##### 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 endedSeptember 30, 2006
 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: 000-51284
 Integrity Bancshares, Inc.
  Georgia
    
    58-2508612(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 11140 State Bridge Road, Alpharetta, Georgia 30022
  (770) 777-0324
 (Issuers telephone number)
  (Former name, former address and former fiscal year, if changed since last report)
 þ o
  o o þ
 o þ




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##### 



INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY
 INDEX
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.  Financial StatementsConsolidated
Balance Sheets - September 30, 2006 and December 31, 2005
    
    3Consolidated Statements of Income and Comprehensive Income 
Three and Nine Months Ended September 30, 2006 and 2005
    
    4Consolidated Statements of Cash Flows - 
Nine Months Ended September 30, 2006 and 2005
    
    5Notes
to Consolidated Financial Statements
    
    6Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    11Item 3.   Quantitative and Qualitative Disclosures About Market Risk
    
    18Item 4.  Controls and Procedures
    
    18PART II.
    
    OTHER INFORMATIONItem 1.  Legal Proceedings
    
    19Item 1A.  Risk Factors
    
    19Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
    
    19Item 3.  Defaults Upon Senior Securities
    
    19Item 4.  Submission of Matters to a Vote of Security Holders
    
    19Item 5.  Other Information
    
    19Item 6.  Exhibits
    
    19Signatures
    
    20Certifications
    
    21EX-31.1 SECTION 302 CERTIFICAITON OF CEOEX-31.2 SECTION 302 CERTIFICATION OF PFOEX-32.0 SECTION 906 CERTIFICATION OF CEO/PFO
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 INTEGRITY BANCSHARES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    December 31,2006
    
    2005(In thousands)
    
    (Unaudited)ASSETS:Cash and due from banks
    
    $
    2,507
    
    
    $
    5,068Interest-bearing deposits in banks
    
    
    97
    
    
    
    67Federal funds sold
    
    
    
    
    
    
    6,243Securities available for sale, at fair value
    
    
    117,361
    
    
    
    74,110Other investments
    
    
    3,752
    
    
    
    889Loans, net of unearned income
    
    
    854,838
    
    
    
    651,778Less: allowance for loan losses
    
    
    (7,991
    )
    
    
    (5,612
    )Net loans
    
    
    846,847
    
    
    
    646,166Premises and equipment, net
    
    
    14,660
    
    
    
    11,865Other real estate owned
    
    
    542
    
    
    
    Bank owned life insurance
    
    
    20,428
    
    
    
    Other assets
    
    
    12,564
    
    
    
    8,667Total assets
    
    $
    1,018,758
    
    
    $
    753,075LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing demand
    
    $
    21,183
    
    
    $
    13,046Interest-bearing:Demand
    
    
    150,728
    
    
    
    163,487Savings
    
    
    262
    
    
    
    9,768Time, $100,000 and over
    
    
    169,318
    
    
    
    135,474Other time
    
    
    468,798
    
    
    
    352,669Total deposits
    
    
    810,289
    
    
    
    674,444Federal funds purchased and repurchase agreements
    
    
    35,422
    
    
    
    Federal Home Loan Bank advances
    
    
    50,000
    
    
    
    Subordinated debt
    
    
    34,022
    
    
    
    6,186Other liabilities
    
    
    11,980
    
    
    
    6,326Total liabilities
    
    
    941,713
    
    
    
    686,956STOCKHOLDERS EQUITY:Common stock, no par value; 50,000,000 shares authorized; 14,643,342 and
14,361,542 shares issued and outstanding, respectively
    
    
    58,666
    
    
    
    56,992Retained earnings
    
    
    19,245
    
    
    
    10,144Accumulated other comprehensive loss
    
    
    (866
    )
    
    
    (1,017
    )Total stockholders equity
    
    
    77,045
    
    
    
    66,119Total liabilities and stockholders equity
    
    $
    1,018,758
    
    
    $
    753,075
 See Accompanying Notes to Condensed Consolidated Financial Statements.
 3




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##### Table of Contents



INTEGRITY BANCSHARES, INC.
 
 CONDENSED CONSOLIDATED INCOME STATEMENTS
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(Dollars in thousands, except per share amounts)
    
    2006
    
    2005
    
    2006
    
    2005Interest incomeLoans, including fees
    
    $
    19,678
    
    
    $
    10,678
    
    
    $
    53,217
    
    
    $
    27,666Interest-bearing deposits in other banks
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    4Federal funds sold
    
    
    26
    
    
    
    25
    
    
    
    254
    
    
    
    38Investment securities
    
    
    1,342
    
    
    
    665
    
    
    
    3,410
    
    
    
    1,942Total interest income
    
    
    21,046
    
    
    
    11,369
    
    
    
    56,883
    
    
    
    29,650Interest expenseTime deposits, $100,000 and over
    
    
    2,159
    
    
    
    824
    
    
    
    5,749
    
    
    
    1,800Other deposits
    
    
    7,729
    
    
    
    3,822
    
    
    
    20,389
    
    
    
    9,523Federal Home Loan Bank advances
    
    
    334
    
    
    
    156
    
    
    
    358
    
    
    
    526Other borrowings
    
    
    206
    
    
    
    20
    
    
    
    264
    
    
    
    113Long-term debentures
    
    
    614
    
    
    
    104
    
    
    
    1,508
    
    
    
    288Total interest expense
    
    
    11,042
    
    
    
    4,926
    
    
    
    28,268
    
    
    
    12,250Net interest income
    
    
    10,004
    
    
    
    6,443
    
    
    
    28,615
    
    
    
    17,400Provision for loan losses
    
    
    351
    
    
    
    765
    
    
    
    2,490
    
    
    
    2,001Net interest income after provision for loan losses
    
    
    9,653
    
    
    
    5,678
    
    
    
    26,125
    
    
    
    15,399Noninterest incomeService charges on deposit accounts
    
    
    20
    
    
    
    18
    
    
    
    61
    
    
    
    44Increase in CSV of bank owned life insurance
    
    
    257
    
    
    
    
    
    
    
    428
    
    
    
    Other operating income
    
    
    189
    
    
    
    172
    
    
    
    459
    
    
    
    533Total noninterest income
    
    
    466
    
    
    
    190
    
    
    
    948
    
    
    
    577Noninterest expenseSalaries and employee benefits
    
    
    2,999
    
    
    
    1,482
    
    
    
    7,834
    
    
    
    4,720Net occupancy
    
    
    635
    
    
    
    444
    
    
    
    1,787
    
    
    
    1,278Other operating expenses
    
    
    1,305
    
    
    
    941
    
    
    
    4,138
    
    
    
    2,509Total noninterest expense
    
    
    4,939
    
    
    
    2,867
    
    
    
    13,759
    
    
    
    8,507Income before income taxes
    
    
    5,180
    
    
    
    3,001
    
    
    
    13,314
    
    
    
    7,469Income tax expense
    
    
    1,814
    
    
    
    1,103
    
    
    
    4,990
    
    
    
    2,762Net income
    
    $
    3,366
    
    
    
    1,898
    
    
    
    8,324
    
    
    
    4,707Unrealized (loss) gain on securities available
for sale arising during period, net of tax
    
    
    1,146
    
    
    
    (130
    )
    
    
    151
    
    
    
    (170
    )Comprehensive income
    
    
    4,512
    
    
    
    1,768
    
    
    
    8,475
    
    
    
    4,537Basic net income per common share
    
    $
    .23
    
    
    
    .13
    
    
    
    .57
    
    
    
    .35Diluted net income per common share and
common share equivalents
    
    $
    .22
    
    
    
    .12
    
    
    
    .54
    
    
    
    .33Dividends declared per common share
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
 See Accompanying Notes to Condensed Consolidated Financial Statements.
 4




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INTEGRITY BANCSHARES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine months endedSeptember 30,(In thousands)
    
    2006
    
    2005Cash flows from operating activities:Net income
    
    $
    8,324
    
    
    $
    4,707Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    434
    
    
    
    405Stock compensation, net
    
    
    1,557
    
    
    
    400Increase in interest receivable
    
    
    (2,546
    )
    
    
    (1,317
    )Increase in interest payable
    
    
    3,272
    
    
    
    436Provision for loan losses
    
    
    2,490
    
    
    
    2,001Income from BOLI
    
    
    (428
    )
    
    
    Net gains on sales of premises and equipment
    
    
    (251
    )
    
    
    (309
    )Net loss on sale of other real estate
    
    
    142
    
    
    
    Net other operating activities
    
    
    257
    
    
    
    (296
    )Net cash provided by operating activities
    
    
    13,251
    
    
    
    6,027Cash flows from investing activities:Net (increase) decrease in interest-earning deposits in banks
    
    
    (30
    )
    
    
    74Net decrease (increase) in federal funds sold
    
    
    6,243
    
    
    
    (3,095
    )Proceeds from maturities and paydowns of securities available-for-sale
    
    
    11,360
    
    
    
    10,735(Purchases) redemptions of restricted equity securities
    
    
    (2,863
    )
    
    
    343Purchases of securities available for sale
    
    
    (54,246
    )
    
    
    (25,338
    )Purchase of bank owned life insurance (BOLI)
    
    
    (20,000
    )
    
    
    Net loans made to customers, net of principal collected on loans
    
    
    (203,171
    )
    
    
    (192,702
    )Purchases of premises and equipment
    
    
    (3,103
    )
    
    
    (2,514
    )Net cash used in investing activities
    
    
    (265,810
    )
    
    
    (212,497
    )Cash flows from financing activities:Net increase in noninterest-bearing deposits
    
    
    8,137
    
    
    
    2,742Net increase in interest-bearing deposits
    
    
    127,708
    
    
    
    210,903Net increase (decrease) in federal funds purchased
    
    
    35,422
    
    
    
    (4,279
    )Proceeds from exercised stock options
    
    
    895
    
    
    
    751Net increase (decrease) in other borrowed funds
    
    
    50,000
    
    
    
    (15,000
    )Net increase in long-term borrowed funds
    
    
    27,836
    
    
    
    Net proceeds from sale of common stock
    
    
    
    
    
    
    14,994Net cash provided by financing activities
    
    
    249,998
    
    
    
    210,111Net (decrease) increase in cash and due from banks
    
    
    (2,561
    )
    
    
    3,641Cash and due from banks at beginning of period
    
    
    5,068
    
    
    
    1,275Cash and due from banks at end of period
    
    $
    2,507
    
    
    
    4,916Supplemental disclosures of cash paid during the period:Interest
    
    $
    24,996
    
    
    
    11,814Income taxes
    
    $
    6,436
    
    
    
    2,906Supplemental disclosures of noncash investing activities:Transfer of loans to other real estate owned
    
    $
    542
    
    
    $
    
 See Accompanying Notes to Condensed Consolidated Financial Statements.
 5




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##### Table of Contents



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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Three Months Ended
    
    Nine Months EndedSeptember 30, 2005Net income available to common stockholders:As reported
    
    $
    1,898
    
    
    $
    4,707Pro forma
    
    
    1,747
    
    
    
    4,338Basic earnings per common share:As reported
    
    
    .13
    
    
    
    .35Pro forma
    
    
    .12
    
    
    
    .32Diluted earnings per common share:As reported
    
    
    .12
    
    
    
    .33Pro forma
    
    
    .11
    
    
    
    .30
    7




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##### Table of Contents



Employee Plan
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value ($000)Outstanding at June 30, 2006
    
    
    1,247,662
    
    
    $
    4.84Granted
    
    
    
    
    
    
    Exercised
    
    
    (10,000
    )
    
    
    4.50Forfeited
    
    
    
    
    
    
    Outstanding at September 30, 2006
    
    
    1,237,662
    
    
    $
    4.84
    
    
    
    5.79
    
    
    $
    10,221Exercisable at September 30, 2006
    
    
    585,903
    
    
    $
    3.72
    
    
    
    6.22
    
    
    $
    5,495
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value ($000)Outstanding at December 31, 2005
    
    
    1,409,072
    
    
    $
    4.67Granted (below market)
    
    
    13,590
    
    
    
    2.45Granted (at market)
    
    
    124,000
    
    
    
    12.19Exercised
    
    
    (138,800
    )
    
    
    3.43Forfeited
    
    
    (170,200
    )
    
    
    9.70Outstanding at September 30, 2006
    
    
    1,237,662
    
    
    $
    4.84
    
    
    
    5.79
    
    
    $
    10,221Exercisable at September 30, 2006
    
    
    585,902
    
    
    $
    3.72
    
    
    
    6.22
    
    
    $
    5,495
  8




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##### Table of Contents



Number of
    
    
    Weighted AverageShares
    
    
    Grant-Date Fair ValueNonvested stock options beginning of period
    
    
    727,825
    
    
    $
    5.77Granted
    
    
    
    
    
    
    Vested
    
    
    (76,065
    )
    
    
    1.98Forfeited
    
    
    
    
    
    
    Nonvested stock options end of period
    
    
    651,760
    
    
    $
    4.54
  Number of
    
    
    Weighted AverageShares
    
    
    Grant-Date Fair ValueNonvested stock options beginning of period
    
    
    991,720
    
    
    $
    5.89Granted
    
    
    137,590
    
    
    
    11.23Vested
    
    
    (307,350
    )
    
    
    1.60Forfeited
    
    
    (170,200
    )
    
    
    9.69Nonvested stock options end of period
    
    
    651,760
    
    
    $
    4.54
    9




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##### Table of Contents



Nine Months EndedSeptember 30,2006
    
    2005Expected volatility
    
    
    30
    %
    
    
    32.68
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected life (in years)
    
    
    7.50
    
    
    
    10.0Risk-free rate
    
    
    4.7
    %
    
    
    5.82
    %
 Director Plan
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value ($000)Outstanding at June 30, 2006
    
    
    395,000
    
    
    $
    4.18Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Outstanding at September 30, 2006
    
    
    395,000
    
    
    $
    4.18
    
    
    
    6.9
    
    
    $
    3,523Exercisable at September 30, 2006
    
    
    395,000
    
    
    $
    4.18
    
    
    
    6.9
    
    
    $
    3,523
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    Value ($000)Outstanding at December 31, 2005
    
    
    538,000
    
    
    $
    3.85Granted
    
    
    
    
    
    
    Exercised
    
    
    (143,000
    )
    
    
    2.92Forfeited
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Outstanding at September 30, 2006
    
    
    395,000
    
    
    $
    4.18
    
    
    
    6.9
    
    
    $
    3,523Exercisable at September 30, 2006
    
    
    395,000
    
    
    $
    4.18
    
    
    
    6.9
    
    
    $
    3,523
  10




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##### Table of Contents



NOTE 4. EARNINGS PER SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic Earnings Per Share:Weighted average common shares outstanding
    
    
    14,637,518
    
    
    
    14,361,542
    
    
    
    14,567,824
    
    
    
    13,530,746Net income
    
    $
    3,365,765
    
    
    $
    1,898,391
    
    
    $
    8,323,701
    
    
    $
    4,707,408Basic earnings per share
    
    $
    0.23
    
    
    $
    0.13
    
    
    $
    0.57
    
    
    $
    0.35Diluted Earnings Per Share:Weighted average common shares outstanding
    
    
    14,637,518
    
    
    
    14,361,542
    
    
    
    14,567,824
    
    
    
    13,530,746Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the period
    
    
    571,845
    
    
    
    895,014
    
    
    
    806,285
    
    
    
    890,736Total weighted average common shares and
common stock equivalents outstanding
    
    
    15,209,363
    
    
    
    15,256,556
    
    
    
    15,374,109
    
    
    
    14,421,482Net income
    
    $
    3,365,765
    
    
    $
    1,898,391
    
    
    $
    8,323,701
    
    
    $
    4,707,408Diluted earnings per share
    
    $
    0.22
    
    
    $
    0.12
    
    
    $
    0.54
    
    
    $
    0.33
 11




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward Looking Statements
   Critical Accounting Policies
   Allowance for loan losses
 12




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Liquidity and Capital Resources
    MinimumActual
    
    RegulatoryConsolidated
    
    Bank
    
    Requirement*Leverage capital ratios
    
    
    10.63
    %
    
    
    10.86
    %
    
    
    5.00
    %Risk-based capital ratios:Tier 1 capital
    
    
    10.25
    
    
    
    10.46
    
    
    
    6.00Total capital
    
    
    11.74
    
    
    
    11.25
    
    
    
    10.00
 
 *
    
    The percentages listed as the Minimum Regulatory Requirement are required to maintain a
well-capitalized status.  Commitments and Contractual Obligations
   13




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##### Table of Contents



September 30, 2006Commitments to extend credit
    
    $
    330,205,000Letters of credit
    
    
    1,863,000$
    332,068,000
   Financial Condition
    14




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##### Table of Contents



September 30,
    
    %(Dollars in thousands)
    
    2006
    
    2005
    
    ChangeTotal investment securities
    
    $
    91,953
    
    
    
    56,696
    
    
    
    60.12
    %Loans, net
    
    
    761,231
    
    
    
    483,211
    
    
    
    57.54Earning assets
    
    
    868,972
    
    
    
    547,685
    
    
    
    58.66Total assets
    
    
    900,865
    
    
    
    567,668
    
    
    
    58.69Non-interest-bearing deposits
    
    
    18,738
    
    
    
    11,704
    
    
    
    60.10Interest-bearing deposits
    
    
    760,170
    
    
    
    460,747
    
    
    
    64.99Borrowed funds
    
    
    15,579
    
    
    
    26,466
    
    
    
    -41.14Total interest-bearing liabilities
    
    
    775,749
    
    
    
    487,213
    
    
    
    59.22Total equity
    
    
    71,438
    
    
    
    52,726
    
    
    
    35.49
 Asset Quality
   September 30,(Dollars in Thousands)
    
    2006
    
    2005Nonaccrual loans
    
    $
    513
    
    
    $
    2,885Loans contractually past due ninety days or more as to interest
or principal payments and still accruing
    
    
    739
    
    
    
    Restructured loans
    
    
    
    
    
    
    Potential problem loans
    
    
    389
    
    
    
    819Interest income that would have been recorded on nonaccrual
and restructured loans under original terms
    
    
    5
    
    
    
    105Interest income that was recorded on nonaccrual and
restructured loans
    
    
    
    
    
    
    
  15




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Results of Operations for the Three and Nine Months Ended September 30, 2006 and 2005
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##### Table of Contents



Allowance for Loan Losses
  Nine Months EndedSeptember 30,(Dollars in Thousands)
    
    2006
    
    
    2005Average amount of loans outstanding
    
    $
    768,016
    
    
    
    487,403Balance of allowance for loan losses at beginning of period
    
    $
    5,612
    
    
    
    3,433Loans charged offCommercial and financial
    
    
    
    
    
    
    (210
    )Real estate mortgage
    
    
    (160
    )
    
    
    (160
    )
    
    
    (210
    )Loans recoveredCommercial and financial
    
    
    49
    
    
    
    Real estate mortgage
    
    
    
    
    
    
    5549
    
    
    
    55Net charge-offs
    
    
    (111
    )
    
    
    (155
    )Additions to allowance charged to operating expense during period
    
    
    2,490
    
    
    
    2,001Balance of allowance for loan losses at end of period
    
    $
    7,991
    
    
    
    5,279Ratio of net loans charged off during the period to
average loans outstanding
    
    
    0.01
    %
    
    
    0.03
    %
  Noninterest Income
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Noninterest Expenses
     18




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  19




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. The following exhibits are furnished with this report:
 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 2002.32.0
    
    Certification of the Chief Executive Officer and Principal
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
  INTEGRITY BANCSHARES, INC.
     (Registrant)DATE:  November 14, 2006

BY:
    /s/ Steven M. SkowSteven M. Skow, President and C.E.O.(Principal Executive Officer) DATE:  November 14, 2006
    By:    /s/ Suzanne LongSuzanne Long, Senior VP & C.F.O.(Principal Financial and Accounting Officer) 21