in 2003. As part of this service, we manage a pool of overnight federal funds. Most of this pool is invested with upstream correspondent banks and we use up to 25% as a funding source. At
December 31, 2006, the pool of federal funds totaled $248.1 million of which we used $35.0 million as a funding source compared with $219.6 million and $560,000 at December 31, 2005.

The following table presents additional information about our contractual obligations as of December 31, 2006, which by their terms have contractual
maturity and termination dates subsequent to December 31, 2006 (dollars in thousands):

Table 18



|                         |  |                   |         |          |   |          |  |              |       |       |   |        |  |   |        
|------------------------ |  | ----------------- | ------- | -------- | - | -------- |  | ------------ | ----- | ----- | - | ------ |  | - | -------
|                         |  | Less thanOne year |         | 1-3Years |   | 4-5Years |  | After 5Years |       | Total
|Contractual Obligations: |  |                   |         |          |   |          |  |              |       |       |   |        |  |   |        
|Time Deposits            |  | $                 | 380,412 |          | $ | 30,622   |  | $            | 0     |       | $ | 0      |  | $ | 411,034
|Short-term borrowings    |  |                   | 35,000  |          |   | 0        |  |              | 0     |       |   | 0      |  |   | 35,000 
|Long-term borrowings     |  |                   | 10,000  |          |   | 10,000   |  |              | 5,000 |       |   | 85,000 |  |   | 110,000
|Subordinated debentures  |  |                   | 0       |          |   | 0        |  |              | 0     |       |   | 12,372 |  |   | 12,372 
|Operating leases         |  |                   | 143     |          |   | 257      |  |              | 121   |       |   | 38     |  |   | 559    
|                         |  |                   |         |          |   |          |  |              |       |       |   |        |  |   |        
|Total                    |  | $                 | 425,555 |          | $ | 40,879   |  | $            | 5,121 |       | $ | 97,410 |  | $ | 568,965
|                         |  |                   |         |          |   |          |  |              |       |       |   |        |  |   |        



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Our management believes that we have adequate liquidity to meet all known contractual obligations and
unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months.

Off-Balance
Sheet Arrangements

At December 31, 2006, we had outstanding standby letters of credit of $9.6 million and unfunded loan
commitments outstanding of $179.2 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed
to fund these outstanding commitments, we have the ability to liquidate federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase federal funds from correspondent banks. At December 31, 2006, we had
accommodations with upstream correspondent banks for unsecured short-term advances. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within a month.

The following table presents additional information about our unfunded commitments as of December 31, 2006, which by their terms have contractual
maturity dates subsequent to December 31, 2006 (dollars in thousands):

Table 19



|                      |  |                    |        |           |   |          |  |              |       |       |   |        |  |   |        
|--------------------- |  | ------------------ | ------ | --------- | - | -------- |  | ------------ | ----- | ----- | - | ------ |  | - | -------
|                      |  | Less than One year |        | 1-3 Years |   | 4-5Years |  | After 5Years |       | Total
|Unfunded commitments: |  |                    |        |           |   |          |  |              |       |       |   |        |  |   |        
|Letters of credit     |  | $                  | 8,633  |           | $ | 1,000    |  | $            |      |       | $ |       |  | $ | 9,633  
|Lines of credit       |  |                    | 72,495 |           |   | 45,689   |  |              | 6,562 |       |   | 52,916 |  |   | 177,662
|                      |  |                    |        |           |   |          |  |              |       |       |   |        |  |   |        
|Total                 |  | $                  | 81,128 |           | $ | 46,689   |  | $            | 6,562 |       | $ | 52,916 |  | $ | 187,295
|                      |  |                    |        |           |   |          |  |              |       |       |   |        |  |   |        

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

See Market Risk and
Asset/Liability Management and Liquidity Risk Management in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Note 2, Restrictions on Cash and Due from Bank
Accounts, and Note 17, Disclosures about Fair Value of Financial Instruments, from our 2006 Consolidated Financial Statements for quantitative and qualitative disclosures about market risk, which information is incorporated herein by
reference.



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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



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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.

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



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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.



49



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##### Table of Contents

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.



50



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##### Table of Contents

Nexity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                  |  |                         |              |   |      |   |              |      |  |   |             |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------------ | - | ---- | - | ------------ | ---- |  | - | ----------- | -
|                                                                                  |  | Years ended December 31 |             
|                                                                                  |  | 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 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           |  
|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                                         |  |                         | 6,514,688    |   |      |   | 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  |  
|Purchase of trading securities                                                    |  |                         | (1,998,500   | ) |      |   | 0            |      |  |   | 0           |  
|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                                            |  |                         | (124,189,077 | ) |      |   | (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.



51



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##### Table of Contents

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.



52



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##### Table of Contents

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.



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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.



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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.



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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



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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.



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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.



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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
|                                                                  |  |                |             |                      |   |                       |  |   |            |   |  |   |            



|                                                                  |  |                |             |                      |   |                       |  |   |            |   |  |   |            
|----------------------------------------------------------------- |  | -------------- | ----------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -----------
|                                                                  |  | 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
|                                                                  |  |                |             |                      |   |                       |  |   |            |   |  |   |            



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Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



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.



|                                                                  |  |                     |   |                     |   |            |  |                  |             |            |   |                  |  |   |             |  |   |          
|----------------------------------------------------------------- |  | ------------------- | - | ------------------- | - | ---------- |  | ---------------- | ----------- | ---------- | - | ---------------- |  | - | ----------- |  | - | ---------
|                                                                  |  | 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
|                                                                  |  |                     |   |                     |   |            |  |                  |             |            |   |                  |  |   |             |  |   |          



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Notes to Consolidated Financial Statements(Continued)



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.

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.



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Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



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.

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        



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Notes to Consolidated Financial Statements(Continued)



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.

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.



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Nexity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



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
|      |  |   |            



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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.



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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.



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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



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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
|                                   |  |      |           |      |   |           |  |   |          



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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.



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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.



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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.



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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



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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



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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.



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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.



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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 |  
|                                                                              |  |      |           |   |      |   |           |      |  |   |           |  



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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.



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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 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There have
been no disagreements or reportable events with accountants on accounting and financial disclosure.

Item 9A. Controls and Procedures

(a) Management, with the participation of our principal executive
officer and principal financial officer, has evaluated the effectiveness, as of December 31, 2006, of our disclosure controls and procedures, as such term



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is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended (the Exchange Act). Based upon their evaluation, our
principal executive officer and principal financial officer concluded that our disclosure controls and procedures, as of December 31, 2006, were effective to provide reasonable assurance that information required to be disclosed by us in the
reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SECs rules and forms, and to provide reasonable assurance that information required to be
disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Managements Report on Internal Control Over Financial Reporting

The management of Nexity Financial Corporation and Subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15 and 15d-15. This internal
control system has been designed to provide reasonable assurance to the Companys management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America.

All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The management of Nexity Financial Corporation and Subsidiaries has assessed the effectiveness of the companys internal control over financial
reporting as of December 31, 2006. To make this assessment, we used the criteria for effective internal control over financial reporting described in Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on our assessment and based on such criteria, we believe that, as of December 31, 2006, the Companys internal control over financial reporting was effective.

Mauldin & Jenkins, LLC, the independent registered public accounting firm that audited the consolidated financial statements of the Company included
in this Annual Report on Form 10-K, has issued a report on managements assessment of the Companys internal control over financial reporting as of December 31, 2006. The report, which expresses an unqualified opinion on managements
assessment and on the effectiveness of the Companys internal control over financial reporting as of December 31, 2006, is included in this Item under the heading Report of Independent Registered Public Accounting Firm.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Nexity Financial Corporation

Birmingham, Alabama

We have
audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting, that Nexity Financial Corporation and Subsidiaries maintained effective 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). Nexity Financial Corporation and
Subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.

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 effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that Nexity Financial Corporation and Subsidiaries maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also in our opinion, Nexity Financial Corporation and Subsidiaries maintained, in all material respects, effective 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).



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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the 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 and our report dated March 9, 2007 expressed an unqualified opinion.

/s/ Mauldin & Jenkins LLC

Birmingham, Alabama

March 14, 2007

(c) Changes in internal control over financial reporting. We continually assess the adequacy of our internal control over financial reporting and enhance
our controls in response to internal control assessments and internal and external audit and regulatory recommendations. No control enhancements during the quarter ended December 31, 2006 or through the date of this Annual Report on Form 10-K
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.



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PART III

Item 10. Directors, Executive Officers and Corporate Governance

See Executive Compensation Plan in
our Proxy Statement relating to the 2007 Annual Meeting of Stockholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.

See Election of Directors, Description of the Board Committees, Section 16(a) Beneficial Ownership Reporting Compliance, Certain Relationships
and Related Transactions, Executive Officers,andCorporate Governance in our Proxy Statement relating to the 2007 Annual Meeting of Stockholders filed with the Securities and Exchange Commission, which information is incorporated herein
by reference.

Item 11. Executive Compensation

Information about director and executive compensation is incorporated by
reference from the discussion under the headings Executive Compensation, Description of the Board Committees, Compensation Committee Report, and Total Shareholder Returnin our 2007 Proxy Statement, which information is incorporated herein by
reference.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

See Security Ownership of Directors and Management in our Proxy Statement relating to the 2007 Annual Meeting of Stockholders filed with the
Securities and Exchange Commission, which information is incorporated herein by reference.

See Equity Compensation Plan Information
in our Proxy Statement relating to the 2007 Annual Meeting of Stockholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

See Certain
Relationships and Related Transactionsin our Proxy Statement relating to the 2007 Annual Meeting of Stockholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

See Audit Fees, Other Audit Committee Matters,andSelection of Independent Public Accountants in our Proxy Statement relating to the 2007 Annual Meeting of Stockholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.



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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1) Financial Statements filed as part of this
report:

The following managements statement on responsibility for financial reporting, report of independent registered public
accounting firm and consolidated financial statements for the year ending December 31, 2006 are included in Item 8 hereof:



|                                                                                            |  |      
|------------------------------------------------------------------------------------------- |  | -----
|Managements Statement on Responsibility for Financial Reporting                            |  | 47   
|Report of Independent Registered Public Accounting Firm                                     |  | 48   
|Consolidated Balance Sheets at December 31, 2006 and 2005                                   |  | 49   
|Consolidated Statements of Income for the years ended December 31, 2006, 2005, and 2004     |  | 50   
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005, and 2004 |  | 51   
|Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income         |  | 52   
|Notes to the Consolidated Financial Statements                                              |  | 53-77

(a)(2) Financial Statement Schedules

All schedules to the consolidated financial statements required by Article 9 of Regulation S-X and all other schedules to the financial statements
required by Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and, therefore, have been omitted, or the required information in contained in the Consolidated Financial Statements or the notes thereto,
which are included in Item 8 hereof.

(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.+



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##### Table of Contents

|            |  |                                                                                                                                                                                                          
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                              
|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.                                            
|            | 
|10.12       |  | Salary Continuation Agreement with Kenneth T. Vassey, dated December 29, 2006, included as Exhibit 10.1 to the Corporations Form 8-K filed January 3, 2007, and incorporated herein by
reference.+      
|            | 
|10.13       |  | Salary Continuation Agreement with Cindy W. Russo, dated December 29, 2006, included as Exhibit 10.2 to the Corporations Form 8-K filed January 3, 2007, and incorporated herein by
reference.+         
|            | 
|14          |  | Code of Ethics.*                                                                                                                                                                                         
|            | 
|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*                                                                                                                                                                            
|            | 
|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.
|- | ---------------------------------------------------

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.



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##### Table of Contents

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)




|                                                         |  |                                                                                                             |  |               
|-------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | --------------
|Name                                                     |  | Position                                                                                                    |  | Date          
|/s/    GREG L.
LEE Greg L. Lee                           |  | Chairman and Chief Executive Officer (Principal Executive Officer)                                          |  | March 14, 2007
|                                                         |  |                                                                                                            
|/s/    DAVID E.
LONG David E. Long                       |  | President and Director                                                                                      |  | March 14, 2007
|                                                         |  |                                                                                                            
|/s/    JOHN J.
MORAN John J. Moran                       |  | Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer) |  | March 14, 2007
|                                                         |  |                                                                                                            
|/s/    R. BRADFORD
BURNETTE R. Bradford Burnette         |  | Director                                                                                                    |  | March 14, 2007
|                                                         |  |                                                                                                            
|/s/    RANDY K.
DOLYNIUK Randy K. Dolyniuk               |  | Director                                                                                                    |  | March 14, 2007
|                                                         |  |                                                                                                            
|/s/    TOMMY E.
LOOPER Tommy E. Looper                   |  | Director                                                                                                    |  | March 14, 2007
|                                                         |  |                                                                                                            
|/s/    DENISE N.
SLUPE Denise N. Slupe                   |  | Director                                                                                                    |  | March 14, 2007
|                                                         |  |                                                                                                            
|/s/    MARK A.
STEVENS Mark A. Stevens                   |  | Director                                                                                                    |  | March 14, 2007
|                                                         |  |                                                                                                            
|/s/    WILLIAM L. THORNTON,
III William L. Thornton, III |  | Director                                                                                                    |  | March 14, 2007



85



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Exhibit Index



|            |  |                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                            
|14          |  | Code of Ethics                                                                                                                                         
|            | 
|23.1        |  | Consent of Mauldin & Jenkins, LLC                                                                                                                      
|            | 
|23.2        |  | Consent of Ernst & Young                                                                                                                               
|            | 
|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
|- | --------------------------------------------------



86