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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-QSB [X]
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 [  ]
    
    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: 333-95335 Integrity Bancshares, Inc. 
  Georgia
    
    58-2508612(State or other jurisdiction of
incorporation or organization)
    
    (IRS Employer
Identification No.)
 11140 State Bridge Road, Alpharetta, Georgia 30022 
  (770) 777-0324 
  N/A 
  Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 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 [  ] State the number of shares outstanding of each of the issuers classes of
common equity, as of April 30, 2004: 3,246,697; no par value. Transitional Small Business Disclosure Format Yes [  ] No [X]




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INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY INDEX  
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheet - March 31, 2004
    
    
    1Consolidated Statements of Income and Comprehensive IncomeThree Months Ended March 31, 2004 and 2003
    
    
    2Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 and 2003
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    7Item 3. Controls and Procedures
    
    
    14PART II.
    
    OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    15Item 2  Changes in Securities and Small Business Issuer Purchases of Equity Securities
    
    
    15Item 3  Defaults Upon Senior Securities
    
    
    15Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    15Item 5  Other Information
    
    
    15Item 6 - Exhibits and Reports on Form 8-K
    
    
    15Signatures
    
    
    16EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE PFOEX-32 SECTION 906 CERTIFICATION OF THE CEO AND PFO
  i




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PART I - FINANCIAL INFORMATION 
 ITEM I. FINANCIAL STATEMENTS INTEGRITY BANCSHARES, INC. AND SUBSIDIARY  
 CONSOLIDATED BALANCE SHEET
 MARCH 31, 2004
 (Unaudited)
 AssetsCash and due from banks
    
    $
    2,383,440Interest-bearing deposits in banks
    
    
    255,653Federal funds sold
    
    
    16,444,000Securities available-for-sale, at fair value
    
    
    26,643,468Restricted equity securities, at cost
    
    
    500,000Loans
    
    
    245,882,489Less allowance for loan losses
    
    
    3,713,790Loans, net
    
    
    242,168,699Premises and equipment
    
    
    10,429,624Other assets
    
    
    3,093,461Total assets
    
    $
    301,918,345Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    9,474,437Interest-bearing
    
    
    244,246,022Total deposits
    
    
    253,720,459Other borrowings
    
    
    16,186,000Other liabilities
    
    
    7,484,121Total liabilities
    
    
    277,390,580Commitments and contingenciesStockholders equityCommon stock, no par value; 10,000,000 shares authorized;
3,015,173 shares issued and outstanding
    
    
    22,746,330Retained earnings
    
    
    1,695,718Accumulated other comprehensive income
    
    
    85,717Total stockholders equity
    
    
    24,527,765Total liabilities and stockholders equity
    
    $
    301,918,345
 See Notes to Consolidated Financial Statements. 1




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INTEGRITY BANCSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF INCOME
 AND COMPREHENSIVE INCOME
 THREE MONTHS ENDED MARCH 31, 2004 AND 2003
 (Unaudited)
 Three Months EndedMarch 31,2004
    
    2003Interest incomeLoans
    
    $
    4,231,246
    
    
    $
    2,636,957Taxable securities
    
    
    316,071
    
    
    
    160,431Deposits in banks
    
    
    378
    
    
    
    2,238Federal funds sold
    
    
    8,719
    
    
    
    23,091Total interest income
    
    
    4,556,414
    
    
    
    2,822,717Interest expenseDeposits
    
    
    1,367,250
    
    
    
    1,007,641Federal funds purchased, securities sold under
repurchase agreements and other borrowings
    
    
    104,681
    
    
    
    27,888Total interest expense
    
    
    1,471,931
    
    
    
    1,035,529Net interest income
    
    
    3,084,483
    
    
    
    1,787,188Provision for loan losses
    
    
    140,806
    
    
    
    332,621Net interest income after
provision for loan losses
    
    
    2,943,677
    
    
    
    1,454,567Other incomeService charges on deposit accounts
    
    
    12,990
    
    
    
    21,386Other operating income
    
    
    49,365
    
    
    
    6,314Total other income
    
    
    62,355
    
    
    
    27,700Other expensesSalaries and employee benefits
    
    
    890,155
    
    
    
    480,245Occupancy and equipment expenses
    
    
    177,964
    
    
    
    84,811Other operating expenses
    
    
    480,515
    
    
    
    252,298Total other expenses
    
    
    1,548,634
    
    
    
    817,354Net income before income taxes
    
    
    1,457,398
    
    
    
    664,913Income tax expense
    
    
    570,700
    
    
    
    Net income
    
    
    886,698
    
    
    
    664,913Other comprehensive income (loss):Unrealized gains (losses) on securities
available-for-sale arising during period
    
    
    22,771
    
    
    
    (139,683
    )Comprehensive income
    
    $
    909,469
    
    
    $
    525,230Basic earnings per share
    
    $
    0.32
    
    
    $
    0.31Diluted earnings per share
    
    $
    0.30
    
    
    $
    0.31Cash dividends per share
    
    $
    
    
    
    $
    
 See Notes to Consolidated Financial Statements. 2




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INTEGRITY BANCSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 THREE MONTHS ENDED MARCH 31, 2004 AND 2003
 (Unaudited)
 2004
    
    2003OPERATING ACTIVITIESNet income
    
    $
    886,698
    
    
    $
    664,913Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation
    
    
    91,337
    
    
    
    53,259Provision for loan losses
    
    
    140,806
    
    
    
    332,621Stock Compensation
    
    
    77,310
    
    
    
    Increase in interest receivable
    
    
    (141,751
    )
    
    
    (168,382
    )Increase in interest payable
    
    
    111,514
    
    
    
    173,276Gain on sale of other real estate
    
    
    (2,528
    )
    
    
    Net other operating activities
    
    
    (1,168,790
    )
    
    
    (101,767
    )Net cash provided by (used in) operating activities
    
    
    (5,404
    )
    
    
    953,920INVESTING ACTIVITIESNet increase in interest-bearing deposits in banks
    
    
    (141,699
    )
    
    
    (86,653
    )Purchases of securities available-for-sale
    
    
    (1,989,688
    )
    
    
    (15,108,595
    )Proceeds from maturities of securities available-for-sale
    
    
    2,589,695
    
    
    
    3,763,828Redemption of restricted equity securities
    
    
    150,000
    
    
    
    Net increase in federal funds sold
    
    
    (14,005,000
    )
    
    
    Net increase in loans
    
    
    (6,963,501
    )
    
    
    (33,283,355
    )Loan proceeds payable to particpants
    
    
    6,171,609
    
    
    
    Proceeds from sale of other real estate
    
    
    206,380
    
    
    
    Purchase of premises and equipment
    
    
    (913,560
    )
    
    
    (755,461
    )Net cash used in investing activities
    
    
    (14,895,764
    )
    
    
    (45,470,236
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    21,942,737
    
    
    
    46,333,811Net decrease in federal funds purchased
    
    
    (10,000,000
    )
    
    
    (3,067,000
    )Net proceeds from sale of common stock
    
    
    3,648,716
    
    
    
    2,669,502Net cash provided by financing activities
    
    
    15,591,453
    
    
    
    45,936,313Net increase in cash and due from banks
    
    
    690,285
    
    
    
    1,419,997Cash and due from banks, beginning of period
    
    
    1,693,155
    
    
    
    1,242,074Cash and due from banks, end of period
    
    $
    2,383,440
    
    
    $
    2,662,071SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during period for:Interest
    
    $
    1,360,417
    
    
    $
    862,253Income taxes
    
    $
    1,616,688
    
    
    $
    6,983
 See Notes to Consolidated Financial Statements. 3




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INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 NOTE 1.
    
    BASIS OF PRESENTATIONThe consolidated financial information for Integrity Bancshares,
Inc. (the Company) included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim period.The results of operations for the three month periods ended March
31, 2004 are not necessarily indicative of the results to be
expected for the full year.NOTE 2.
    
    STOCK COMPENSATION PLANSAt March 31, 2004, the Company has two stock-based employee
compensation plans. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related
Interpretations. For fixed stock options, no stock-based employee
compensation cost is reflected in net income, as all fixed options
granted under those plans had an exercise price equal to the market
value of the underlying stock on the date of grant. For variable
stock options, stock-based compensation amounted to $48,126 and $0
for the three months ended March 31, 2004 and 2003, respectively.
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
 Three Months EndedMarch 31,2004
    
    2003Net income, as reported
    
    $
    886,698
    
    
    $
    664,913Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax
    
    
    23,225
    
    
    
    71,351Pro forma net income
    
    $
    863,473
    
    
    $
    593,562Earnings per share:Basic - as reported
    
    $
    .32
    
    
    $
    .31Basic  pro forma
    
    $
    .31
    
    
    $
    .28Diluted - as reported
    
    $
    .30
    
    
    $
    .31Diluted - pro forma
    
    $
    .29
    
    
    $
    .28
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 3.
    
    EARNINGS PER SHAREPresented below is a summary of the components used to calculate
basic and diluted earnings per common share.
 Three Months EndedMarch 31,2004
    
    2003Basic Earnings Per Share:Weighted average common shares outstanding
    
    
    2,763,229
    
    
    
    2,153,374Net income
    
    $
    886,698
    
    
    $
    664,913Basic earnings per share
    
    $
    0.32
    
    
    $
    0.31Diluted Earnings Per Share:Weighted average common shares outstanding
    
    
    2,763,229
    
    
    
    2,153,374Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the year
    
    
    216,106
    
    
    
    0Total weighted average common shares and
common stock equivalents outstanding
    
    
    2,979,335
    
    
    
    2,153,374Net income
    
    $
    886,698
    
    
    $
    664,913Diluted earnings per share
    
    $
    0.30
    
    
    $
    0.31
 NOTE 4.
    
    CURRENT ACCOUNTING DEVELOPMENTSIn January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation
of ARB No. 51, and on December 24, 2003, the FASB issued FASB
Interpretation No. 46 (Revised December 2003), Consolidation of
Variable Interest Entities which replaced FIN 46. The
interpretation addresses consolidation by business enterprises of
variable interest entities. A variable interest entity is
defined as an entity subject to consolidation according to the
provisions of the interpretation. The revised interpretation
provides for special effective dates for entities that had fully
or partially applied the original interpretation as of December
24, 2003. Otherwise, application of the interpretation was
required in financial statements of public entities that have
interests in special-purpose entities, or SPEs, for periods
ending after December 15, 2003. Application by public entities,
other than small business issuers, for all other types of
variable interest entities (i.e., non-SPEs) is required in
financial statements for periods ending after March 15, 2004.
Application by small business issuers to variable interest
entities other than SPEs is required at various dates in 2004 and
2005. The Company has determined that the revised provisions
required deconsolidation of subsidiary trusts which issued trust
preferred securities. The Company adopted these revised
provisions in the first quarter of 2004. The interpretations did
not have a material effect on the Companys financial condition
or results of operations.
 5




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 5.
    
    CAPITAL SECRURITIES OF SUBSIDIARY TRUSTIn December of 2003, the Company formed Integrity Statutory Trust I
(the Trust), a statutory business trust. The Company purchased
all the common securities of the Trust for $186,000. The Trust
sold 6,000 floating rate capital securities, having a liquidation
value of $1,000 per security, for $6 million. The sole assets of
the Trust are the Companys subordinated debentures totaling
$6,186,000 which are due December 17, 2033. The distributions
payable on the floating rate capital securities are based on LIBOR
plus 2.85%. Cash distributions on the securities are made to the
extent interest on the debentures is received by the Trust. The
securities are redeemable in whole at any time on or after December
17, 2008, or earlier in the event of certain changes or amendments
to regulatory requirements or federal tax rules. The Company fully
guarantees the obligations of the Trust.
 6




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is managements discussion and analysis of certain
significant factors which have affected the financial position and operating
results of Integrity Bancshares, Inc. (the Company) and its bank subsidiary,
Integrity Bank (the Bank), during the period included in the accompanying
consolidated financial statements. Forward Looking Statements Certain of the statements made herein under the caption Managements
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) are forward-looking statements for purposes of the Securities Act of
1933, as amended (the Securities Act) and the Securities Exchange Act of
1934, as amended (the Exchange Act), and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Such forward looking statements include statements
using the words such as may, will, anticipate, should, would,
believe, contemplate, expect, estimate, continue, may, intend, or
other similar words and expressions of the future. Our actual results may
differ significantly from the results we discuss in these forward-looking
statements. These forward-looking statements involve risks and uncertainties and may
not be realized due to a variety of factors, including, without limitation:
the effects of future economic conditions; governmental monetary and fiscal
policies, as well as legislative and regulatory changes; the risks of changes
in interest rates on the level and composition of deposits, loan demand, and
the values of loan collateral, securities, and other interest-sensitive assets
and liabilities; interest rate risks; the effects of competition from other
commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market
and other mutual funds and other financial institutions operating in our market
area and elsewhere, including institutions operating regionally, nationally,
and internationally, together with such competitors offering banking products
and services by mail, telephone, computer, and the Internet. Critical Accounting Policies The Companys accounting and reporting policies are in accordance with
accounting principles generally accepted in the United States of America as
defined by Public Company Accounting Oversight Board and conform to general
practices within the banking industry. Its significant accounting policies are
described in the notes to the consolidated financial statements included in the
Companys Form 10-KSB for the year ended December 31, 2003. Certain accounting
policies require management to make significant estimates and assumptions,
which have a material impact on the carrying value of certain assets and
liabilities, and the Company considers these to be critical accounting
policies. The estimates and assumptions used are based on historical
experience and other factors that management believes to be reasonable under
the circumstances. Actual results could differ significantly from these
estimates and assumptions, which could have a material impact on the carrying
value of assets and liabilities at the balance sheet dates and results of
operations for the reporting periods. The Company believes the following are critical accounting policies that
require the most significant estimates and assumptions that are particularly
susceptible to a significant change in the preparation of its financial
statements. Allowance for loan losses. A provision for loan losses is based on
managements opinion of an amount that is adequate to absorb losses inherent in
the existing loan portfolio. The allowance for loan losses is established
through a provision for losses based on managements evaluation of current
economic conditions, volume and composition of the loan portfolio, the fair
market value or the estimated net realizable value of underlying collateral,
historical charge off experience, the level of nonperforming and past due
loans, and other indicators derived from reviewing the loan portfolio. The
evaluation includes a review of all loans on which full collection may not be 7




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reasonably assumed. Should the factors that are considered in determining the
allowance for loan losses change over time, or should managements estimates
prove incorrect, a different amount may be reported for the allowance and the
associated provision for loan losses. For example, if economic conditions in
our market area experience an unexpected and adverse change, we may need to
increase our allowance for loan losses by taking a charge against earnings in
the form of an additional provision for loan loss. Investment securities. Investment securities are classified into three
categories. Debt securities that we have the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported
at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
trading securities and reported as fair value, with unrealized gains and
losses included in earnings. Debt securities not classified as either
held-to-maturity securities or trading securities and equity securities not
classified as trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of other
comprehensive income. We did not have any securities classified as trading or
held-to-maturity securities as of March 31, 2004 or 2003. Premiums and discounts related to securities are amortized or accreted
over the life of the related security as an adjustment to the yield using the
effective interest method and considering prepayment assumptions. Dividend and
interest income is recognized when earned. Gains and losses on sales or calls of securities are recognized on the
settlement date based on the adjusted cost basis of the specific security. The
financial statement impact of settlement date accounting versus trade date
accounting is not significant. Declines in fair value of individual held to
maturity and available for sale securities below their cost that are other than
temporary result in write-downs of the individual securities to their fair
value. Management conducts regular reviews to assess whether the values of our
investments are impaired and if any impairment is other than temporary. If the
Company determines that the value of any investment is other than temporarily
impaired, it records a charge against earnings in the amount of the impairment.
The determination of whether other than temporary impairment has occurred
involves significant assumptions, estimates and judgments by management.
Changing economic conditions  global, regional or related to industries of
specific issuers  could adversely affect these values. There was no
impairment for securities recorded in the quarters ended March 31, 2004 and
2003. Liquidity and Capital Resources We monitor our liquidity resources on an ongoing basis. Our liquidity is
also monitored on a periodic basis by State and Federal regulatory authorities,
As of March 31, 2004, our liquidity, as determined under guidelines established
by regulatory authorities and internal policy, was satisfactory. At March 31, 2004, our capital ratios were adequate based on regulatory
minimum capital requirements. The minimum capital requirements and the actual
capital ratios on a consolidated and bank-only basis are as follows: ActualMinimumRegulatoryConsolidated
    
    Bank
    
    RequirementLeverage capital ratios
    
    
    10.49
    %
    
    
    10.21
    %
    
    
    5.00
    %Risk-based capital ratios:Tier 1 capital
    
    
    10.59
    
    
    
    10.23
    
    
    
    6.00Total capital
    
    
    11.84
    
    
    
    11.48
    
    
    
    10.00
 8




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These ratios may decline as asset growth continues, but are expected to
exceed the minimum regulatory requirements. Future earnings and proceeds from
our stock offerings will assist in keeping these ratios at satisfactory levels. As of March 31, 2004, we were in the process of selling 1,500,000 shares
of common stock at a price of $13.50 per share. Proceeds totaling $3,658,716
representing the sale of 271,016 shares had been received as of March 31, 2004.
These proceeds are included in the capital section of the balance sheet in
common stock, net of $10,000 prorated offering expenses. The proceeds will be
used primarily to maintain adequate capital ratios and to fund future growth. Off-Balance Sheet Risk We are a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of our customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Such commitments involve, to varying degrees, elements of credit
risk and interest rate risk in excess of the amount recognized in the balance
sheets. 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 contractual amount of those
instruments. We use the same credit policies in making commitments and
conditional obligations as we do for on-balance sheet instruments. A summary
of our commitments is as follows: March 31, 2004(Dollars in Thousands)Commitments to extend credit
    
    $
    85,113Letters of credit
    
    
    1,533$
    86,646
 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. Since
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. Those letters of
credit are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers.
Collateral is required in instances which we deem necessary. 9




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Financial Condition The following is a summary of our balance sheets for the periods
indicated: March 31,
    
    December 31,2004
    
    2003(Dollars in Thousands)Cash and due from banks
    
    $
    2,383
    
    
    $
    1,693Interest-bearing deposits in banks
    
    
    256
    
    
    
    114Federal funds sold
    
    
    16,444
    
    
    
    2,439Securities
    
    
    26,643
    
    
    
    27,202Restricted equity securities
    
    
    500
    
    
    
    650Loans, net
    
    
    242,169
    
    
    
    235,346Premises and equipment
    
    
    10,430
    
    
    
    9,600Other assets
    
    
    3,093
    
    
    
    2,704$
    301,918
    
    
    $
    279,748Deposits
    
    $
    253,720
    
    
    $
    231,778Federal funds purchased
    
    
    
    
    
    
    10,000Other borrowings
    
    
    16,186
    
    
    
    16,000Other liabilities
    
    
    7,484
    
    
    
    2,078Stockholders equity
    
    
    24,528
    
    
    
    19,892$
    301,918
    
    
    $
    279,748
 Our total assets grew by 7.9% for the first quarter of 2004. Deposit
growth of $21.9 million was used primarily to pay off federal funds purchased
and invested in loans and federal funds sold. Other liabilities increased $5.4
million due to an $11.5 million payoff of a participated loan on March 31,
2004. This amount paid off our balance of $5.3 million. The remaining $6.2
million was sent to the participating banks on April 1, 2004. The $6.2 million
is included in other liabilities and federal funds sold as of March 31, 2004.
Our ratio of loans to deposits and other borrowings decreased to 91.1% at March
31, 2004 from 96.4% at December 31, 2003, although loan demand in our primary
market area of Northern Fulton County, Georgia continues to be strong. Our
total equity increased by $4.6 million, consisting of $3.6 million in stock
sale proceeds, year-to-date net income of $886,000, paid-in capital from stock
option expense of $77,000, and an increase in gains on securities
available-for-sale, net of tax, of $23,000. 10




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Results of Operations For The Three Months Ended March 31, 2004 and 2003 The following is a summary of our operations for the periods indicated. Three Months EndedMarch 31,2004
    
    2003(Dollars in Thousands)Interest income
    
    $
    4,556
    
    
    $
    2,823Interest expense
    
    
    1,472
    
    
    
    1,036Net interest income
    
    
    3,084
    
    
    
    1,787Provision for loan losses
    
    
    141
    
    
    
    333Other income
    
    
    62
    
    
    
    28Other expense
    
    
    1,548
    
    
    
    817Pretax income
    
    
    1,457
    
    
    
    665Income taxes
    
    
    570
    
    
    
    Net income
    
    $
    887
    
    
    $
    665
 Our net interest income has increased by $1.3 million during the first
quarter of 2004 as compared to the same period in 2003. Our net interest
margin increased to 4.45% during the first quarter of 2004 as compared to 4.36%
during the first quarter of 2003 and to 4.37% for the entire year of 2003. The
increase in net interest income is due primarily to the increased volume of
average loans outstanding. Yields earned on loans decreased to 6.89% in the
first quarter of 2004 as compared to 7.47% in the first quarter of 2003. The
cost of funds also decreased, as deposits have been re-priced as they matured.
Our cost of funds including non-interest bearing deposits, decreased to 2.22%
in the first quarter of 2004 as compared to 2.38% in the first quarter of 2003. The provision for loan losses decreased by $192,000 in the first quarter
of 2004 compared to the same period in 2003. This decrease is due primarily to
the loan portfolio growing $33.3 million in the first quarter of 2003 vs. $7.0
million in the first quarter of 2004. The amounts provided are indicative of
our assessment of the inherent risk in the portfolio. There were $2.9 million in nonaccrual loans at March 31, 2004, consisting
of a $2.3 million commercial loan in which the borrower has filed for
bankruptcy, and another commercial loan for $550,000. The bank is taking all
commercially reasonable steps to minimize losses on these loans. However, the
$550,000 loan was charged-off in April, resulting in an additional $275,000
charge to the provision for loan losses. Based on our most current
information, we believe the amount of $1.2 million included in the allowance
for loan losses related to the $2.3 million loan is adequate to provide for
potential losses for that credit. There was one loan past due ninety days or
more and still accruing interest at March 31, 2004. This loan was foreclosed
in May, 2004. Management does not expect to incur any loss on the disposition
of the real estate collateral obtained in the foreclosure. Potential problem 11




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loans consist of 20 various credits which are currently less than 90 days
past due and are accruing interest, but have the potential to become 90 days or
more past due, become nonaccruing, or be restructured before final maturity.
Management believes the $3.7 million in the allowance for loan losses at March
31, 2004, or 1.51% of total outstanding loans, is adequate to absorb risks in
the portfolio. No assurance can be given, however, that increased loan volume,
adverse economic conditions or other circumstances will not result in increased
losses in our loan portfolio. Information with respect to nonaccrual, past due, restructured, and
potential problem loans at March 31, 2004 and 2003 is as follows: March 31,2004
    
    2003(Dollars in Thousands)Nonaccrual loans
    
    $
    2,869
    
    
    $
    0Loans contractually past due ninety days or more as to interest
or principal payments and still accruing
    
    
    1,205
    
    
    
    0Restructured loans
    
    
    0
    
    
    
    0Potential problem loans
    
    
    2,179
    
    
    
    1,087Interest income that would have been recorded on nonaccrual
and restructured loans under original terms
    
    
    124
    
    
    
    0Interest income that was recorded on nonaccrual and
restructured loans
    
    
    0
    
    
    
    0
 Potential problem loans are defined as loans about which we have serious
doubts as to the ability of the borrower to comply with the present loan
repayment terms and which may cause the loan to be placed on nonaccrual status,
to become past due more than ninety days, or to be restructured. It is our policy to discontinue the accrual of interest income when, in
the opinion of management, collection of such interest becomes doubtful. This
status is accorded interest when (1) there is a significant deterioration in
the financial condition of the borrower and full repayment of principal and
interest is not expected and (2) the principal or interest is more than ninety
days past due, unless the loan is both well-secured and in the process of
collection. Loans classified for regulatory purposes as loss, doubtful, substandard,
or special mention that have not been included in the table above do not
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity or capital
resources. Management is not aware of any information that causes it to have
serious doubts as to the ability of borrowers to comply with the loan repayment
terms. 12




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##### Table of Contents



Information regarding certain loans and allowance for loan loss data
through March 31, 2004 and 2003 is as follows: Three Months EndedMarch 31,2004
    
    2003(Dollars in Thousands)Average amount of loans outstanding
    
    $
    245,527
    
    
    $
    141,033Balance of allowance for loan losses at beginning of period
    
    $
    3,573
    
    
    $
    1,105Loans charged offCommercial and financial
    
    
    0
    
    
    
    0Real estate mortgage
    
    
    0
    
    
    
    0Installment
    
    
    0
    
    
    
    (20
    )0
    
    
    
    (20
    )Loans recoveredCommercial and financial
    
    
    0
    
    
    
    0Real estate mortgage
    
    
    0
    
    
    
    0Installment
    
    
    0
    
    
    
    00
    
    
    
    0Net (charge-offs)/recoveries
    
    
    0
    
    
    
    (20
    )Additions to allowance charged to operating expense during period
    
    
    141
    
    
    
    333Balance of allowance for loan losses at end of period
    
    $
    3,714
    
    
    $
    1,418Ratio of net loans charged off during the period to
average loans outstanding
    
    
    0.00
    %
    
    
    0.01
    %
 The allowance for loan losses is maintained at a level that is deemed
appropriate by management to adequately cover all known and inherent risks in
the loan portfolio. Managements evaluation of the loan portfolio includes a
loan classification program. Under the program, as each loan is made, we
assign a loan grade. Each loan grade is assigned an allowance percentage based
on our experience specifically and the historical experience of the banking
industry generally. Loan classifications are then subject to periodic review
by the responsible lending officers and by senior management based upon their
judgment, our loan loss experience, current economic conditions that may affect
the borrowers ability to repay, lender requirements, the underlying collateral
value of the loans and other appropriate information. Management relies
predominantly on this ongoing review of the loan portfolio to assess the risk
characteristics of the portfolio in the aggregate and to determine adjustments,
if any, to our allowance for loan losses. Based upon this ongoing review, we
may identify loans that could be impaired. A loan is considered impaired when
it is probable that we will be unable to collect all principal and interest due
in accordance with the contractual terms of the loan agreement. When we
identify a loan as impaired, the allowance for loan losses is 13




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increased if we determine that the amount of impairment is in excess of the
allowance determined under our loan classification program. Other income has increased in the first quarter of 2004 as compared to the
same period in 2003 by $34,000 due to an increase in rental income from our
administrative building. Other expenses increased in the first quarter of 2004 as compared to the
same period in 2003 by $731,000 due to increased salaries and employee benefits
of $410,000, increased equipment and occupancy expenses of $93,000, and
increased other operating expenses of $228,000. Salaries and employee benefits
have increased due to an increase in the number of full time equivalent
employees to 36 at March 31, 2004 from 16 at March 31, 2003, compensation
expense recognized for variable stock options in the amount of $77,000, and to
annual salary increases. The increase in the number of employees is due to our
overall growth. The increase in equipment and occupancy expense is due to our
overall growth and additional expenses related to our Roswell financial center
which opened in July, 2003 and the purchase of the administrative building in
June, 2003. The increase in other operating expense is due primarily to
growth, with the largest increases in the categories of director fees of
$81,000, loan expenses of $62,000, donations/tithing of $49,000, and
miscellaneous other expenses of $44,000. The Company has recorded income tax expense of $570,000 in the first
quarter of 2004 as compared to $0 in the first quarter of 2003. The rate of
tax as a percentage of pretax income was 39% for 2004. No taxes were recorded
in 2003 due to net operating loss carryforwards. The Company is not aware of any known trends, events or uncertainties,
other than the effect of events as described above, that will have or that are
reasonably likely to have a material effect on our liquidity, capital resources
or operations. We are also not aware of any current recommendations by the
regulatory authorities which, if they were implemented, would have such an
effect. 
 ITEM 3. CONTROLS AND PROCEDURES Based upon an evaluation of our disclosure controls and procedures as of
the end of the period covered by this report, under the supervision and with
the participation of management, our President and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company
required to be included in the Companys Exchange Act filings. There have been
no significant changes in internal controls over financial reporting or in
other factors that could significantly affect internal controls over financial
reporting during the first quarter of 2004. 14




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##### Table of Contents



PART II - OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS. The Company is not a party to any pending legal proceeding (nor is any
property of the Company subject to any legal proceeding) other than routine
litigation that is incidental to the business. 
 ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES. There has been no change to the rights of the holders of the Companys
common stock. The Company did not repurchase any equity securities during the
first quarter of 2004. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. There have been no defaults in the payment of principal, interest, a
sinking or purchase fund installment, or any other default with respect to any
indebtedness of the Company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders during the first quarter of 2004. 
 ITEM 5. OTHER INFORMATION. None. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 31.1
    
    
    Certification of the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certificate of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    
    Certification of the Chief Executive Officer and
Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 (b) Reports on Form 8-K. No reports on Form 8-K were filed during the first quarter of 2004. 15




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SIGNATURES In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. INTEGRITY BANCSHARES, INC.(Registrant)DATE: May 12, 2004
    
    BY:
    
    /s/ Steven M. SkowSteven M. Skow, President and C.E.O.(Principal Executive Officer)DATE: May 12, 2004
    
    BY:
    
    /s/ Jeff L. SandersJeff L. Sanders, Senior VP - Finance(Principal Financial and Accounting Officer)
 16