##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 o
    
    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: 001-33005
 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
 
   (Former name, former address and former fiscal year, if changed since last report)
 þ o
  o þ o
 o þ




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##### 



INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  September 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Operations and Comprehensive Income (Loss)
Three and Nine Months Ended September 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows 
Nine Months Ended September 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24Signatures
    
    
    25EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATIONS OF THE CEO AND CFO
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 INTEGRITY BANCSHARES, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,2007
    
    December 31,(Dollars in thousands)
    
    (Unaudited)
    
    2006ASSETS:Cash and due from banks
    
    $
    7,816
    
    
    $
    5,719Interest-bearing deposits in banks
    
    
    259
    
    
    
    85Federal funds sold
    
    
    93,596
    
    
    
    Securities available for sale, at fair value
    
    
    146,525
    
    
    
    133,923Restricted equity securities, at cost
    
    
    4,941
    
    
    
    1,727Loans
    
    
    994,752
    
    
    
    941,580Less: allowance for loan losses
    
    
    (25,618
    )
    
    
    (9,825
    )Net loans
    
    
    969,134
    
    
    
    931,755Premises and equipment
    
    
    21,845
    
    
    
    15,372Other real estate owned
    
    
    7,206
    
    
    
    542Bank owned life insurance
    
    
    21,463
    
    
    
    20,687Deferred taxes
    
    
    7,475
    
    
    
    5,442Other assets
    
    
    21,217
    
    
    
    9,569Total assets
    
    $
    1,301,477
    
    
    $
    1,124,821LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing demand
    
    $
    13,424
    
    
    $
    20,146Interest-bearing:Demand
    
    
    97,436
    
    
    
    125,446Savings
    
    
    35,260
    
    
    
    31,963Time, $100,000 and over
    
    
    214,090
    
    
    
    169,615Other time
    
    
    713,446
    
    
    
    581,617Total deposits
    
    
    1,073,656
    
    
    
    928,787Federal funds purchased and repurchase agreements
    
    
    45,000
    
    
    
    46,551Federal Home Loan Bank advances
    
    
    65,000
    
    
    
    5,000Subordinated long-term debentures
    
    
    52,022
    
    
    
    52,022Other liabilities
    
    
    9,939
    
    
    
    12,089Total liabilities
    
    
    1,245,617
    
    
    
    1,044,449STOCKHOLDERS EQUITY:Common stock, no par value; 50,000,000 shares authorized; 15,511,014 and
14,764,538 shares issued and outstanding, respectively
    
    
    64,451
    
    
    
    60,723Accumulated (deficit) earnings
    
    
    (7,999
    )
    
    
    20,280Accumulated other comprehensive loss
    
    
    (592
    )
    
    
    (631
    )Total stockholders equity
    
    
    55,860
    
    
    
    80,372Total liabilities and stockholders equity
    
    $
    1,301,477
    
    
    $
    1,124,821
 See Accompanying Notes to Condensed Consolidated Financial Statements.
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INTEGRITY BANCSHARES, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(Dollars in thousands, except share and per share amounts)
    
    2007
    
    2006
    
    2007
    
    2006Interest incomeLoans, including fees
    
    $
    20,337
    
    
    $
    19,678
    
    
    $
    62,418
    
    
    $
    53,217Interest-bearing deposits in banks
    
    
    7
    
    
    
    
    
    
    
    15
    
    
    
    2Federal funds sold
    
    
    391
    
    
    
    26
    
    
    
    413
    
    
    
    254Taxable investment securities
    
    
    1,975
    
    
    
    1,342
    
    
    
    5,734
    
    
    
    3,410Total interest income
    
    
    22,710
    
    
    
    21,046
    
    
    
    68,580
    
    
    
    56,883Interest expenseTime deposits, $100,000 and over
    
    
    2,872
    
    
    
    2,159
    
    
    
    7,779
    
    
    
    5,749Other deposits
    
    
    10,730
    
    
    
    7,729
    
    
    
    29,937
    
    
    
    20,389Federal Home Loan Bank advances
    
    
    776
    
    
    
    334
    
    
    
    2,204
    
    
    
    358Other borrowings
    
    
    554
    
    
    
    206
    
    
    
    1,991
    
    
    
    264Long-term debentures
    
    
    1,011
    
    
    
    614
    
    
    
    2,973
    
    
    
    1,508Total interest expense
    
    
    15,943
    
    
    
    11,042
    
    
    
    44,884
    
    
    
    28,268Net interest income
    
    
    6,767
    
    
    
    10,004
    
    
    
    23,696
    
    
    
    28,615Provision for loan losses
    
    
    1,195
    
    
    
    351
    
    
    
    50,683
    
    
    
    2,490Net interest income
(loss) after provision
for loan losses
    
    
    5,572
    
    
    
    9,653
    
    
    
    (26,987
    )
    
    
    26,125Other incomeService charges on deposit accounts
    
    
    20
    
    
    
    20
    
    
    
    57
    
    
    
    61Income from bank owned life insurance
    
    
    259
    
    
    
    257
    
    
    
    776
    
    
    
    428Other operating income
    
    
    51
    
    
    
    189
    
    
    
    221
    
    
    
    459Total other income
    
    
    330
    
    
    
    466
    
    
    
    1,054
    
    
    
    948Other expenseSalaries and employee benefits
    
    
    1,683
    
    
    
    2,999
    
    
    
    6,990
    
    
    
    7,834Occupancy and equipment expenses
    
    
    610
    
    
    
    635
    
    
    
    1,826
    
    
    
    1,787Other operating expenses
    
    
    1,987
    
    
    
    1,305
    
    
    
    5,432
    
    
    
    4,138Total other expense
    
    
    4,280
    
    
    
    4,939
    
    
    
    14,248
    
    
    
    13,759Income (loss) before income taxes (benefits)
    
    
    1,622
    
    
    
    5,180
    
    
    
    (40,181
    )
    
    
    13,314Income tax expense (benefit)
    
    
    930
    
    
    
    1,814
    
    
    
    (11,902
    )
    
    
    4,990Net income (loss)
    
    $
    692
    
    
    $
    3,366
    
    
    $
    (28,279
    )
    
    $
    8,324Other comprehensive income (loss)Unrealized gains on securities available-for-
sale arising during period, net of tax benefit
    
    $
    1,110
    
    
    $
    1,146
    
    
    $
    40
    
    
    $
    151Comprehensive income (loss)
    
    $
    1,802
    
    
    $
    4,512
    
    
    $
    (28,239
    )
    
    $
    8,475Basic earnings (loss) per common share
    
    $
    0.04
    
    
    $
    .23
    
    
    $
    (1.83
    )
    
    $
    .57Diluted earnings (loss) per common share
    
    
    0.04
    
    
    
    .22
    
    
    
    (1.83
    )
    
    
    .54Dividends per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 See Accompanying Notes to Condensed Consolidated Financial Statements.
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INTEGRITY BANCSHARES, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine months endedSeptember 30,(Dollars in thousands)
    
    2007
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (28,279
    )
    
    $
    8,324Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation, accretion and amortization
    
    
    877
    
    
    
    434Stock compensation
    
    
    488
    
    
    
    1,022Increase in interest receivable
    
    
    (1,167
    )
    
    
    (2,546
    )Increase in interest payable
    
    
    1,291
    
    
    
    3,272Excess tax benefits from exercise of options
    
    
    (1,248
    )
    
    
    (535
    )Provision for loan losses
    
    
    50,683
    
    
    
    2,490Income from bank owned life insurance
    
    
    (775
    )
    
    
    (428
    )Net gains on sales of premises and equipment
    
    
    (37
    )
    
    
    (251
    )Net (gains) losses on sale of other real estate
    
    
    (76
    )
    
    
    142Write-downs of other real estate
    
    
    48
    
    
    
    160Net other operating activities
    
    
    (14,822
    )
    
    
    632Net cash provided by operating activities
    
    
    6,983
    
    
    
    12,716Cash flows from investing activities:Net increase in interest-earning deposits in banks
    
    
    (173
    )
    
    
    (30
    )Net (increase) decrease in federal funds sold
    
    
    (93,596
    )
    
    
    6,243Proceeds from maturities and paydowns of securities available-for-sale
    
    
    15,638
    
    
    
    11,360Purchases of restricted equity securities
    
    
    (3,214
    )
    
    
    (2,863
    )Purchases of securities available for sale
    
    
    (28,272
    )
    
    
    (54,246
    )Purchase of bank owned life insurance
    
    
    
    
    
    
    (20,000
    )Net loans made to customers, net of principal collected on loans
    
    
    (102,468
    )
    
    
    (203,171
    )Purchases of premises and equipment
    
    
    (7,217
    )
    
    
    (3,103
    )Proceeds from sale of other real estate
    
    
    7,858
    
    
    
    Net cash used in investing activities
    
    
    (211,444
    )
    
    
    (265,810
    )Cash flows from financing activities:Net (decrease) increase in
noninterest-bearing deposits
    
    
    (6,722
    )
    
    
    8,137Net increase in interest-bearing deposits
    
    
    151,591
    
    
    
    127,708Net (decrease) increase in federal
funds purchased and repurchase agreements
    
    
    (1,551
    )
    
    
    35,422Proceeds from exercise of stock options
    
    
    1,992
    
    
    
    895Excess tax benefits from exercise of options
    
    
    1,248
    
    
    
    535Net increase in Federal Home Loan Bank advances
    
    
    60,000
    
    
    
    50,000Issuance of subordinated debt
    
    
    
    
    
    
    27,836Net cash provided by financing activities
    
    
    206,558
    
    
    
    250,533Net increase (decrease) in cash and due from banks
    
    
    2,097
    
    
    
    (2,561
    )Cash and due from banks at beginning of period
    
    
    5,719
    
    
    
    5,068Cash and due from banks at end of period
    
    $
    7,816
    
    
    $
    2,507Supplemental disclosures of cash paid during the period:Interest
    
    $
    43,593
    
    
    $
    24,996Income taxes
    
    
    1,310
    
    
    
    6,436Supplemental disclosures of noncash investing activities:Transfer of loans to other real estate owned
    
    $
    14,406
    
    
    $
    542
 See Accompanying Notes to Condensed Consolidated Financial Statements.
 5




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INTEGRITY BANCSHARES, INC. AND SUBSIDIARY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1. BASIS OF PRESENTATION
     NOTE 2. ACCOUNTING POLICIES
  NOTE 3. STOCK COMPENSATION PLANS
  6




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Weighted-Weighted-
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term
    
    Value ($000)Outstanding at December 31, 2006
    
    
    1,214,466
    
    
    $
    4.89Granted
    
    
    400,000
    
    
    
    4.95Exercised
    
    
    (738,466
    )
    
    
    2.58Forfeited
    
    
    (56,867
    )
    
    
    11.76Outstanding at September 30, 2007
    
    
    819,133
    
    
    
    6.52
    
    
    
    8.57
    
    
    $
    192Exercisable at September 30, 2007
    
    
    304,155
    
    
    
    6.22
    
    
    
    5.89
    
    
    
    192
    Weighted-Weighted-
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term
    
    Value ($000)Outstanding at December 31, 2006
    
    
    297,000
    
    
    $
    4.52Granted
    
    
    
    
    
    
    Exercised
    
    
    (8,000
    )
    
    
    11.00Forfeited
    
    
    
    
    
    
    Outstanding at September 30, 2007
    
    
    289,000
    
    
    
    4.34
    
    
    
    5.95
    
    
    $
    490Exercisable at September 30, 2007
    
    
    289,000
    
    
    
    4.34
    
    
    
    5.95
    
    
    
    490
  7




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NOTE 4. EARNINGS (LOSS) PER SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Basic Earnings (Loss) Per Share:Weighted average common shares outstanding
    
    
    15,511,014
    
    
    
    14,637,518
    
    
    
    15,432,980
    
    
    
    14,567,824Net income (loss)
    
    $
    691,862
    
    
    $
    3,365,765
    
    
    $
    (28,279,156
    )
    
    $
    8,323,701Basic earnings (loss) per share
    
    $
    0.04
    
    
    $
    0.23
    
    
    $
    (1.83
    )
    
    $
    0.57Diluted Earnings (Loss) Per Share:Weighted average common shares outstanding
    
    
    15,511,014
    
    
    
    14,637,518
    
    
    
    15,432,980
    
    
    
    14,567,824Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the period
    
    
    
    
    
    
    571,845
    
    
    
    
    
    
    
    806,285Total weighted average common shares and
common stock equivalents outstanding
    
    
    15,511,014
    
    
    
    15,209,363
    
    
    
    15,432,980
    
    
    
    15,374,109Net income (loss)
    
    $
    691,862
    
    
    $
    3,365,765
    
    
    $
    (28,279,156
    )
    
    $
    8,323,701Diluted earnings (loss) per share
    
    $
    0.04
    
    
    $
    0.22
    
    
    $
    (1.83
    )
    
    $
    0.54
 NOTE 5. Recent Accounting Pronouncements
 Fair Value Measurements
 8




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The Fair Value Option for Financial Assets and Financial
Liabilities
 Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement 109 Accounting for Income Taxes
 9




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward Looking Statements
   Overview
  10




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Critical Accounting Policies
   General
 special mention, substandard, doubtful, and loss.
  Impaired Loans
 11




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Unallocated Loss Factors
 Liquidity and Capital Resources
    To Be WellCapitalizedUnder PromptFor Capital
    
    CorrectiveActual
    
    Adequacy
    
    ActionConsolidated
    
    Bank
    
    Purposes*
    
    Provisions*Leverage capital ratios
    
    
    5.98
    %
    
    
    6.72
    %
    
    
    4.00
    %
    
    
    5.00
    %Risk-based capital ratiosTier 1 capital
    
    
    6.48
    %
    
    
    7.28
    %
    
    
    4.00
    %
    
    
    6.00
    %Total capital
    
    
    10.52
    %
    
    
    10.10
    %
    
    
    8.00
    %
    
    
    10.00
    %
 
 *
    
    Minimum Regulatory Requirement  12




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Commitments and Contractual Obligations
    (Dollars in Thousands)
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Thereafter
    
    TotalDemand and savings deposits
    
    $
    146,120
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    146,120Time deposits
    
    
    184,317
    
    
    
    691,278
    
    
    
    32,264
    
    
    
    8,673
    
    
    
    6,829
    
    
    
    4,175
    
    
    
    927,536FHLB advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    50,000
    
    
    
    65,000Other borrowed funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,000
    
    
    
    45,000Long-term debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,022
    
    
    
    52,022Commitments to customers
under lines and letters
of credit
    
    
    33,310
    
    
    
    197,799
    
    
    
    43,602
    
    
    
    9,940
    
    
    
    
    
    
    
    104
    
    
    
    284,755Commitments under lease
agreements
    
    
    21
    
    
    
    61
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113$
    363,768
    
    
    $
    889,138
    
    
    $
    75,897
    
    
    $
    33,613
    
    
    $
    6,829
    
    
    $
    151,301
    
    
    $
    1,520,546
   13




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Financial Condition
     14




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September 30,
    
    %(Dollars in thousands)
    
    2007
    
    2006
    
    ChangeTotal investment securities
    
    $
    152,965
    
    
    $
    104,833
    
    
    
    45.91
    %Loans, net
    
    
    986,336
    
    
    
    818,479
    
    
    
    20.51Earning assets
    
    
    1,199,515
    
    
    
    934,885
    
    
    
    28.31Total assets
    
    
    1,259,478
    
    
    
    977,017
    
    
    
    28.91Non-interest-bearing deposits
    
    
    14,696
    
    
    
    17,140
    
    
    
    -14.26Interest-bearing deposits
    
    
    1,015,706
    
    
    
    802,776
    
    
    
    26.52Borrowed funds
    
    
    127,319
    
    
    
    39,734
    
    
    
    220.43Total funds
    
    
    1,157,721
    
    
    
    859,650
    
    
    
    34.71Total equity
    
    
    56,525
    
    
    
    74,752
    
    
    
    -24.33
 Asset Quality
    15




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##### Table of Contents



September 30,(In thousands)
    
    2007
    
    2006Nonaccrual loans
    
    $
    88,786
    
    
    $
    513Loans contractually past due ninety days or more as to interest
or principal payments and still accruing
    
    
    164
    
    
    
    739Restructured loans
    
    
    
    
    
    
    Potential problem loans
    
    
    16,686
    
    
    
    389Interest income that would have been recorded on nonaccrual
and restructured loans under original terms
    
    
    4,995
    
    
    
    5Interest income that was recorded on nonaccrual and
restructured loans
    
    
    1
    
    
    
    
   16




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Allowance for Loan Losses
  Nine Months EndedSeptember 30,(Dollars in Thousands)
    
    2007
    
    
    2006Average amount of loans outstanding
    
    $
    1,000,361
    
    
    $
    768,016Balance of allowance for loan losses at beginning of period
    
    $
    9,825
    
    
    $
    5,612Loans charged offCommercial and financial
    
    
    (17,093
    )
    
    
    Real estate mortgage
    
    
    (17,799
    )
    
    
    (160
    )(34,892
    )
    
    
    (160
    )Loans recoveredCommercial and financial
    
    
    2
    
    
    
    49Net charge-offs
    
    
    (34,890
    )
    
    
    (111
    )Additions to allowance charged to operating expense during period
    
    
    50,683
    
    
    
    2,490Balance of allowance for loan losses at end of period
    
    $
    25,618
    
    
    $
    7,991Ratio of allowance for loan losses to total loans outstanding
at the end of the period
    
    
    2.58
    %
    
    
    0.93
    %Ratio of net loans charged off during the nine-month period to
average loans outstanding for the period
    
    
    3.49
    %
    
    
    0.01
    %
  Results of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
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Noninterest Income
  18




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Noninterest Expenses
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
    
    The Board of Directors took steps to make major changes in the Banks
management structure and organization. Currently, efforts continue to hire additional
qualified staff and management in key leadership and the risk management area.
    
    The Board of Directors, in September 2007, adopted a comprehensive Action
Plan that guides all activities related to the enhancement of performance of the
Company.
    
    The Board of Directors engaged qualified independent consultants and advisors
to provide professional assistance in the strategic planning, loan administration,
credit risk, and other management functions.
    
    The Company is actively exploring alternatives to dispose of troubled assets,
reduce large loan concentrations, and otherwise strengthen borrowing relationships.
    
    The Company continues to enhance its risk rating methodology and analysis to
better identify and quantify the amount required in the allowance for loan losses, in
particular, with regard to impaired loans.
    
    The Company has taken steps to begin diversifying its balance sheet through the
offering of new products both on the lending side and the deposit side of the Bank.
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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS
  We may face liquidity constraints and experience higher costs of funding if we are unable to
maintain a well-capitalized status in the near future.
  Losing key personnel will negatively affect us.
  We have a concentration of loans within a small group of lending relationships.
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We may have to raise additional capital which may dilute your ownership.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS
  31.1
    Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    Certification 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. 24




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SIGNATURES
  INTEGRITY BANCSHARES, INC.
     (Registrant)DATE:  November 9, 2007
    By:

/s/ Patrick M. FrawleyPatrick M. Frawley, President and CEO(Principal Executive Officer) DATE:  November 9, 2007
    By:

/s/ Suzanne LongSuzanne Long, Senior VP & CFO(Principal Financial and Accounting Officer) 25