##### Table of Contents



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 1934For the quarterly period ended September 30, 2004
 [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from
 to
 Commission File Number: 333-95335 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 
  N/A 
 (Former name, former address and former fiscal year, if changed since l
 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 November 12, 2004: 4,257,092; 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  September 30, 2004
    
    
    3Consolidated
Statements of Income and Comprehensive Income  Three Months
Ended September 30, 2004 and 2003 and Nine Months Ended
September 30, 2004 and 2003
    
    
    4Consolidated
Statement of Cash Flows  Nine Months Ended September 30,
2004 and 2003
    
    
    5Notes
to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Controls and Procedures
    
    
    19PART II.
    
    OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    20Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3  Defaults Upon Senior Securities
    
    
    20Item 4  Submission of Matters to a Vote of Security Holders
    
    
    20Item 6  Exhibits and Reports on Form 8-K
    
    
    20Signatures
    
    
    21EX-10.1 AMENDMENT TO STOCK OPTION PLANEX-31.1 SECTION 302 CERTIFICAITON OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO




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PART I  FINANCIAL INFORMATION 
 ITEM I. FINANCIAL STATEMENTS INTEGRITY BANCSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2004
 (Unaudited)
 AssetsCash and due from banks
    
    $
    3,885,610Interest-bearing deposits in banks
    
    
    211,584Securities available-for-sale, at fair value
    
    
    40,772,535Restricted equity securities, at cost
    
    
    1,750,000Loans
    
    
    350,271,467Less allowance for loan losses
    
    
    5,356,352Loans, net
    
    
    344,915,115Premises and equipment
    
    
    8,609,236Other assets
    
    
    3,393,643Total assets
    
    $
    403,537,723Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    10,517,728Interest-bearing
    
    
    306,202,289Total deposits
    
    
    316,720,017Federal funds purchased
    
    
    185,000Other borrowings
    
    
    41,186,000Other liabilities
    
    
    3,129,756Total liabilities
    
    
    361,220,773Commitments and contingenciesStockholders equityCommon stock, no par value; 10,000,000 shares authorized;
4,257,092 shares issued and outstanding
    
    
    39,557,302Retained earnings
    
    
    2,816,191Accumulated other comprehensive loss
    
    
    (56,543
    )Total stockholders equity
    
    
    42,316,950Total liabilities and stockholders equity
    
    $
    403,537,723
 See Notes to Consolidated Financial Statements. 3




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INTEGRITY BANCSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
 AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
 (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest incomeLoans
    
    $
    5,554,414
    
    
    $
    3,517,908
    
    
    $
    14,472,970
    
    
    $
    9,201,236Taxable securities
    
    
    434,111
    
    
    
    197,428
    
    
    
    1,109,737
    
    
    
    587,155Deposits in banks
    
    
    1,473
    
    
    
    5,571
    
    
    
    2,294
    
    
    
    9,456Federal funds sold
    
    
    6,236
    
    
    
    10,595
    
    
    
    20,353
    
    
    
    42,590Total interest income
    
    
    5,996,234
    
    
    
    3,731,502
    
    
    
    15,605,354
    
    
    
    9,840,437Interest expenseDeposits
    
    
    1,810,620
    
    
    
    1,300,228
    
    
    
    4,592,139
    
    
    
    3,477,189Federal funds purchased, securities sold under
repurchase agreements and other borrowings
    
    
    162,663
    
    
    
    22,721
    
    
    
    415,178
    
    
    
    77,566Total interest expense
    
    
    1,973,283
    
    
    
    1,322,949
    
    
    
    5,007,317
    
    
    
    3,554,755Net interest income
    
    
    4,022,951
    
    
    
    2,408,553
    
    
    
    10,598,037
    
    
    
    6,285,682Provision for loan losses
    
    
    1,608,801
    
    
    
    219,334
    
    
    
    2,321,249
    
    
    
    902,140Net interest income after
provision for loan losses
    
    
    2,414,150
    
    
    
    2,189,219
    
    
    
    8,276,788
    
    
    
    5,383,542Other incomeService charges on deposit accounts
    
    
    14,746
    
    
    
    20,040
    
    
    
    43,587
    
    
    
    64,435Other operating income
    
    
    259,446
    
    
    
    13,579
    
    
    
    370,331
    
    
    
    27,965Total other income
    
    
    274,192
    
    
    
    33,619
    
    
    
    413,918
    
    
    
    92,400Other expensesSalaries and employee benefits
    
    
    1,270,995
    
    
    
    678,047
    
    
    
    3,032,938
    
    
    
    1,714,108Occupancy and equipment expenses
    
    
    315,870
    
    
    
    134,467
    
    
    
    696,396
    
    
    
    325,215Other operating expenses
    
    
    693,459
    
    
    
    454,868
    
    
    
    1,775,115
    
    
    
    1,024,598Total other expenses
    
    
    2,280,324
    
    
    
    1,267,382
    
    
    
    5,504,449
    
    
    
    3,063,921Net income before income taxes
    
    
    408,018
    
    
    
    955,456
    
    
    
    3,186,257
    
    
    
    2,412,021Income tax expense
    
    
    151,686
    
    
    
    360,883
    
    
    
    1,179,086
    
    
    
    564,400Net income
    
    
    256,332
    
    
    
    594,573
    
    
    
    2,007,171
    
    
    
    1,847,621Other comprehensive income (loss):Unrealized gains (losses) on securities
available-for-sale arising during period
    
    
    535,524
    
    
    
    (276,798
    )
    
    
    (119,489
    )
    
    
    (401,110
    )Comprehensive income
    
    $
    791,856
    
    
    $
    317,775
    
    
    $
    1,887,682
    
    
    $
    1,446,511Basic earnings per share
    
    $
    0.06
    
    
    $
    0.22
    
    
    $
    0.59
    
    
    $
    0.73Diluted earnings per share
    
    $
    0.06
    
    
    $
    0.21
    
    
    $
    0.56
    
    
    $
    0.73Cash dividends per share
    
    $
    
    
    
    $
    -
    
    
    $
    
    
    
    $
    
 See Notes to Consolidated Financial Statements. 4




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INTEGRITY BANCSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
 (Unaudited)
 2004
    
    2003OPERATING ACTIVITIESNet income
    
    $
    2,007,171
    
    
    $
    1,847,621Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    310,201
    
    
    
    213,133Provision for loan losses
    
    
    2,321,249
    
    
    
    902,140Stock compensation
    
    
    227,389
    
    
    
    Increase in interest receivable
    
    
    (330,102
    )
    
    
    (361,874
    )Increase in interest payable
    
    
    489,203
    
    
    
    480,061Gain on sale of other real estate
    
    
    (177,495
    )
    
    
    Gain on sale of premises and equipment
    
    
    (40,490
    )
    
    
    Net other operating activities
    
    
    (2,027,577
    )
    
    
    437,355Net cash provided by operating activities
    
    
    2,779,549
    
    
    
    3,518,436INVESTING ACTIVITIESNet (increase) decrease in interest-bearing deposits in banks
    
    
    (97,630
    )
    
    
    308,935Purchases of securities available-for-sale
    
    
    (24,258,482
    )
    
    
    (29,780,469
    )Proceeds from maturities of securities available-for-sale
    
    
    10,497,180
    
    
    
    15,252,171Purchases of restricted equity securities
    
    
    (1,100,000
    )
    
    
    Net (increase) decrease in federal funds sold
    
    
    2,439,000
    
    
    
    (11,927,000
    )Net increase in loans
    
    
    (114,169,959
    )
    
    
    (79,913,850
    )Proceeds from sale of other real estate
    
    
    2,693,669
    
    
    
    Proceeds from sale of premises and equipment
    
    
    5,000,000
    
    
    
    Purchase of premises and equipment
    
    
    (2,213,776
    )
    
    
    (5,518,612
    )Net cash used in investing activities
    
    
    (121,209,998
    )
    
    
    (111,578,825
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    84,942,295
    
    
    
    104,645,739Net decrease in federal funds purchased
    
    
    (9,815,000
    )
    
    
    (3,115,000
    )Net proceeds from other borrowings
    
    
    25,186,000
    
    
    
    4,000,000Net proceeds from sale of common stock
    
    
    20,309,609
    
    
    
    4,563,538Net purchase sale of treasury stock
    
    
    
    
    
    
    (168,972
    )Net cash provided by financing activities
    
    
    120,622,904
    
    
    
    109,925,305Net increase in cash and due from banks
    
    
    2,192,455
    
    
    
    1,864,916Cash and due from banks, beginning of period
    
    
    1,693,155
    
    
    
    1,242,074Cash and due from banks, end of period
    
    $
    3,885,610
    
    
    $
    3,106,990SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during period for:Interest
    
    $
    4,518,114
    
    
    $
    3,074,694Income taxes
    
    $
    3,320,488
    
    
    $
    12,233
 See Notes to Consolidated Financial Statements. 5




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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 and nine month periods ended
September 30, 2004 are not necessarily indicative of the results to
be expected for the full year.NOTE 2.
    
    STOCK COMPENSATION PLANSAt September 30, 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 $227,389 and $0
for the nine months ended September 30, 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 EndedSeptember 30,2004
    
    2003Net income, as reported
    
    $
    256,332
    
    
    $
    594,573Deduct: Difference between stock-based employee
compensation expense determined under fair value
based method and APB No. 25 for all awards,
net of tax
    
    
    41,421
    
    
    
    0Pro forma net income
    
    $
    297,753
    
    
    $
    594,573Earnings per share:Basic  as reported
    
    $
    .06
    
    
    $
    .22Basic  pro forma
    
    $
    .07
    
    
    $
    .22Diluted  as reported
    
    $
    .06
    
    
    $
    .21Diluted  pro forma
    
    $
    .07
    
    
    $
    .21
 6




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 NOTE 2.
    
    STOCK COMPENSATION PLANS (Continued)
 Nine Months EndedSeptember 30,2004
    
    2003Net income, as reported
    
    $
    2,007,171
    
    
    $
    1,847,621Deduct: Difference between stock-based employee
compensation expense determined under fair value
based method and APB No. 25 for all awards,
net of tax
    
    
    7,415
    
    
    
    (328,267
    )Pro forma net income
    
    $
    2,014,586
    
    
    $
    1,519,354Earnings per share:Basic  as reported
    
    $
    0.59
    
    
    $
    0.73Basic  pro forma
    
    $
    0.60
    
    
    $
    0.61Diluted  as reported
    
    $
    0.56
    
    
    $
    0.73Diluted  pro forma
    
    $
    0.56
    
    
    $
    0.60
 NOTE 3.
    
    EARNINGS PER SHAREPresented below is a summary of the components used to calculate
basic and diluted earnings per common share.
 Three Months EndedSeptember 30,2004
    
    2003Basic Earnings Per Share:Weighted average common shares outstanding
    
    
    4,080,543
    
    
    
    2,762,530Net income
    
    $
    256,332
    
    
    $
    594,573Basic earnings per share
    
    $
    0.06
    
    
    $
    0.22Diluted Earnings Per Share:Weighted average common shares outstanding
    
    
    4,080,543
    
    
    
    2,762,530Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the year
    
    
    212,650
    
    
    
    17,882Total weighted average common shares and
common stock equivalents outstanding
    
    
    4,293,193
    
    
    
    2,780,412Net income
    
    $
    256,332
    
    
    $
    594,573Diluted earnings per share
    
    $
    0.06
    
    
    $
    0.21
 7




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 NOTE 3.
    
    EARNINGS PER SHARE (Continued)
 Nine Months EndedSeptember 30,2004
    
    2003Basic Earnings Per Share:Weighted average common shares outstanding
    
    
    3,383,795
    
    
    
    2,514,698Net income
    
    $
    2,007,171
    
    
    $
    1,847,621Basic earnings per share
    
    $
    0.59
    
    
    $
    0.73Diluted Earnings Per Share:Weighted average common shares outstanding
    
    
    3,383,795
    
    
    
    2,514,698Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the year
    
    
    215,453
    
    
    
    9,139Total weighted average common shares and
common stock equivalents outstanding
    
    
    3,599,248
    
    
    
    2,523,837Net income
    
    $
    2,007,171
    
    
    $
    1,847,621Diluted earnings per share
    
    $
    0.56
    
    
    $
    0.73
 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
 8




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 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.NOTE 5.
    
    CAPITAL SECURITIES 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.
 9




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ITEM 2. Managements Discussion and Analysis 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 periods included in the accompanying
consolidated financial statements. Special Cautionary Notice Regarding 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 Integrity Bancshares, Inc. 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 words such as may, will, anticipate, should,
would, believe, contemplate, expect, estimate, continue, 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 the 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. 10




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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
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 September 30, 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 September 30, 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 September 30, 2004, our liquidity, as determined under guidelines
established by regulatory authorities and internal policy, was satisfactory. At September 30, 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: 11




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ActualMinimumRegulatoryConsolidated
    
    Bank
    
    Requirement*Leverage capital ratios
    
    
    13.11
    %
    
    
    12.75
    %
    
    
    5.00
    %Risk-based capital ratios:Tier 1 capital
    
    
    12.61
    
    
    
    12.25
    
    
    
    6.00Total capital
    
    
    13.86
    
    
    
    13.51
    
    
    
    10.00
 The percentages listed as the Minimum Regulatory Requirement are
required to maintain a well-capitalized status. As a condition for approval
to issue $6.0 million of trust preferred securities last December, the Federal
Reserve Bank of Atlanta required that we maintain a well-capitalized status
(bank and consolidated) until November 1, 2005. These ratios may decline as asset growth continues, but are expected to
exceed the minimum regulatory requirements. Future earnings should assist in
keeping these ratios at satisfactory levels. As of September 30, 2004, our public stock offering of 1,500,000 shares of
common stock at a price of $13.50 per share was completed. Proceeds totaling
$20,424,622 from the sale of 1,512,935 shares were received. These proceeds
are included in the capital section of the balance sheet in common stock, net
of $115,000 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: September 30,2004(Dollars in Thousands)Commitments to extend credit
    
    $
    79,344Letters of credit
    
    
    820$
    80,164
 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.
The amount of collateral obtained, if deemed necessary by us upon extension of
credit, is based on our credit evaluation of the customer. 12




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##### Table of Contents



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. Financial Condition Following is a summary of our balance sheets for the periods indicated: September 30,
    
    December 31,2004
    
    2003(Dollars in Thousands)Cash and due from banks
    
    $
    3,886
    
    
    $
    1,693Interest-bearing deposits in banks
    
    
    212
    
    
    
    114Federal funds sold
    
    
    
    
    
    
    2,439Securities
    
    
    40,772
    
    
    
    27,202Restricted equity securities
    
    
    1,750
    
    
    
    650Loans, net
    
    
    344,915
    
    
    
    235,346Premises and equipment
    
    
    8,609
    
    
    
    9,600Other assets
    
    
    3,394
    
    
    
    2,704$
    403,538
    
    
    $
    279,748Deposits
    
    $
    316,720
    
    
    $
    231,778Federal funds purchased
    
    
    185
    
    
    
    10,000Other borrowings
    
    
    41,186
    
    
    
    16,000Other liabilities
    
    
    3,130
    
    
    
    2,078Stockholders equity
    
    
    42,317
    
    
    
    19,892$
    403,538
    
    
    $
    279,748
 Our total assets grew by 44.3% the first nine months of 2004. Deposit
growth of $84.9 million, additional Federal Home Loan Bank borrowings of $25
million, and net proceeds of $20.3 million from the stock offering were used
primarily to fund loan growth and purchase investment securities. Cash and due
from banks increased $2.3 million due to the cash requirements of a new branch
and a decrease in federal funds sold. Restricted equity securities have
increased $1.1 million. These securities are stock in the Federal Home Loan
Bank (FHLB) of Atlanta, and the amount fluctuates based on the level of
borrowings the bank has with the FHLB. Premises and equipment decreased $1.0 million. A new branch building was
constructed in the Vinings area of Smyrna, Georgia, at a cost of $1.6 million
(excluding land costs of $1.2 million that were included in the December 31,
2003 premises and equipment total). Construction was completed in June by a
company owned by a director, with payments of $1.1 million made to the
directors company. In August, we sold an administrative building with a book
value of $2.9 million for $5.0 million cash in a sale-leaseback transaction. A
five year non-renewable operating lease on the building was entered into
between the Bank and the buyer, with minimum annual lease payments of $560,000.
The resulting $2.1 million gain on sale was deferred and will be recognized
over the life of the lease. The net effect of the addition of the new branch
and the sale of the administrative building was a decrease in premises and
equipment of $1.0 million, as noted above. 13




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The Bank had obtained regulatory approval for the construction of a branch
in Forsyth County, which was expected to open in 2005. After reviewing the
final site plans for the proposed location, the Board of Directors decided in
October, 2004 to withdraw from pursuing the project. The site had not been
purchased by the Bank, and no staff had been hired prior to withdrawal.
However, approximately $30,000 of earnest money and legal fees were forfeited
by the bank and will be charged to earnings in the fourth quarter of 2004. On
October 11, 2004, the bank entered into a lease for office space in
Lawrenceville (Gwinnett County), Georgia for the purpose of opening a loan
production office (LPO). The LPO opened in November, 2004. Other assets increased $0.7 million, primarily due to increased accrued
interest on loans and investments. Other liabilities increased $1.1 million
due primarily to the $2.1 million deferred gain on sale of the administrative
building discussed above, an increase in interest payable of $0.5 million, a
decrease in income taxes payable of $1.9 million, and increases in other
miscellaneous liabilities of $0.4 million. Our ratio of gross loans to
deposits and other borrowings increased to 97.9% at September 30, 2004 from
96.4% at December 31, 2003. Our total equity increased by $22.4 million,
consisting of $20.3 million in stock sale proceeds, year-to-date net income of
$2.0 million, paid-in capital from stock option expense of $227,000, and an
increase in unrealized losses on securities available-for-sale, net of tax, of
$119,000. 14




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##### Table of Contents



Results of Operations for the Three Months Ended September 30, 2004 and 2003
and for the Nine Months Ended September 30, 2004 and 2003 Following is a summary of our operations for the periods indicated. Three Months EndedSeptember 30,2004
    
    2003(Dollars in Thousands)Interest income
    
    $
    5,996
    
    
    $
    3,732Interest expense
    
    
    1,973
    
    
    
    1,323Net interest income
    
    
    4,023
    
    
    
    2,409Provision for loan losses
    
    
    1,609
    
    
    
    219Other income
    
    
    274
    
    
    
    33Other expense
    
    
    2,280
    
    
    
    1,267Pretax income
    
    
    408
    
    
    
    956Income taxes
    
    
    152
    
    
    
    361Net income
    
    $
    256
    
    
    $
    595
 Nine Months EndedSeptember 30,2004
    
    2003(Dollars in Thousands)Interest income
    
    $
    15,605
    
    
    $
    9,840Interest expense
    
    
    5,007
    
    
    
    3,555Net interest income
    
    
    10,598
    
    
    
    6,285Provision for loan losses
    
    
    2,321
    
    
    
    902Other income
    
    
    414
    
    
    
    92Other expense
    
    
    5,505
    
    
    
    3,063Pretax income
    
    
    3,186
    
    
    
    2,412Income taxes
    
    
    1,179
    
    
    
    564Net income
    
    $
    2,007
    
    
    $
    1,848
 Our net interest income has increased by $1.6 million and $4.3 million for
the third quarter and first nine months of 2004, respectively, as compared to
the same periods in 2003. Our net interest margin increased to 4.53% during
the first nine months of 2004 as compared to 4.29% for the first nine months of
2003. The increases in net interest income and net interest margin are due
primarily to an increase in the average balance of securities and loans
outstanding, and to a decrease in the overall cost of funds. 15




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##### Table of Contents



The provision for loan losses increased by $1,390,000 and $1,419,000 for
the third quarter and first nine months of 2004, respectively, as compared to
the same periods in 2003. We incurred net charge-offs of $538,000 in the first
nine months of 2004, compared to $20,000 in the first nine months of 2003. The
allowance for loan losses as percentage of total loans was 1.53% as of
September 30, 2004 compared to 1.50% at December 31, 2003. The increase is
primarily due to an additional $1.2 million provision for loan losses on a $2.3
million loan discussed below, the current period charge-off, and the overall
growth in the loan balances. The amounts provided are indicative of our
assessment of the inherent risk in the portfolio. The increase in the provision for loan losses as of September 30, 2004 was
primarily due to a $2.3 million nonaccrual commercial loan in which the
borrower has filed for bankruptcy. In October, 2004, due to updated
information received from the collection attorney and the bankruptcy court, the
bank decided to charge off the loan while continuing recovery efforts. As of
September 30, 2004, the Bank increased the allocated reserve in the allowance
for loan losses for this credit from 50% to 100%. The bank will continue to
take all commercially reasonable steps to ascertain a recovery for the full
amount of the charge-off. A residential real estate loan to the same borrower
was foreclosed on in May, 2004. The collateral was sold in September,
resulting in a $160,000 gain. Potential problem loans consist of 12 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 $5.4 million in the allowance for loan
losses at September 30, 2004, or 1.53% 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 and restructured loans at
September 30, 2004 and 2003 is as follows: September 30,2004
    
    2003(Dollars in Thousands)Nonaccrual loans
    
    $
    2,292
    
    
    $
    550Loans contractually past due ninety days or more as to interest
or principal payments and still accruing
    
    
    0
    
    
    
    453Restructured loans
    
    
    0
    
    
    
    0Potential problem loans
    
    
    1,882
    
    
    
    935Interest income that would have been recorded on nonaccrual
and restructured loans under original terms
    
    
    135
    
    
    
    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 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. 16




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##### Table of Contents



The majority of the Banks loans are collateralized by real estate.
Management believes that there is sufficient diversity in borrowers, location,
and types of real estate to minimize any adverse effects of a deterioration of
market conditions. 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. These classified loans do not represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms. Information regarding certain loans and allowance for loan loss data
through September 30, 2004 and 2003 is as follows: Nine Months EndedSeptember 30,2004
    
    2003(Dollars in Thousands)Average amount of loans outstanding
    
    $
    276,557
    
    
    $
    170,897Balance of allowance for loan losses at beginning of period
    
    $
    3,573
    
    
    $
    1,105Loans charged offCommercial and financial
    
    $
    0
    
    
    $
    0Real estate mortgage
    
    
    (550
    )
    
    
    0Installment
    
    
    0
    
    
    
    (20
    )(550
    )
    
    
    (20
    )Loans recoveredCommercial and financial
    
    
    0
    
    
    
    0Real estate mortgage
    
    
    12
    
    
    
    0Installment
    
    
    0
    
    
    
    012
    
    
    
    0Net (charge-offs)/recoveries
    
    
    (538
    )
    
    
    (20
    )Additions to allowance charged to operating expense during period
    
    
    2,321
    
    
    
    902Balance of allowance for loan losses at end of period
    
    $
    5,356
    
    
    $
    1,987Ratio of net loans charged off during the period to
average loans outstanding
    
    
    0.19
    %
    
    
    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 17




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##### Table of Contents



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 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 by $241,000 and $322,000 during the third
quarter and first nine months of 2004, respectively, as compared to the same
periods in 2003. The increases are due primarily to the gain on sale of a
foreclosure of $160,000 and the amortized gain recognized on the sale-leaseback
of an administrative building of $41,000, as previously discussed. Other expenses increased by $1,013,000 and $2,442,000 during the third
quarter and first nine months of 2004, respectively, as compared to the same
periods in 2003. The increases are due to increased salaries and employee
benefits of $593,000 and $1,319,000, respectively, increased occupancy and
equipment expenses of $182,000 and $371,000, respectively, and increased other
operating expenses of $238,000 and $750,000, respectively. Salaries and
employee benefits have increased due to the number of full time employees
increasing to 47 at September 30, 2004 from 34 at September 30, 2003 and to
other annual salary increases. The increase in the number of employees is due
to the opening of a full service branch in the Vinings area of Smyrna, Georgia
in June, 2004, and the addition of staff for the loan production office
scheduled to open in November, 2004. Additional administrative staff has also
been added as the company has grown. Occupancy and equipment expenses have
increased as a result of the new branches and the purchase of the
administrative building in June, 2003, which was sold in September, 2004.
Other operating expenses have increased primarily in general and administrative
expenses due to the growth of the Bank. The provision for income taxes was $1.2 million for the first nine months
of 2004 (effective tax rate of 37%) as compared to $564,000 (effective tax rate
of 23%) for the first nine months of 2003. The amount and effective tax rate
recorded in 2003 is substantially lower than in 2004 due to the use of
available net operating loss carryovers in 2003 and lower net income in 2003
compared to 2004. We are 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. 18




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##### Table of Contents



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 third quarter of 2004. 19




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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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. The Company did not sell equity securities during the third quarter of
2004 that were not registered under the Securities Act of 1933. The Company
did not repurchase any equity securities during the third 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 matters were submitted to a vote of security holders during the third quarter of 2004. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits.  3.1
    
    Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to Form SB-2 filed by the registrant
on January 25, 2000  File No. 333-95335).3.2
    
    Bylaws (incorporated by reference to Exhibit 3.2 to
Form SB-2 filed by the registrant on January 25, 2000  File
No. 333-95335).10.1
    
    Amendment to stock option plan increasing the
number of shares available for issuance.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. 20




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##### Table of Contents



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: November 12, 2004
    
    BY:
    
    /s/ Steven M. SkowSteven M.Skow, President and C.E.O.(Principal Executive Officer)DATE: November 12, 2004
    
    BY:
    
    /s/ Jeff L. SandersJeff L. Sanders, Senior VP & C.F.O.(Principal Financial and Accounting Officer)
 21