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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-QSB [ X ]
    
    QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 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   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 August 6, 2004: 4,172,880; 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 - June 30, 2004
    
    
    3Consolidated Statements of Income and Comprehensive
Income - Three Months Ended June 30, 2004 and 2003
and Six Months Ended June 30, 2004 and 2003
    
    
    4Consolidated Statement of Cash Flows - Six
Months Ended June 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
    
    
    17PART II.
    
    OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    18Item 2  Changes in Securities and Small Business
Issuer Repurchases of Equity Securities
    
    
    18Item 3  Defaults Upon Senior Securities
    
    
    18Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    18Item 6 - Exhibits and Reports on Form 8-K
    
    
    19Signatures
    
    
    20EX-31.1 302 Certification of CEOEX-31.2 302 Certification of CFOEX-32   906 Certification of CEO and CFO




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PART I - FINANCIAL INFORMATION 
 ITEM I. FINANCIAL STATEMENTS INTEGRITY BANCSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEET
June 30, 2004
(Unaudited) AssetsCash and due from banks
    
    $
    5,715,953Interest-bearing deposits in banks
    
    
    137,839Securities available-for-sale, at fair value
    
    
    38,505,493Restricted equity securities, at cost
    
    
    1,725,000Loans
    
    
    290,879,081Less allowance for loan losses
    
    
    3,735,432Loans, net
    
    
    287,143,649Premises and equipment
    
    
    11,445,099Other assets
    
    
    5,920,001Total assets
    
    $
    350,593,034Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    9,270,399Interest-bearing
    
    
    262,226,327Total deposits
    
    
    271,496,726Federal funds purchased
    
    
    5,774,000Other borrowings
    
    
    40,686,000Other liabilities
    
    
    829,819Total liabilities
    
    
    318,786,545Commitments and contingenciesStockholders equityCommon stock, no par value; 10,000,000 shares authorized;
3,544,163 shares issued and outstanding
    
    
    29,838,695Retained earnings
    
    
    2,559,861Accumulated other comprehensive loss
    
    
    (592,067
    )Total stockholders equity
    
    
    31,806,489Total liabilities and stockholders equity
    
    $
    350,593,034
 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 JUNE 30, 2004 AND 2003
AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Interest incomeLoans
    
    $
    4,687,310
    
    
    $
    3,046,371
    
    
    $
    8,918,556
    
    
    $
    5,683,328Taxable securities
    
    
    359,555
    
    
    
    229,296
    
    
    
    675,626
    
    
    
    389,727Deposits in banks
    
    
    443
    
    
    
    1,647
    
    
    
    821
    
    
    
    3,885Federal funds sold
    
    
    5,398
    
    
    
    8,904
    
    
    
    14,117
    
    
    
    31,995Total interest income
    
    
    5,052,706
    
    
    
    3,286,218
    
    
    
    9,609,120
    
    
    
    6,108,935Interest expenseDeposits
    
    
    1,414,269
    
    
    
    1,169,320
    
    
    
    2,781,519
    
    
    
    2,176,961Federal funds purchased, securities sold under
repurchase agreements and other borrowings
    
    
    147,834
    
    
    
    26,957
    
    
    
    252,515
    
    
    
    54,845Total interest expense
    
    
    1,562,103
    
    
    
    1,196,277
    
    
    
    3,034,034
    
    
    
    2,231,806Net interest income
    
    
    3,490,603
    
    
    
    2,089,941
    
    
    
    6,575,086
    
    
    
    3,877,129Provision for loan losses
    
    
    571,642
    
    
    
    350,185
    
    
    
    712,448
    
    
    
    682,806Net interest income after
provision for loan losses
    
    
    2,918,961
    
    
    
    1,739,756
    
    
    
    5,862,638
    
    
    
    3,194,323Other incomeService charges on deposit accounts
    
    
    15,851
    
    
    
    23,009
    
    
    
    28,841
    
    
    
    44,395Other operating income
    
    
    61,520
    
    
    
    8,072
    
    
    
    110,885
    
    
    
    14,386Total other income
    
    
    77,371
    
    
    
    31,081
    
    
    
    139,726
    
    
    
    58,781Other expensesSalaries and employee benefits
    
    
    871,788
    
    
    
    555,816
    
    
    
    1,761,943
    
    
    
    1,036,061Occupancy and equipment expenses
    
    
    202,562
    
    
    
    105,937
    
    
    
    380,526
    
    
    
    190,748Other operating expenses
    
    
    601,141
    
    
    
    317,432
    
    
    
    1,081,656
    
    
    
    569,730Total other expenses
    
    
    1,675,491
    
    
    
    979,185
    
    
    
    3,224,125
    
    
    
    1,796,539Net income before income taxes
    
    
    1,320,841
    
    
    
    791,652
    
    
    
    2,778,239
    
    
    
    1,456,565Income tax expense
    
    
    456,700
    
    
    
    203,517
    
    
    
    1,027,400
    
    
    
    203,517Net income
    
    
    864,141
    
    
    
    588,135
    
    
    
    1,750,839
    
    
    
    1,253,048Other comprehensive income (loss):Unrealized gains (losses) on securities
available-for-sale arising during period, net of tax
    
    
    (677,784
    )
    
    
    15,371
    
    
    
    (655,013
    )
    
    
    (124,312
    )Comprehensive income
    
    $
    186,357
    
    
    $
    603,506
    
    
    $
    1,095,826
    
    
    $
    1,128,736Basic earnings per share
    
    $
    0.26
    
    
    $
    0.22
    
    
    $
    0.58
    
    
    $
    0.53Diluted earnings per share
    
    $
    0.25
    
    
    $
    0.22
    
    
    $
    0.54
    
    
    $
    0.53Cash dividends per share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 See Notes to Consolidated Financial Statements. 4




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INTEGRITY BANCSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited) 2004
    
    2003OPERATING ACTIVITIESNet income
    
    $
    1,750,839
    
    
    $
    1,253,048Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    187,129
    
    
    
    122,091Provision for loan losses
    
    
    712,448
    
    
    
    682,806Stock compensation
    
    
    77,310
    
    
    
    Increase in interest receivable
    
    
    (242,222
    )
    
    
    (295,950
    )Increase in interest payable
    
    
    167,917
    
    
    
    354,371Gain on sale of other real estate
    
    
    (16,756
    )
    
    
    Net other operating activities
    
    
    (1,742,970
    )
    
    
    167,860Net cash provided by operating activities
    
    
    893,695
    
    
    
    2,284,226INVESTING ACTIVITIESNet increase in interest-bearing deposits in banks
    
    
    (23,885
    )
    
    
    (223,176
    )Purchases of securities available-for-sale
    
    
    (19,286,294
    )
    
    
    (19,150,470
    )Proceeds from maturities of securities available-for-sale
    
    
    6,941,710
    
    
    
    6,649,728Purchase of restricted equity securities
    
    
    (1,075,000
    )
    
    
    Net (increase) decrease in federal funds sold
    
    
    2,439,000
    
    
    
    (8,059,000
    )Net increase in loans
    
    
    (54,789,692
    )
    
    
    (52,839,377
    )Proceeds from sale of other real estate
    
    
    206,380
    
    
    
    Purchase of premises and equipment
    
    
    (2,017,203
    )
    
    
    (3,933,895
    )Net cash used in investing activities
    
    
    (67,604,984
    )
    
    
    (77,556,190
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    39,719,004
    
    
    
    76,316,025Net decrease in federal funds purchased
    
    
    (4,226,000
    )
    
    
    (3,115,000
    )Net proceeds from other borrowings
    
    
    24,500,000
    
    
    
    Net proceeds from sale of common stock
    
    
    10,741,083
    
    
    
    4,556,542Net cash provided by financing activities
    
    
    70,734,087
    
    
    
    77,757,567Net increase in cash and due from banks
    
    
    4,022,798
    
    
    
    2,485,603Cash and due from banks, beginning of period
    
    
    1,693,155
    
    
    
    1,242,074Cash and due from banks, end of period
    
    $
    5,715,953
    
    
    $
    3,727,677SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during period for:Interest
    
    $
    2,866,117
    
    
    $
    1,877,435Income taxes
    
    $
    2,754,888
    
    
    $
    10,483
 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 PRESENTATION The 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 six month periods ended
June 30, 2004 are not necessarily indicative of the results to be
expected for the full year. NOTE 2. STOCK COMPENSATION PLANS At June 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 $77,311 and $0
for the six months ended June 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 Ended June 30,2004
    
    2003Net income, as reported
    
    $
    864,141
    
    
    $
    588,135Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax
    
    
    10,781
    
    
    
    16,773Pro forma net income
    
    $
    853,360
    
    
    $
    571,362Earnings per share:Basic - as reported
    
    $
    .26
    
    
    $
    .22Basic  pro forma
    
    $
    .26
    
    
    $
    .22Diluted - as reported
    
    $
    .25
    
    
    $
    .22Diluted - pro forma
    
    $
    .24
    
    
    $
    .22
 6




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 2. STOCK COMPENSATION PLANS (Continued) Six Months Ended June 30,2004
    
    2003Net income, as reported
    
    $
    1,750,839
    
    
    $
    1,253,048Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax
    
    
    34,006
    
    
    
    328,267Pro forma net income
    
    $
    1,716,833
    
    
    $
    924,781Earnings per share:Basic - as reported
    
    $
    0.58
    
    
    $
    0.53Basic  pro forma
    
    $
    0.57
    
    
    $
    0.39Diluted - as reported
    
    $
    0.54
    
    
    $
    0.53Diluted - pro forma
    
    $
    0.53
    
    
    $
    0.39
 NOTE 3. EARNINGS PER SHARE Presented below is a summary of the components used to calculate
basic and diluted earnings per common share. Three Months Ended June 30,2004
    
    2003Basic Earnings Per Share:Weighted average common shares outstanding
    
    
    3,299,955
    
    
    
    2,621,486Net income
    
    $
    864,141
    
    
    $
    588,135Basic earnings per share
    
    $
    0.26
    
    
    $
    0.22Diluted Earnings Per Share:Weighted average common shares outstanding
    
    
    3,299,955
    
    
    
    2,621,486Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the year
    
    
    200,662
    
    
    
    0Total weighted average common shares and
common stock equivalents outstanding
    
    
    3,500,617
    
    
    
    2,621,486Net income
    
    $
    864,141
    
    
    $
    588,135Diluted earnings per share
    
    $
    0.25
    
    
    $
    0.22
 7




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 3. EARNINGS PER SHARE (Continued) Six Months Ended June 30,2004
    
    2003Basic Earnings Per Share:Weighted average common shares outstanding
    
    
    3,031,592
    
    
    
    2,388,728Net income
    
    $
    1,750,839
    
    
    $
    1,253,048Basic earnings per share
    
    $
    0.58
    
    
    $
    0.53Diluted Earnings Per Share:Weighted average common shares outstanding
    
    
    3,031,592
    
    
    
    2,388,728Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the year
    
    
    200,326
    
    
    
    0Total weighted average common shares and
common stock equivalents outstanding
    
    
    3,231,918
    
    
    
    2,388,728Net income
    
    $
    1,750,839
    
    
    $
    1,253,048Diluted earnings per share
    
    $
    0.54
    
    
    $
    0.53
 NOTE 4. CURRENT ACCOUNTING DEVELOPMENTS In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51, and on December 24, 2003, the FASB issued FASB
Interpretation No. 46 (Revised December 2003), Consolidation of
Variable Interest Entities which replaced FIN 46. The
interpretation addresses consolidation by business enterprises of
variable interest entities. A variable interest entity is defined
as an entity subject to consolidation according to the provisions of
the interpretation. The revised interpretation provides for special
effective dates for entities that had fully or partially applied the
original interpretation as of December 24, 2003. Otherwise,
application of the interpretation was required in financial
statements of public entities that have interests in special-purpose
entities, or SPEs, for periods ending after December 15, 2003.
Application by public entities, other than small business issuers,
for all other types of variable interest entities (i.e., non-SPEs)
is required in financial statements for periods ending after March
15, 2004. Application by small business issuers to variable interest
entities other than SPEs is required at various dates in 2004 and
2005. The Company has determined that the revised provisions
required deconsolidation of subsidiary trusts 8




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 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 TRUST In 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 of Financial Condition
and Results of Operations The following is managements discussion and analysis of certain
significant factors which have affected the financial position and operating
results of Integrity Bancshares, Inc. (the Company) and its bank subsidiary,
Integrity Bank (the Bank), during the 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, may,
intend, or other similar words and expressions of the future. Our actual
results may differ significantly from the results we discuss in these
forward-looking statements. These forward-looking statements involve risks and uncertainties and may
not be realized due to a variety of factors, including, without limitation:
the effects of future economic conditions; governmental monetary and fiscal
policies, as well as legislative and regulatory changes; the risks of changes
in interest rates on the level and composition of deposits, loan demand, and
the values of loan collateral, securities, and other interest-sensitive assets
and liabilities; interest rate risks; the effects of competition from other
commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market
and other mutual funds and other financial institutions operating in our market
area and elsewhere, including institutions operating regionally, nationally,
and internationally, together with such competitors offering banking products
and services by mail, telephone, computer, and the Internet. Critical Accounting Policies The Companys accounting and reporting policies are in accordance with
accounting principles generally accepted in the United States of America as
defined by Public Company Accounting Oversight Board and conform to general
practices within the banking industry. Its significant accounting policies are
described in the notes to the consolidated financial statements included in the
Companys Form 10-KSB for the year ended December 31, 2003. Certain accounting
policies require management to make significant estimates and assumptions,
which have a material impact on the carrying value of certain assets and
liabilities, and the Company considers these to be critical accounting
policies. The estimates and assumptions used are based on historical
experience and other factors that management believes to be reasonable under
the circumstances. Actual results could differ significantly from these
estimates and assumptions, which could have a material impact on the carrying
value of assets and liabilities at the balance sheet dates and results of
operations for the reporting periods. The Company believes the following are critical accounting policies that
require the most significant estimates and assumptions that are particularly
susceptible to a significant change in the preparation of its financial
statements. 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 June 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 June 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 June 30, 2004, our liquidity, as determined under guidelines established
by regulatory authorities and internal policy, was satisfactory. At June 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
    
    
    11.98
    %
    
    
    11.58
    %
    
    
    5.00
    %Risk-based capital ratios:Tier 1 capital
    
    
    11.41
    
    
    
    11.01
    
    
    
    6.00Total capital
    
    
    12.52
    
    
    
    12.13
    
    
    
    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 has 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 and proceeds from
our stock offerings will assist in keeping these ratios at satisfactory levels. As of June 30, 2004, we were in the process of selling 1,500,000 shares of
common stock at a price of $13.50 per share. Proceeds totaling $10,800,081
representing the sale of 800,006 shares had been received as of June 30, 2004.
These proceeds are included in the capital section of the balance sheet in
common stock, net of $59,000 prorated offering expenses. The stock sale was
completed in August, 2004. 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: June 30,2004(Dollars in Thousands)Commitments to extend credit
    
    $
    84,693Letters of credit
    
    
    661$
    85,354
 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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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: June 30,
    
    December 31,2004
    
    2003(Dollars in Thousands)Cash and due from banks
    
    $
    5,716
    
    
    $
    1,693Interest-bearing deposits in banks
    
    
    138
    
    
    
    114Federal funds sold
    
    
    
    
    
    
    2,439Securities
    
    
    38,505
    
    
    
    27,202Restricted equity securities
    
    
    1,725
    
    
    
    650Loans, net
    
    
    287,144
    
    
    
    235,346Premises and equipment
    
    
    11,445
    
    
    
    9,600Other assets
    
    
    5,920
    
    
    
    2,704$
    350,593
    
    
    $
    279,748Deposits
    
    $
    271,497
    
    
    $
    231,778Federal funds purchased
    
    
    5,774
    
    
    
    10,000Other borrowings
    
    
    40,686
    
    
    
    16,000Other liabilities
    
    
    830
    
    
    
    2,078Stockholders equity
    
    
    31,806
    
    
    
    19,892$
    350,593
    
    
    $
    279,748
 Our total assets grew by 25.3% the first six months of 2004. Deposit
growth of $39.7 million and additional Federal Home Loan Bank borrowings of
$24.7 million were used primarily to fund loan growth and purchase investment
securities. Cash and due from banks increased $4.0 million due to the cash
requirements of a new branch, and an influx of cash from deposits at the end of
the period. Premises and equipment increased $1.8 million, primarily due to
the construction of a branch building in the Vinings area of Smyrna, Georgia.
Construction was completed in June by a company owned by a director, with
payments of $1.1 million made to the directors company. Payments of $150,000
were made to the same company to partially complete the inside of an
administrative building the bank owns. Other assets increased $3.2 million
primarily due to an increase in other real estate of $1.0 million, a receivable
for the sale of other real estate of $1.1 million (the transaction resulting in
the receivable was completed in June, and the proceeds were received in July),
an increase in deferred income taxes on unrealized gains/losses on available
for sale securities of $0.3 million, and other miscellaneous items of $0.7
million. Other liabilities decreased $1.2 million due to the payment of the
December 31, 2003 income tax liability. Our ratio of loans to deposits and
other borrowings decreased to 93.2% at June 30, 2004 from 96.4% at December 31,
2003, although loan demand in our primary market area of Northern Fulton and
Cobb County, Georgia continues to be strong. Our total equity increased by
$11.9 million, consisting of $10.8 million in stock sale proceeds, year-to-date
net income of $1,751,000, paid-in capital from stock option expense of $77,000,
and an increase in unrealized losses on securities available-for-sale, net of
tax, of $655,000. 13




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##### Table of Contents



Results of Operations for the Three Months Ended June 30, 2004 and 2003 and for
the Six Months Ended June 30, 2004 and 2003 Following is a summary of our operations for the periods indicated. Three Months EndedJune 30,2004
    
    2003(Dollars in Thousands)Interest income
    
    $
    5,053
    
    
    $
    3,286Interest expense
    
    
    1,562
    
    
    
    1,196Net interest income
    
    
    3,491
    
    
    
    2,090Provision for loan losses
    
    
    572
    
    
    
    350Other income
    
    
    77
    
    
    
    31Other expense
    
    
    1,675
    
    
    
    979Pretax income
    
    
    1,321
    
    
    
    792Income taxes
    
    
    457
    
    
    
    204Net income
    
    $
    864
    
    
    $
    588
 Six Months EndedJune 30,2004
    
    2003(Dollars in Thousands)Interest income
    
    $
    9,609
    
    
    $
    6,109Interest expense
    
    
    3,034
    
    
    
    2,232Net interest income
    
    
    6,575
    
    
    
    3,877Provision for loan losses
    
    
    712
    
    
    
    683Other income
    
    
    139
    
    
    
    59Other expense
    
    
    3,224
    
    
    
    1,796Pretax income
    
    
    2,778
    
    
    
    1,457Income taxes
    
    
    1,027
    
    
    
    204Net income
    
    $
    1,751
    
    
    $
    1,253
 Our net interest income has increased by $1.4 million and $2.7 million for
the second quarter and first six months of 2004, respectively, as compared to
the same periods in 2003. Our net interest margin increased to 4.51% during
the first six months of 2004 as compared to 4.31% for the first six 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. 14




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The provision for loan losses increased by $222,000 and $29,000 for the
second quarter and first six months of 2004, respectively, as compared to the
same periods in 2003. We incurred net charge-offs of $550,000 in the first six
months of 2004, compared to $20,000 in the first six months of 2003. The
allowance for loan losses as percentage of total loans was 1.28% as of June 30,
2004 compared to 1.50% at December 31, 2003. The percentage decrease is
primarily due to the current period charge-off and the transfer of several
problem loans to other real estate. The amounts provided are indicative of our
assessment of the inherent risk in the portfolio. There were $2.3 million in nonaccrual loans at June 30, 2004, consisting
of one commercial loan in which the borrower has filed for bankruptcy. The
bank is taking all commercially reasonable steps to minimize losses on these
loans. Based on our most current information, we believe the amount of $1.2
million included in the allowance for loan losses related to the loan is
adequate to provide for potential losses for that credit. A residential real
estate loan to the same borrower was foreclosed on in May, 2004. Management
does not expect to incur any loss on the disposition of the real estate
collateral obtained in the foreclosure. Potential problem loans consist of 11
various credits which are currently less than 90 days past due and are accruing
interest, but have the potential to become 90 days or more past due, become
nonaccruing, or be restructured before final maturity. Management believes the
$3.7 million in the allowance for loan losses at June 30, 2004, or 1.28% 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
June 30, 2004 and 2003 is as follows: June 30,2004
    
    2003(Dollars in Thousands)Nonaccrual loans
    
    $
    2,319
    
    
    $
    0Loans contractually past due ninety days or more as to interest
or principal payments and still accruing
    
    
    0
    
    
    
    550Restructured loans
    
    
    0
    
    
    
    0Potential problem loans
    
    
    1,641
    
    
    
    1,461Interest income that would have been recorded on nonaccrual
and restructured loans under original terms
    
    
    100
    
    
    
    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. 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. 15




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##### Table of Contents



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 June 30, 2004 and 2003 is as follows: Six Months EndedJune 30,2004
    
    2003(Dollars in Thousands)Average amount of loans outstanding
    
    $
    258,011
    
    
    $
    156,325Balance 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
    
    
    0
    
    
    
    0Installment
    
    
    0
    
    
    
    00
    
    
    
    0Net (charge-offs)/recoveries
    
    
    (550
    )
    
    
    (20
    )Additions to allowance charged to operating expense during period
    
    
    712
    
    
    
    683Balance of allowance for loan losses at end of period
    
    $
    3,735
    
    
    $
    1,768Ratio of net loans charged off during the period to
average loans outstanding
    
    
    0.21
    %
    
    
    0.01
    %
 The allowance for loan losses is maintained at a level that is deemed
appropriate by management to adequately cover all known and inherent risks in
the loan portfolio. Managements evaluation of the loan portfolio includes a
loan classification program. Under the program, as each loan is made, we
assign a loan grade. Each loan grade is assigned an allowance percentage based
on our experience specifically and the historical experience of the banking
industry generally. Loan classifications are then subject to periodic review
by the responsible lending officers and by senior management based upon their
judgment, our loan loss experience, current economic conditions that may affect
the borrowers ability to repay, lender requirements, the underlying collateral
value of the loans and other appropriate information. Management relies
predominantly on this ongoing review of the loan portfolio to assess the risk
characteristics of the portfolio in the aggregate and to determine adjustments,
if any, to our allowance for loan 16




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##### Table of Contents



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 $46,000 and $80,000 during the second
quarter and first six months of 2004, respectively, as compared to the same
periods in 2003. The increases are due primarily to increased rental income on
an administrative building of $28,000 and $62,000, respectively. Other expenses increased by $696,000 and $1,428,000 during the second
quarter and first six months of 2004, respectively, as compared to the same
periods in 2003. The increases are due to increased salaries and employee
benefits of $316,000 and $726,000, respectively, increased occupancy and
equipment expenses of $97,000 and $190,000, respectively, and increased other
operating expenses of $284,000 and $512,000, respectively. Salaries and
employee benefits have increased due to the number of full time employees
increasing to 41 at June 30, 2004 from 28 at June 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 Roswell, Georgia in July, 2003, and the
opening of another full service branch in the Vinings area of Smyrna, Georgia
in June, 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. Other operating expenses have increased primarily in general and
administrative expenses due to the growth of the Bank. The provision for income taxes was $1,027,400 for the first six months of
2004 (effective tax rate of 37%) as compared to $203,500 (effective tax rate of
14%) for the first six 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. 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. 
 ITEM 3. Controls and Procedures Based upon an evaluation of our disclosure controls and procedures as of
the end of the period covered by this report, under the supervision and with
the participation of management, our President and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company
required to be included in the Companys Exchange Act filings. There have been
no significant changes in internal controls over financial reporting or in
other factors that could significantly affect internal controls over financial
reporting during the first two quarters of 2004. 17




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##### Table of Contents



PART II - OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS. The Company is not a party to any pending legal proceeding (nor is any
property of the Company subject to any legal proceeding) other than routine
litigation that is incidental to the business. 
 ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER REPURCHASES OF EQUITY
SECURITIES. There has been no change to the rights of the holders of the Companys
common stock. The Company did not repurchase any equity securities during the
first two quarters 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.  (a)
    
    The Annual Meeting of Shareholders was held on May 20,
2004.(b)
    
    See (c) below for the name of each director elected at
the meeting and the name of each other director whose term of
office as a director continued after the meeting.(c)
    
    The following matter was voted on at the meeting as was previously
identified in
the Proxy materials forwarded to each shareholder. The shares
represented at
the meeting (2,164,153 or 68.1% of the total outstanding shares
on the record
date) voted as follows:  1.
    
    Proposal to elect 3 Class II directors to
serve for a three year term. Director
    
    For
    
    Against
    
    AbstainDon C. Hartsfield
    
    
    2,164,153
    
    
    
    0
    
    
    
    0Jack S. Murphy
    
    
    2,164,153
    
    
    
    0
    
    
    
    0Richard H. Peden, Sr.
    
    
    2,164,153
    
    
    
    0
    
    
    
    0
 The other directors whose term of office continued after the
meeting are Alan K. Arnold, James E. Bridges, Clinton M. Day, Joseph
J. Ernest, Charles J. Puckett, Gerald O. Reynolds, Steven M. Skow,
and Robert S. Wholey. 18




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##### Table of Contents



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).31.1
    
    Certification of the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certificate of Principal Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certification of the Chief Executive Officer and
Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
  (b)
    
    Reports on Form 8-K. The company filed one Form 8-K during the second quarter of 2004.
It was filed on April 20, 2004 and attached a press release
announcing the results of the first quarter. 19




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SIGNATURES In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. INTEGRITY BANCSHARES, INC.
(Registrant)DATE:  August 12, 2004
    BY:
    /s/      Steven M. SkowSteven M.Skow, President and C.E.O.(Principal Executive Officer) DATE:  August 12, 2004
    BY:
    /s/      Jeff L. SandersJeff L. Sanders, Senior VP - Finance(Principal Financial and Accounting Officer) 20