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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-QSB þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period
ended March 31, 2005 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from to Commission File Number: 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 þ No o State the number of shares outstanding of each of the issuers classes of common equity, as of May
12, 2005: 6,506,097; no par value. Transitional Small Business
Disclosure Format Yes o No
þ




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INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY   INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheet - March 31, 2005
    
    
    3Consolidated Statements of Income and Comprehensive Income
Three Months Ended March 31, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    9Item 3. Controls and Procedures
    
    
    15PART II.
    
    OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    16Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 3  Defaults Upon Senior Securities
    
    
    16Item 4  Submission of Matters to a Vote of Security Holders
    
    
    16Item 5  Other Information
    
    
    16Item 6  Exhibits and Reports on Form 8-K
    
    
    16Signatures
    
    
    17EX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE PFOEX-32 SECTION 906, CERTIFICATION OF THE CEO AND PFO
  2




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PART I  FINANCIAL INFORMATION 
 ITEM I. FINANCIAL STATEMENTS INTEGRITY BANCSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
(Unaudited) AssetsCash and due from banks
    
    $
    1,988,157Interest-bearing deposits in banks
    
    
    60,292Federal funds sold
    
    
    Securities available-for-sale, at fair value
    
    
    60,063,856Restricted equity securities, at cost
    
    
    889,300Loans
    
    
    451,682,998Less allowance for loan losses
    
    
    3,844,801Loans, net
    
    
    447,838,197Premises and equipment
    
    
    8,601,805Other assets
    
    
    5,319,077Total assets
    
    $
    524,760,684Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    8,036,505Interest-bearing
    
    
    456,696,996Total deposits
    
    
    464,733,501Federal funds purchased
    
    
    4,047,000Other borrowings
    
    
    6,186,000Other liabilities
    
    
    4,687,737Total liabilities
    
    
    479,654,238Commitments and contingenciesStockholders equityCommon stock, no par value; 10,000,000 shares authorized;
6,493,597 shares issued and outstanding
    
    
    40,681,950Retained earnings
    
    
    5,155,126Accumulated other comprehensive loss
    
    
    (730,630
    )Total stockholders equity
    
    
    45,106,446Total liabilities and stockholders equity
    
    $
    524,760,684
 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 MARCH 31, 2005 AND 2004
(Unaudited) Three Months EndedMarch 31,2005
    
    
    2004Interest incomeLoans
    
    $
    7,671,292
    
    
    $
    4,231,246Taxable securities
    
    
    607,907
    
    
    
    316,071Deposits in banks
    
    
    1,121
    
    
    
    378Federal funds sold
    
    
    6,956
    
    
    
    8,719Total interest income
    
    
    8,287,276
    
    
    
    4,556,414Interest expenseDeposits
    
    
    2,876,415
    
    
    
    1,367,250Federal funds purchased, securities sold under

repurchase agreements and other borrowings
    
    
    330,284
    
    
    
    104,681Total interest expense
    
    
    3,206,699
    
    
    
    1,471,931Net interest income
    
    
    5,080,577
    
    
    
    3,084,483Provision for loan losses
    
    
    571,841
    
    
    
    140,806Net interest income after
provision for loan losses
    
    
    4,508,736
    
    
    
    2,943,677Other incomeService charges on deposit accounts
    
    
    11,006
    
    
    
    12,990Other operating income
    
    
    179,470
    
    
    
    49,365Total other income
    
    
    190,476
    
    
    
    62,355Other expensesSalaries and employee benefits
    
    
    1,500,484
    
    
    
    890,155Occupancy and equipment expenses
    
    
    402,781
    
    
    
    177,964Other operating expenses
    
    
    671,844
    
    
    
    480,515Total other expenses
    
    
    2,575,109
    
    
    
    1,548,634Net income before income taxes
    
    
    2,124,103
    
    
    
    1,457,398Income tax expense
    
    
    790,380
    
    
    
    570,700Net income
    
    
    1,333,723
    
    
    
    886,698Other comprehensive income (loss):Unrealized gains (losses) on securities available-
for-sale arising during period, net of tax
    
    
    (531,882
    )
    
    
    22,771Comprehensive income
    
    $
    801,841
    
    
    $
    909,469Basic earnings per share
    
    $
    0.21
    
    
    $
    0.21Diluted earnings per share
    
    $
    0.19
    
    
    $
    0.20Cash dividends per share
    
    $
    
    
    
    $
    
 See Notes to Consolidated Financial Statements. 4




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INTEGRITY BANCSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited) 2005
    
    
    2004OPERATING ACTIVITIESNet income
    
    $
    1,333,723
    
    
    $
    886,698Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation
    
    
    122,643
    
    
    
    91,337Provision for loan losses
    
    
    571,841
    
    
    
    140,806Stock compensation
    
    
    221,659
    
    
    
    77,310Increase in interest receivable
    
    
    (322,575
    )
    
    
    (141,751
    )Increase in interest payable
    
    
    447,101
    
    
    
    111,514Gain on sale of other real estate
    
    
    
    
    
    
    (2,528
    )Gain on sale of premises and equipment
    
    
    (103,125
    )
    
    
    Net other operating activities
    
    
    142,630
    
    
    
    (1,168,790
    )Net cash provided by (used in) operating activities
    
    
    2,413,897
    
    
    
    (5,404
    )INVESTING ACTIVITIESNet (increase) decrease in interest-bearing deposits in banks
    
    
    227,670
    
    
    
    (141,699
    )Purchases of securities available-for-sale
    
    

    (15,476,806
    )
    
    
    (1,989,688
    )Proceeds from maturities of securities available-for-sale
    
    
    2,496,402
    
    
    
    2,589,695Redemption of restricted equity securities
    
    
    343,300
    
    
    
    150,000Net increase in federal funds sold
    
    
    
    
    
    
    (14,005,000
    )Net increase in loans
    
    
    (65,937,386
    )
    
    
    (6,963,501
    )Loan proceeds payable to participants
    
    
    
    
    
    
    6,171,609Proceeds from sale of other real estate
    
    
    
    
    
    
    206,380Purchase of premises and equipment
    
    
    (111,001
    )
    
    
    (913,560
    )Net cash used in investing activities
    
    
    (78,457,821
    )
    
    
    (14,895,764
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    91,461,250
    
    
    
    21,942,737Net decrease in federal funds purchased
    
    
    (232,000
    )
    
    
    (10,000,000
    )Net repayments of other borrowings
    
    
    (15,000,000
    )
    
    
    Proceeds from exercised stock options
    
    
    528,120
    
    
    
    Net proceeds from sale of common stock
    
    
    
    
    
    
    3,648,716Net cash provided by financing activities
    
    
    76,757,370
    
    
    
    15,591,453Net increase in cash and due from banks
    
    
    713,446
    
    
    
    690,285Cash and due from banks, beginning of period
    
    
    1,274,711
    
    
    
    1,693,155Cash and due from banks, end of period
    
    $
    1,988,157
    
    
    $
    2,383,440SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during period for:Interest
    
    $
    2,759,598
    
    
    $
    1,360,417Income taxes
    
    $
    68,319
    
    
    $
    1,616,688
 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 month periods ended March 31, 2005 are
not necessarily indicative of the results to be expected for the full year.NOTE 2.
    
    STOCK COMPENSATION PLANSAt March 31, 2005, 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 $221,659 and $48,126 for the three months ended March 31, 2005 and 2004,
respectively. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of SFAS
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
 Three Months EndedMarch 31,2005
    
    
    2004Net income, as reported
    
    $
    1,333,723
    
    
    $
    886,698Difference between stock-based employee
compensation expense determined under fair value
based method and APB No. 25 for all awards,
net of tax
    
    
    66,631
    
    
    
    (23,225
    )Pro forma net income
    
    $
    1,400,354
    
    
    $
    863,473Earnings per share:Basic  as reported
    
    $
    .21
    
    
    $
    .21Basic  pro forma
    
    $
    .22
    
    
    $
    .21Diluted  as reported
    
    $
    .19
    
    
    $
    .20Diluted  pro forma
    
    $
    .20
    
    
    $
    .19
 6




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 3.
    
    EARNINGS PER SHAREPresented below is a summary of the components used to
calculate basic and diluted earnings per common share.
 Three Months EndedMarch 31,2005
    
    
    2004Basic Earnings Per Share:Weighted average common shares outstanding
    
    
    6,458,997
    
    
    
    4,144,844Net income
    
    $
    1,333,723
    
    
    $
    886,698Basic earnings per share
    
    $
    0.21
    
    
    $
    0.21Diluted Earnings Per Share:Weighted average common shares outstanding
    
    
    6,458,997
    
    
    
    4,144,844Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the year
    
    
    572,261
    
    
    
    324,159Total weighted average common shares and
common stock equivalents outstanding
    
    
    7,031,258
    
    
    
    4,469,003Net income
    
    $
    1,333,723
    
    
    $
    886,698Diluted earnings per share
    
    $
    0.19
    
    
    $
    0.20
 NOTE 4.
    
    CURRENT ACCOUNTING DEVELOPMENTSIn January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51, and on December 24,
2003, the FASB issued FASB Interpretation No. 46 (Revised December 2003),
Consolidation of Variable Interest Entities which replaced FIN 46. The
interpretation addresses consolidation by business enterprises of variable interest
entities. A variable interest entity is defined as an entity subject to
consolidation according to the provisions of the interpretation. The revised
interpretation provides for special effective dates for entities that had fully or
partially applied the original interpretation as of December 24, 2003. Otherwise,
application of the interpretation was required in financial statements of public
entities that have interests in special-purpose entities, or SPEs, for periods
ending after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities (i.e., non-SPEs)
is required in financial statements for periods ending after March 15, 2004.
Application by small business issuers to variable interest entities other than SPEs
is required at various dates in 2004 and 2005. The Company has determined that the
revised provisions required deconsolidation of subsidiary trusts which issued trust
preferred securities. The Company adopted these revised provisions in the first
quarter of 2004. The interpretations did not have a material effect on the
Companys financial condition or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 4.
    
    CURRENT ACCOUNTING DEVELOPMENTS (Continued)In December 2004, the FASB published Statement No. 123 (revised 2004),
Share-Based Payment (FAS 123(R) or the Statement). FAS 123(R) requires that
the compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments issued. FAS
123(R) covers a wide range of share-based compensation arrangements including stock
options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. FAS 123(R) is a replacement of FASB
Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretive guidance (APB 25).The effect of the Statement will be to require entities to measure the cost of
employee services received in exchange for stock options based on the grant-date
fair value of the award, and to recognize the cost over the period the employee is
required to provide services for the award. FAS 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement.The Company will be required to apply FAS 123(R) as of the beginning of its
first interim period that begins after December 15, 2005, which will be the year
ending December 31, 2006.FAS
123(R) allows two methods for determining the effects of the transition: the modified prospective transition method and the modified retrospective method of
transition. Under the modified prospective transition method, an entity would use
the fair value based accounting method for all employee awards granted, modified, or
settled after the effective date. As of the effective date, compensation cost
related to the nonvested portion of awards outstanding as of that date would be
based on the grant-date fair value of those awards as calculated under the original
provisions of Statement No. 123; that is, an entity would not remeasure the
grant-date fair value estimate of the unvested portion of awards granted prior to
the effective date. An entity will have the further option to either apply the
Statement to only the quarters in the period of adoption and subsequent periods, or
apply the Statement to all quarters in the fiscal year of adoption. Under the
modified retrospective method of transition, an entity would revise its previously
issued financial statements to recognize employee compensation cost for prior
periods presented in accordance with the original provisions of Statement No. 123.The Company has not yet completed its study of the transition methods or made
any decisions about how it will adopt FAS 123(R). The impact of this Statement on
the Company in fiscal 2006 and beyond will depend upon various factors, among them
being our future compensation strategy. The pro forma compensation costs presented
in the table above and in prior filings for the Company have been calculated using a
Black-Scholes option pricing model and may not be indicative of amounts which should
be expected in future years. No decisions have been made as to which option-pricing
model is most appropriate for the Company for future awards.
 8




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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 period included in the
accompanying consolidated financial statements. Forward Looking Statements Certain of the statements made herein under the caption Managements Discussion and
Analysis (MD&A) are forward-looking statements for purposes of the Securities Act of 1933, as
amended (the Securities Act) and the Securities Exchange Act of 1934, as amended (the Exchange
Act), and as such may involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such forward-looking
statements. Such forward looking statements include statements using the words such as may,
will, anticipate, should, would, believe, contemplate, expect, estimate,
continue, 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, 2004. 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 critical accounting policy requires the most significant
estimates and assumptions that are particularly susceptible to a significant change in the
preparation of its financial statements. Allowance for loan losses. The allowance 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 9




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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. Liquidity and Capital Resources We monitor our liquidity resources on an ongoing basis. Our liquidity is also monitored
on a periodic basis by State and Federal regulatory authorities, As of March 31, 2005, our
liquidity, as determined under guidelines established by regulatory authorities and internal
policy, was satisfactory. At March 31, 2005, our capital ratios were adequate based on regulatory minimum capital
requirements. The minimum capital requirements and the actual capital ratios on a consolidated and
bank-only basis are as follows: ActualMinimumRegulatoryConsolidated
    
    
    Bank
    
    
    Requirement*Leverage capital ratios
    
    
    10.56
    %
    
    
    10.30
    %
    
    
    5.00
    %Risk-based capital ratios:Tier 1 capital
    
    
    10.25
    
    
    
    9.98
    
    
    
    6.00Total capital
    
    
    11.01
    
    
    
    10.75
    
    
    
    10.00
    In order to continue the growth in assets, the directors have preliminarily approved a private
placement offering of common stock up to $15 million. This offering should take place beginning in
May, 2005, and will be available to accredited investors. We believe that the capital raised from
the offering should allow the company to continue growing assets while complying with the minimum
capital requirements discussed above. Future earnings will also assist in keeping these ratios at
satisfactory levels. Off-Balance Sheet Risk We are a party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of our customers. These financial instruments include
commitments to extend credit and standby letters of credit. Such commitments involve, to varying
degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the
balance sheets. Our exposure to credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. We use the same credit policies in making commitments and
conditional obligations as we do for on-balance sheet instruments. A summary of our commitments is
as follows: March 31, 2005(Dollars in Thousands)Commitments to extend credit
    
    $
    108,945Letters of credit
    
    
    1,771$
    110,716
 10




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Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee the
performance of a customer to a third party. Those letters of credit are primarily issued to
support public and private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers. Collateral is
required in instances which we deem necessary. Financial Condition The following is a summary of our balance sheets for the periods indicated: March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in Thousands)Cash and due from banks
    
    $
    1,988
    
    
    $
    1,275Interest-bearing deposits in banks
    
    
    60
    
    
    
    288Federal funds sold
    
    
    
    
    
    
    Securities
    
    
    60,064
    
    
    
    47,928Restricted equity securities
    
    
    889
    
    
    
    1,233Loans, net
    
    
    447,838
    
    
    
    382,473Premises and equipment
    
    
    8,602
    
    
    
    8,608Other assets
    
    
    5,320
    
    
    
    4,370$
    524,761
    
    
    $
    446,175Deposits
    
    $
    464,734
    
    
    $
    373,272Federal funds purchased
    
    
    4,047
    
    
    
    4,279Other borrowings
    
    
    6,186
    
    
    
    21,186Other liabilities
    
    
    4,688
    
    
    
    3,883Stockholders equity
    
    
    45,106
    
    
    
    43,555$
    524,761
    
    
    $
    446,175
 Our total assets grew 17.6% in the first quarter of 2005. Deposit grew $91.5 million,
including $55.3 of brokered time deposits. The brokered deposits have maturities comparable to our
local time deposits, and were obtained at more favorable rates. The funds obtained from the
deposits were used primarily to fund loan growth of $65.4 million, purchase additional securities
of $12.1 million, and pay down other borrowings of $15.0 million. Our ratio of gross loans to
deposits and other borrowings decreased to 95.9% at March 31, 2005 from 97.8% at December 31, 2004,
although loan demand in our primary market areas continues to be strong. Our total equity
increased $1.6 million due to year-to-date net income of $1,334,000, paid-in capital from the
exercising of stock options of $528,000, paid-in capital from stock option expense of $222,000, and
an increase in the unrealized loss on securities available-for-sale, net of tax, of $532,000. Other assets increased $950,000 during the first quarter of 2005, primarily due to increases
in accrued interest receivable and deferred income taxes on unrealized losses on securities. Other
liabilities increased $805,000 in the same period, primarily due to increases in accrued payables
for interest and income taxes. 11




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Results of Operations For The Three Months Ended March 31, 2005 and 2004 The following is a summary of our operations for the periods indicated. Three Months EndedMarch 31,2005
    
    
    2004(Dollars in Thousands)Interest income
    
    $
    8,287
    
    
    $
    4,556Interest expense
    
    
    3,206
    
    

    
    1,472Net interest income
    
    
    5,081
    
    
    
    3,084Provision for loan losses
    
    
    572
    
    
    
    141Other income
    
    
    190
    
    
    
    62Other expense
    
    
    2,575
    
    
    
    1,548Pretax income
    
    
    2,124
    
    
    
    1,457Income taxes
    
    
    790
    
    
    
    570Net income
    
    $
    1,334
    
    
    $
    887
 Our net interest income increased by $2.0 million during the first quarter of 2005 compared to
the same period in 2004. The increase in net interest income is due primarily to the increased
volume of average loans and securities. Our net interest margin decreased to 4.27% during the
first quarter of 2005 as compared to 4.45% during the first quarter of 2004 and to 4.39% for the
entire year of 2004. The decrease in the net interest margin is due to the cost of funds
increasing more than the yield on loans over the period. Yields earned on loans increased to 7.29%
in the first quarter of 2005 as compared to 6.89% in the first quarter of 2004. Our cost of funds,
including non-interest bearing deposits, increased to 2.90% in the first quarter of 2005 as
compared to 2.22% in the first quarter of 2004. The provision for loan losses increased by $431,000 in the first quarter of 2005 compared to
the same period in 2004. This increase is due primarily to the gross loan portfolio growing $65.8
million in the first quarter of 2005 vs. $7.0 million in the first quarter of 2004. The amounts
provided are indicative of our assessment of the inherent risk in the portfolio. There were no nonaccrual loans or loans past due ninety days or more and still accruing
interest at March 31, 2005. Potential problem loans consist of 6 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 $3.8 million in the allowance for loan losses at March 31, 2005, or 0.85% 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. 12




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##### Table of Contents



Information with respect to nonaccrual, past due, restructured, and potential problem loans at
March 31, 2005 and 2004 is as follows: March 31,2005
    
    
    2004(Dollars in Thousands)Nonaccrual loans
    
    $
    0
    
    
    $
    2,869Loans contractually past due ninety days or more as to interest
or principal payments and still accruing
    
    
    0
    
    
    
    1,205Restructured loans
    
    
    0
    
    
    
    0Potential problem loans
    
    
    1,199
    
    
    
    2,179Interest income that would have been recorded on nonaccrual
and restructured loans under original terms
    
    
    0
    
    
    
    124Interest income that was recorded on nonaccrual and
restructured loans
    
    
    0
    
    
    
    0
 Potential problem loans are defined as loans about which we have serious doubts as to the
ability of the borrower to comply with the present loan repayment terms and which may cause the
loan to be placed on nonaccrual status, to become past due more than ninety days, or to be
restructured. It is our policy to discontinue the accrual of interest income when, in the opinion of
management, collection of such interest becomes doubtful. This status is accorded interest when (1)
there is a significant deterioration in the financial condition of the borrower and full repayment
of principal and interest is not expected and (2) the principal or interest is more than ninety
days past due, unless the loan is both well-secured and in the process of collection. Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention
that have not been included in the table above do not represent or result from trends or
uncertainties which management reasonably expects will materially impact future operating results,
liquidity or capital resources. Management is not aware of any information that causes it to have
serious doubts as to the ability of borrowers to comply with the loan repayment terms. 13




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##### Table of Contents



Information regarding certain loans and allowance for loan loss data through March 31, 2005
and 2004 is as follows: Three Months EndedMarch 31,2005
    
    
    2004(Dollars in Thousands)Average amount of loans outstanding
    
    $
    421,200
    
    
    $
    245,527Balance of allowance for loan losses at beginning of period
    
    $
    3,433
    
    
    $
    3,573Loans charged offCommercial and financial
    
    
    (210
    )
    
    
    0Real estate mortgage
    
    
    0
    
    
    
    0Installment
    
    
    0
    
    
    
    0(210
    )
    
    
    0Loans recoveredCommercial and financial
    
    
    0
    
    
    
    0Real estate mortgage
    
    
    50
    
    
    
    0Installment
    
    
    0
    
    
    
    050
    
    
    
    0Net (charge-offs)/recoveries
    
    
    (160
    )
    
    
    0Additions to allowance charged to operating expense during period
    
    
    572
    
    
    
    141Balance of allowance for loan losses at end of period
    
    $
    3,845
    
    
    $
    3,714Ratio of net loans charged off during the period to
average loans outstanding
    
    
    0.04
    %
    
    
    0.00
    %
 The allowance for loan losses is maintained at a level that is deemed appropriate by
management to adequately cover all known and inherent risks in the loan portfolio. Managements
evaluation of the loan portfolio includes a loan classification program. Under the program, as
each loan is made, we assign a loan grade. Each loan grade is assigned an allowance percentage
based on our experience specifically and the historical experience of the banking industry
generally. Loan classifications are then subject to periodic review by the responsible lending
officers and by senior management based upon their judgment, our loan loss experience, current
economic conditions that may affect the borrowers ability to repay, lender requirements, the
underlying collateral value of the loans and other appropriate information. Management relies
predominantly on this ongoing review of the loan portfolio to assess the risk characteristics of
the portfolio in the aggregate and to determine adjustments, if any, to our allowance for loan
losses. Based upon this ongoing review, we may identify loans that could be impaired. A loan is
considered impaired when it is probable that we will be unable to collect all principal and
interest due in accordance with the contractual terms of the loan agreement. When we identify a
loan as impaired, the allowance for loan losses is 14




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##### Table of Contents



increased if we determine that the amount of impairment is in excess of the allowance determined
under our loan classification program. Other income has increased in the first quarter of 2005 as compared to the same period in 2004
by $128,000 primarily due to the recognized gain on the sale of our administrative building of
$103,000 and an increase in rental income from subleases on the administrative building of $19,000. Other expenses increased in the first quarter of 2005 as compared to the same period in 2004
by $1,026,000 due to increased salaries and employee benefits of $610,000, increased occupancy and
equipment expenses of $225,000, and increased other operating expenses of $191,000. Salaries and
employee benefits have increased due to an increase in the number of full time equivalent employees
to 47 at March 31, 2005 from 36 at March 31, 2004, an increase in compensation expense recognized
for variable stock options of $144,000, and to annual salary increases. The increase in the number
of employees is due to our overall growth. The increase in occupancy and equipment expense is
primarily due to lease expense on an administrative building of $140,000, our overall growth, and
additional expenses related to our Vinings financial center which opened in June, 2004. The
increase in other operating expense is due primarily to growth, with the largest increases in the
categories of donations/tithing of $45,000, consulting fees of $35,000, and data processing
expenses of $26,000. The Company has recorded income tax expense of $790,000 in the first quarter of 2005 as
compared to $571,000 in the first quarter of 2004. The rate of tax as a percentage of pretax
income was 37.2% for 2005 and 39.2% for 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. 
 ITEM 3. CONTROLS AND PROCEDURES Based upon an evaluation of our disclosure controls and procedures as of the end of the
period covered by this report, under the supervision and with the participation of management, our
President and Chief Financial Officer have concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information relating to the Company
required to be included in the Companys Exchange Act filings. There have been no significant
changes in internal controls over financial reporting or in other factors that could significantly
affect internal controls over financial reporting during the first quarter of 2005. 15




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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 first quarter of 2005 that were not
registered under the Securities Act of 1933. The Company did not repurchase any equity securities
during the first quarter of 2005. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. There have been no defaults in the payment of principal, interest, a sinking or purchase
fund installment, or any other default with respect to any indebtedness of the Company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders during the first quarter of 2005. 
 ITEM 5. OTHER INFORMATION. None. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.31.2
    
    Certificate of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.32
    
    Certification of the Chief Executive Officer and Principal Financial Officer Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.
 (b) The Company filed the following Form 8-K during the first quarter of 2005: January 21, 2005  Announcing financial results for the fourth quarter and year
ended 2004. 16




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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: May 13, 2005
    
    BY:
    
    /s/ Steven M. SkowSteven M. Skow, President and C.E.O.(Principal Executive Officer)DATE: May 13, 2005
    
    BY:
    
    /s/ Jeff L. SandersJeff L. Sanders, Senior VP & C.F.O.(Principal Financial and Accounting Officer)
 17