Nexity Financial (NXTY)

Second Quarter Highlights

For the second quarter of 2005, the Corporation reported net income of $1.3 million, down 38.0% from $2.2 million reported for the second quarter of 2004. Net income per basic share for the quarter ended June 30, 2005 was $0.05, down from $0.08 per basic share for the same period last year. Net income per diluted share for the quarter ended June 30, 2005 was $0.04, down from $0.07 per diluted share for the same period last year. Net income was down primarily because of a $1.3 million increase in the provision for income taxes. Tax benefits from loss carry-forwards from previous years totaling $1.2 million reduced income tax expense in 2004.

The Corporation’s net interest income increased to $4.9 million in the second quarter of 2005 from $3.8 million in the same period in 2004. This increase was primarily attributable to increased volume of earning assets and net interest margin. Average earning assets increased 18.5% to $648.8 million or 98.4% of average total assets in the second quarter of 2005, compared with $547.7 million or 98.5% in the same period in 2004. The net interest margin for the second quarter of 2005 was 3.03%, up from 2.82% in the second quarter of 2004.

The provision for loan losses increased $470,000 in the second quarter of 2005 compared to the second quarter of 2004. This increase was primarily due to loan growth. Net charge-offs totaled $32,158 or 0.03% of average loans, annualized in the second quarter of 2005, compared to 0.14% in the second quarter of 2004. Non-accrual loans decreased $1.9 million, loans past due greater than 90 days decreased $16,462 to zero, and other real estate increased $1.1 million compared to second quarter 2004 levels.

Noninterest income increased 75.3% in the second quarter of 2005 compared to the same period in 2004, mostly due to higher gains on sales of investment securities. Gains on the sales of investment securities totaled $468,351 in the second quarter of 2005, compared to $31,950 in the same period of 2004. The gains recognized in 2005 were primarily due to one securities transaction which was nonrecurring. Brokerage and investment services income was down $83,756 or 30.4% during the quarter. As the yield curve flattened, the demand from correspondent bank customers for fixed income securities has declined.

Noninterest expense was up 18.2% in the second quarter of 2005 compared to the same period in 2004, mostly due to higher spending for salaries and employee benefits. Salaries and employee benefits were up 36.6% and net occupancy expense was up 8.2% compared to the second quarter of 2004. The increases are primarily related to the expansion of our correspondent banking business. Equipment expense was down 9.9% and other operating expense was down 4.8% compared to the second quarter of 2004.