##### 



EXHIBIT 13.1 INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2004 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors
Integrity Bancshares, Inc.
Alpharetta, Georgia We have audited the accompanying consolidated balance sheets of Integrity Bancshares, Inc. and
subsidiaryas of December 31, 2004 and 2003, and the related consolidated statements of income,
comprehensive income, stockholders equity and cash flows for the years then ended. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Integrity Bancshares, Inc. and subsidiary as of
December 31, 2004 and 2003, and the results of their operations and their cash flows for the years
then ended, in conformity with U.S. generally accepted accounting principles. /s/ MAULDIN & JENKINS, LLC Atlanta, Georgia
January 14, 2005




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##### 



INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003 Assets
    

2004
    
    

2003Cash and due from banks
    
    $
    1,274,711
    
    
    $
    1,693,155Interest-bearing deposits in banks
    
    
    287,962
    
    
    
    113,954Federal funds sold
    
    
    
    
    
    
    2,439,000Securities available for sale
    
    
    47,927,833
    
    
    
    27,202,502Restricted equity securities, at cost
    
    
    1,232,600
    
    
    
    650,000Loans
    
    
    385,905,782
    
    
    
    238,918,989Less allowance for loan losses
    
    
    3,433,130
    
    
    
    3,572,984Loans, net
    
    
    382,472,652
    
    
    
    235,346,005Premises and equipment
    
    
    8,608,095
    
    
    
    9,599,777Other assets
    
    
    4,371,460
    
    
    
    2,703,802Total assets
    
    $
    446,175,313
    
    
    $
    279,748,195Liabilities and Stockholders EquityLiabilities:Deposits:Noninterest-bearing
    
    $
    9,331,768
    
    
    $
    9,141,024Interest-bearing
    
    
    363,940,483
    
    
    
    222,636,698Total deposits
    
    
    373,272,251
    
    
    
    231,777,722Federal funds purchased
    
    
    4,279,000
    
    
    
    10,000,000Other borrowings
    
    
    21,186,000
    
    
    
    16,000,000Other liabilities
    
    
    3,883,236
    
    
    
    2,078,203Total liabilities
    
    
    402,620,487
    
    
    
    259,855,925Commitments and contingenciesStockholders equityCommon stock, no par value, 10,000,000 shares authorized;
6,385,638 and 2,744,157 shares issued, respectively
    
    
    39,932,171
    
    
    
    19,020,303Retained earnings
    
    
    3,821,403
    
    
    
    809,021Accumulated other comprehensive income (loss)
    
    
    (198,748
    )
    
    
    62,946Total stockholders equity
    
    
    43,554,826
    
    
    
    19,892,270Total liabilities and stockholders equity
    
    $
    446,175,313
    
    
    $
    279,748,195
 See Notes to Consolidated Financial Statements.




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##### 



INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004 AND 2003 2004
    
    
    2003Interest income:Loans, including fees
    
    $
    20,830,692
    
    
    $
    13,252,859Taxable securities
    
    
    1,593,333
    
    
    
    878,336Federal funds sold
    
    
    27,906
    
    
    
    49,201Deposits in banks
    
    
    3,700
    
    
    
    9,736Total interest income
    
    
    22,455,631
    
    
    
    14,190,132Interest expense:Deposits
    
    
    6,943,923
    
    
    
    4,781,147Federal funds purchased, securities sold under repurchase
agreements and other borrowings
    
    
    627,188
    
    
    
    183,465Total interest expense
    
    
    7,571,111
    
    
    
    4,964,612Net interest income
    
    
    14,884,520
    
    
    
    9,225,520Provision for loan losses
    
    
    2,627,348
    
    
    
    2,488,209Net interest income after provision
for loan losses
    
    
    12,257,172
    
    
    
    6,737,311Other income:Service charges on deposit accounts
    
    
    54,781
    
    
    
    63,858Other operating income
    
    
    557,948
    
    
    
    125,740Total other income
    
    
    612,729
    
    
    
    189,598Other expenses:Salaries and employee benefits
    
    
    4,581,670
    
    
    
    2,522,914Equipment and occupancy expenses
    
    
    1,098,100
    
    
    
    584,236Other operating expenses
    
    
    2,402,075
    
    
    
    1,563,469Total other expenses
    
    
    8,081,845
    
    
    
    4,670,619Income before income taxes
    
    
    4,788,056
    
    
    
    2,256,290Income taxes
    
    
    1,775,674
    
    
    
    462,377Net income
    
    $
    3,012,382
    
    
    $
    1,793,913Basic earnings per share
    
    $
    0.56
    
    
    $
    0.47Diluted earnings per share
    
    $
    0.52
    
    
    $
    0.45
 See Notes to Consolidated Financial Statements.




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##### 



INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2004 AND 2003 2004
    
    
    2003Net income
    
    $
    3,012,382
    
    
    $
    1,793,913Other comprehensive income:Unrealized losses on securities available-for-sale:Net unrealized holding losses arising during period, net of tax
of $155,280 and $38,580, respectively
    
    
    (261,694
    )
    
    
    (205,591
    )Comprehensive income
    
    $
    2,750,688
    
    
    $
    1,588,322
 See Notes to Consolidated Financial Statements.




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##### 



INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    Retained Earnings
    
    
    Comprehensive
    
    
    Stockholders'Shares
    
    
    Amount Paid-in
    
    
    (Deficit)
    
    

Income
(Loss)
    
    
    EquityBalance, December 31, 2002
    
    
    1,428,658
    
    
    $
    14,534,954
    
    
    $
    (984,892
    )
    
    $
    268,537
    
    
    $
    13,818,599Net income
    
    
    
    
    
    
    
    
    
    
    1,793,913
    
    
    
    
    
    
    
    1,793,913Issuance of common stock
    
    
    414,866
    
    
    
    4,563,538
    
    
    
    
    
    
    
    
    
    
    
    4,563,538Stock compensation expense
    
    
    
    
    
    
    90,945
    
    
    
    
    
    
    
    
    
    
    
    90,945Purchase and retirement
of treasury stock
    
    
    (14,081
    )
    
    
    (168,972
    )
    
    
    
    
    
    
    
    
    
    
    (168,972
    )3-for-2 common stock split
    
    
    914,714
    
    
    
    (162
    )
    
    
    
    
    
    
    
    
    
    
    (162
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (205,591
    )
    
    
    (205,591
    )Balance, December 31, 2003
    
    
    2,744,157
    
    
    
    19,020,303
    
    
    
    809,021
    
    
    
    62,946
    
    
    
    19,892,270Net income
    
    
    
    
    
    
    
    
    
    
    3,012,382
    
    
    
    
    
    
    
    3,012,382Issuance of common stock
    
    
    1,512,935
    
    
    
    20,309,609
    
    
    
    
    
    
    
    
    
    
    
    20,309,609Stock compensation expense
    
    
    
    
    
    
    602,259
    
    
    
    
    
    
    
    
    
    
    
    602,2593-for-2 common stock split
    
    
    2,128,546
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (261,694
    )
    
    
    (261,694
    )Balance, December 31, 2004
    
    
    6,385,638
    
    
    $
    39,932,171
    
    
    $
    3,821,403
    
    
    $
    (198,748
    )
    
    $
    43,554,826
 See Notes to Consolidated Financial Statements.




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##### 



INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003 2004
    
    
    2003OPERATING ACTIVITIESNet income
    
    $
    3,012,382
    
    
    $
    1,793,913Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and software amortization
    
    
    429,654
    
    
    
    316,528Provision for loan losses
    
    
    2,627,348
    
    
    
    2,488,209Stock compensation
    
    
    602,259
    
    
    
    90,945Deferred income taxes
    
    
    (531,655
    )
    
    
    (1,161,311
    )Increase in interest receivable
    
    
    (842,526
    )
    
    
    (441,639
    )Increase in interest payable
    
    
    940,688
    
    
    
    122,865Increase (decrease) in income taxes payable
    
    
    (1,701,759
    )
    
    
    1,609,705Gain on sale of other real estate
    
    
    (190,024
    )
    
    
    Gain on sale of premises and equipment
    
    
    (147,923
    )
    
    
    Net other operating activities
    
    
    436,326
    
    
    
    (448,532
    )Net cash provided by operating activities
    
    
    4,634,770
    
    
    
    4,370,683INVESTING ACTIVITIESNet (increase) decrease in interest-bearing deposits in banks
    
    
    (174,008
    )
    
    
    416,021Net (increase) decrease in federal funds sold
    
    
    2,439,000
    
    
    
    (2,439,000
    )Proceeds from maturities of securities available-for-sale
    
    
    15,283,233
    
    
    
    18,199,327Purchases of securities available-for-sale
    
    
    (36,425,538
    )
    
    
    (35,168,445
    )Purchases of restricted equity securities
    
    
    (582,600
    )
    
    
    (300,000
    )Net increase in loans
    
    
    (152,033,595
    )
    
    
    (110,930,930
    )Proceeds from sale of other real estate
    
    
    2,693,669
    
    
    
    Proceeds from sale of premises and equipment
    
    
    4,996,500
    
    
    
    Purchase of premises and equipment
    
    
    (2,333,013
    )
    
    
    (5,620,401
    )Net cash used in investing activities
    
    
    (166,136,352
    )
    
    
    (135,843,428
    )FINANCING ACTIVITIESNet increase in deposits
    
    
    141,494,529
    
    
    
    111,644,422Net increase (decrease) in federal funds purchased
    
    
    (5,721,000
    )
    
    
    6,885,000Net proceeds from other borrowings
    
    
    5,000,000
    
    
    
    9,000,000Net proceeds from sale of common stock
    
    
    20,309,609
    
    
    
    4,563,376Purchase of treasury stock
    
    
    
    
    
    
    (168,972
    )Net cash provided by financing activities
    
    
    161,083,138
    
    
    
    131,923,826Net increase (decrease) in cash and due from banks
    
    
    (418,444
    )
    
    
    451,081Cash and due from banks at beginning of year
    
    
    1,693,155
    
    
    
    1,242,074Cash and due from banks at end of year
    
    $
    1,274,711
    
    
    $
    1,693,155SUPPLEMENTAL DISCLOSURECash paid for:Interest
    
    $
    6,630,423
    
    
    $
    4,841,747Income taxes
    
    $
    4,009,088
    
    
    $
    13,983
 See Notes to Consolidated Financial Statements.




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##### 



INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business Integrity Bancshares, Inc. (the Company) is a bank holding company whose
principal activity is the ownership and management of its wholly-owned subsidiary,
Integrity Bank (the Bank). The Bank is a commercial bank located in Alpharetta,
Fulton County, Georgia with additional full service branches located in Roswell,
Georgia and Smyrna, Georgia. The Bank also has a loan production office located in
Lawrenceville, Georgia. The Bank provides a full range of banking services in its
primary market area of Fulton County and the surrounding counties. Basis of Presentation and Accounting Estimates The consolidated financial statements include the accounts of the Company and its
subsidiary. Significant intercompany transactions and balances have been
eliminated in consolidation. In preparing the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities as
of the balance sheet date and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the
near term relate to the determination of the allowance for loan losses, the
valuation of foreclosed real estate, deferred taxes, and contingent assets and
liabilities. The determination of the adequacy of the allowance for loan losses is
based on estimates that are susceptible to significant changes in the economic
environment and market conditions. In connection with the determination of the
estimated losses on loans and the valuation of foreclosed real estate, management
obtains independent appraisals for significant collateral. Cash, Due From Banks and Cash Flows For purposes of reporting cash flows, cash and due from banks includes cash on
hand, cash items in process of collection and amounts due from banks. Cash flows
from loans, interest-bearing deposits in banks, federal funds purchased and sold,
deposits, securities sold under repurchase agreements and other borrowings are
reported net. The Bank is required to maintain reserve balances in cash or on deposit with the
Federal Reserve Bank, based on a percentage of deposits. The total of those
reserve balances was approximately $316,000 and $352,000 at December 31, 2004 and
2003, respectively. Securities Debt securities that management has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at amortized cost.
Securities not classified as held to maturity are classified as available for sale
and recorded at fair value with unrealized gains and losses excluded from earnings
and reported in other comprehensive income, net of the related deferred tax effect.
Equity securities, including restricted equity securities without a readily
determinable fair value, are reported at cost.




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Securities (Continued) The amortization of premiums and accretion of discounts are recognized in interest
income using the interest method over the life of the securities. Realized gains
and losses, determined on the basis of the cost of specific securities sold, are
included in earnings on the settlement date. Declines in the fair value of held to
maturity and available-for-sale securities below their cost that are deemed to be
other than temporary are reflected in earnings as realized losses. In estimating
other-than-temporary impairment losses, management considers (1) the length of time
and the extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and ability of
the Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. Loans Loans are reported at their outstanding principal balances less deferred fees and
the allowance for loan losses. Interest income is accrued on the outstanding
principal balance. Nonrefundable loan fees and costs incurred for loans are deferred and recognized in
income over the estimated life of the loans using a method which approximates a
level yield. The accrual of interest on loans is discontinued when, in managements opinion, the
borrower may be unable to meet payments as they become due, unless the loan is
well-secured. All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income, unless management
believes that the accrued interest is recoverable through the liquidation of
collateral. Interest income on nonaccrual loans is recognized on the cost-recovery
method, until the loans are returned to accrual status. Loans are returned to
accrual status when all the principal and interest amounts are brought current and
future payments are reasonably assured. A loan is considered impaired when it is probable, based on current information and
events, the Company will be unable to collect all principal and interest payments
due in accordance with the contractual terms of the loan agreement. Impaired loans
are measured by either the present value of expected future cash flows discounted
at the loans effective interest rate, the loans obtainable market price, or the
fair value of the collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in the allowance for
loan losses. Interest on accruing impaired loans is recognized as long as such
loans do not meet the criteria for nonaccrual status. The Company sells and purchases participations in certain loans to unrelated
financial institutions. Any gain or loss is determined and recognized at the time
the sale or purchase is consummated. The amount of gain or loss recognized on the
sale or purchase of a specific loan is equal to the percentage resulting from
determining the fair value of the portion of the loan sold or purchased relative to
the fair value of the entire loan. Losses are recognized at the time the loan is
identified as held for sale and the loans carrying value exceeds its fair value.
The Company recognized no gains or losses on the sale or purchase of
participations, nor did it recognize servicing right assets or liabilities as of
and for the years ended December 31, 2004 or 2003, respectively, because the
servicing fees received or paid approximate adequate compensation.




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1.
       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses
charged to expense. Loan losses are charged against the allowance when management
believes the collectibility of the principal is unlikely. Subsequent recoveries,
if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb
estimated losses relating to specifically identified loans, as well as probable
credit losses inherent in the balance of the loan portfolio, based on an evaluation
of the collectibility of existing loans and prior loss experience. This evaluation
also takes into consideration such factors as changes in the nature and volume of
the loan portfolio, overall portfolio quality, review of specific problem loans,
concentrations and current economic conditions that may affect the borrowers
ability to pay. This evaluation does not include the effects of expected losses on
specific loans or groups of loans that are related to future events or expected
changes in economic conditions. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are any significant changes in economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for loan losses, and may require the
Company to make additions to the allowance based on their judgment about
information available to them at the time of their examinations. The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or collateral
value or observable market price) of the impaired loan is lower than the carrying
value of that loan. The general component covers non-classified loans and is based
on historical experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect managements
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio. Premises and Equipment Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation. Depreciation is computed by the straight-line method
over the following estimated useful lives of the assets. Building
    
    40 yearsEquipment
    
    3-7 years
 Other Real Estate Owned Other real estate owned represents properties acquired through or in lieu of loan
foreclosure and is initially recorded at the lower of cost or fair value less
estimated costs to sell. Any write-down to fair value at the time of transfer to
other real estate owned is charged to the allowance for loan losses. Costs of
improvements are capitalized, whereas costs relating to holding other real estate
owned and subsequent adjustments to the value are expensed. The Company had $0 and
$202,870 in other real estate owned at December 31, 2004 and 2003, respectively.




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1.
       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes Deferred income tax assets and liabilities are determined using the balance sheet
method. Under this method, the net deferred tax asset or liability is determined
based on the tax effects of the temporary differences between the book and tax
bases of the various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws. Earnings Per Share Basic earnings per share are computed by dividing net income by the weighted
average number of shares of common stock outstanding. Diluted earnings per share
are computed by dividing net income by the sum of the weighted-average number of
            shares of common stock outstanding and potential common shares. Potential common
            shares consist of stock options. Stock-Based Compensation The Company has two stock-based employee compensation plans, which are described
more fully in Note 7. 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 $602,259 and $90,945 for the years ended December 31, 2004 and 2003,
respectively. Options granted to the Companys president are considered variable
because the number of options granted is based on the outstanding number of shares
of common stock multiplied by 5%. The following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Years Ended December 31,2004
    
    
    2003Net income, as reported
    
    $
    3,012,382
    
    
    $
    1,793,913Difference between stock-based employee
compensation expense determined under fair value
based method and APB No. 25 for all awards,
net of tax
    
    
    230,673
    
    
    
    (228,377
    )Pro forma net income
    
    $
    3,243,055
    
    
    $
    1,565,536Earnings per share:Basic  as reported
    
    $
    0.56
    
    
    $
    0.47Basic  pro forma
    
    $
    0.60
    
    
    $
    0.41Diluted  as reported
    
    $
    0.52
    
    
    $
    0.45Diluted  pro forma
    
    $
    0.56
    
    
    $
    0.39




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Standards 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 provided 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 is 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 require 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. 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.




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Standards (Continued) 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. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale securities,
are reported as a separate component of the equity section of the balance sheet,
such items, along with net income, are components of comprehensive income. NOTE 2.
       SECURITIES AVAILABLE FOR SALE The amortized cost and fair value of securities available for sale are summarized as
follows: Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2004:Equity securities
    
    $
    690,000
    
    
    $
    
    
    
    $
    
    
    
    $
    690,000Mortgage-backed securities
    
    
    47,553,281
    
    
    
    161,284
    
    
    
    (476,732
    )
    
    
    47,237,833$
    48,243,281
    
    
    $
    161,284
    
    
    $
    (476,732
    )
    
    $
    47,927,833December 31, 2003:Equity securities
    
    $
    690,000
    
    
    $
    
    
    
    $
    
    
    
    $
    690,000Mortgage-backed securities
    
    
    26,410,976
    
    
    
    212,892
    
    
    
    (111,366
    )
    
    
    26,512,502$
    27,100,976
    
    
    $
    212,892
    
    
    $
    (111,366
    )
    
    $
    27,202,502
 In 2003, the FASB Emerging Issues Task Force released Issue 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.The
issue requires disclosure of certain information about other than temporary
impairments in the market value of securities. The market value of securities is
based on quoted market values and is significantly affected by the interest rate
environment. At December 31, 2004, all unrealized losses in the securities portfolio
were for debt securities. From the December 31, 2004 tables above, 20 out of 36
securities purchased from U.S. Government sponsored corporations, including
mortgage-backed securities, contained unrealized losses. The amortized cost and fair
value of these securities at December 31, 2004 was $28,998,122 and $28,521,390,
respectively. At December 31, 2004, 17 of the 20 securities with unrealized losses
have been in a continuous unrealized loss position for less than twelve months, and 3
securities with unrealized losses have been in a continuous unrealized loss position
for more than 12 months. These unrealized losses are considered temporary because of
acceptable investment grades on each security and the repayment sources of principal
and interest are government backed.




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2.          SECURITIES AVAILABLE FOR SALE (Continued) The following table shows the gross unrealized losses and fair value of securities,
aggregated by category and length of time that securities have been in a continuous
unrealized loss position at December 31, 2004. Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalDescription of
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedSecurities:
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMortgage-backed
securities
    
    $
    25,444,054
    
    
    $
    (401,015
    )
    
    $
    3,077,336
    
    
    $
    (75,717
    )
    
    $
    28,521,390
    
    
    $
    (476,732
    )Total temporarily
impaired securities
    
    $
    25,444,054
    
    
    $
    (401,015
    )
    
    $
    3,077,336
    
    
    $
    (75,717
    )
    
    $
    28,521,390
    
    
    $
    (476,732
    )
 At December 31, 2003, all unrealized losses in the securities portfolio were for debt
securities. From the December 31, 2003 tables above, 7 out of 28 securities
purchased from U.S. Government sponsored corporations, including mortgage-backed
securities, contained unrealized losses. All securities with an unrealized loss at
December 31, 2003 had been in a continuous unrealized loss position for less than
twelve months. Securities with a carrying value of $7,755,002 and $2,604,294 at December 31, 2004
and 2003, respectively, were pledged to secure public deposits and for other purposes
required or permitted by law. The Company had no gains and losses on sales of securities for the years ended
December 31, 2004 or 2003. NOTE 3.          LOANS The composition of loans is summarized as follows: December 31,2004
    
    
    2003Commercial
    
    $
    11,180,514
    
    
    $
    16,071,000Real estate  construction
    
    
    214,104,492
    
    
    
    123,882,000Real estate  mortgage
    
    
    160,100,751
    
    
    
    98,401,000Consumer installment and other
    
    
    614,249
    
    
    
    723,417386,000,006
    
    
    
    239,077,417Deferred loan fees
    
    
    (94,224
    )
    
    
    (158,428
    )Allowance for loan losses
    
    
    (3,433,130
    )
    
    
    (3,572,984
    )Loans, net
    
    $
    382,472,652
    
    
    $
    235,346,005
 Changes in the allowance for loan losses are as follows: Years Ended December 31,2004
    
    
    2003Balance, beginning of year
    
    $
    3,572,984
    
    
    $
    1,104,912Provision for loan losses
    
    
    2,627,348
    
    
    
    2,488,209Loans charged off
    
    
    (2,841,802
    )
    
    
    (20,137
    )Recoveries of loans previously charged off
    
    
    74,600
    
    
    
    Balance, end of year
    
    $
    3,433,130
    
    
    $
    3,572,984




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3.
       LOANS (Continued) The total recorded investment in impaired loans consisting solely of loans on
nonaccrual status was $779,362 and $2,868,700 at December 31, 2004 and 2003,
respectively. There were no impaired loans that had related allowances determined in
accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, at
December 31, 2004 and 2003. The average recorded investment in impaired loans for
2004 and 2003 was $2,138,069 and $273,498, respectively. Interest income recognized
for cash payments received on impaired loans was not material for the years ended
December 31, 2004 and 2003, respectively. There were no loans past due ninety days or more and still accruing interest at
December 31, 2004 and 2003. In the ordinary course of business, the Company has granted loans to certain related
parties, including executive officers, directors and their affiliates. The interest
rates on these loans were substantially the same as rates prevailing at the time of
the transaction and repayment terms are customary for the type of loan. Changes in
related party loans for the year ended December 31, 2004 are as follows: Balance, beginning of year
    
    $
    6,073,435Advances
    
    
    9,328,897Repayments
    
    
    (6,553,438
    )Balance, end of year
    
    $
    8,848,894
 NOTE 4.
       PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: December 31,2004
    
    
    2003Land
    
    $
    2,987,514
    
    
    $
    4,242,445Building
    
    
    4,548,403
    
    
    
    4,540,906Construction in progress
    
    
    
    
    
    
    68,356Equipment
    
    
    1,999,822
    
    
    
    1,324,9429,535,739
    
    
    
    10,176,649Accumulated depreciation
    
    
    (927,644
    )
    
    
    (576,872
    )$
    8,608,095
    
    
    $
    9,599,777
 In 2003, the Company purchased from a director of the Company, an administrative
building adjacent to its main office building at a cost of $2.6 million. In August,
2004 the Company sold to an unrelated party the administrative building and related
improvements, 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 unamortized balance of $1,924,875 of
the deferred gain is included in other liabilities.




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 4.
    PREMISES AND EQUIPMENT (Continued)The Company has a loan production office in Lawrenceville, Georgia in which office
space is leased. A one year non-renewable operating lease was entered into in
November, 2004. A full-service branch is scheduled to be built in 2005.Rental expense was $202,539 and $0 for the years ended December 31, 2004 and 2003,
respectively.Future minimum lease payments as of December 31, 2004 are as follows: 2005
    
    $
    583,3332006
    
    
    560,0002007
    
    
    560,0002008
    
    
    560,0002009
    
    
    364,100$
    2,627,433
  In 2003, the Company entered into a contract with a business controlled by another
director of the Company to construct an additional branch banking facility in Cobb
County, Georgia. The branch was completed in June, 2004. The Company paid
$1,454,000 and $819,000 to this business for the construction of this facility and
other construction improvements for the years ended December 31, 2004 and 2003,
respectively.NOTE 5.
    DEPOSITSThe aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2004 and 2003 was $54,779,254 and $25,967,784, respectively. The
scheduled maturities of time deposits at December 31, 2004 are as follows: 2005
    
    $
    191,335,4682006
    
    
    2,564,4072007
    
    
    462,7652008
    
    
    10,1582009
    
    
    60,902$
    194,433,700
  Overdraft demand deposits reclassified to loans totaled $1,160 and $9,222 at December
31, 2004 and 2003, respectively.




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 6.
    OTHER BORROWINGSOther borrowings consist of the following: December 31,2004
    
    
    2003Advance from Federal Home Loan Bank with interest at the
overnight federal funds rate (2.44% at December 31, 2004),
due December 16, 2005.
    
    $
    15,000,000
    
    
    $
    Floating rate junior subordinated debentures, interest payable
quarterly at the three month LIBOR plus 2.85%,
due December 17, 2033.
    
    
    6,186,000
    
    
    
    6,000,000Advance from Federal Home Loan Bank with interest at the
three-month LIBOR flat (1.202% at December 31, 2003),
due September 2, 2004.
    
    
    
    
    
    
    5,000,000Advance from Federal Home Loan Bank with interest at the
three-month LIBOR flat (1.221% at December 31, 2003),
due December 8, 2004.
    
    
    
    
    
    
    5,000,000$
    21,186,000
    
    
    $
    16,000,000
  The Companys advances from the Federal Home Loan Bank are collateralized with
certain qualifying loans of approximately $85 million, mortgage-backed securities of
$7.8 million, and Federal Home Loan Bank stock of $1.2 million.In 2003, the Company formed a wholly-owned grantor trust to issue cumulative trust
preferred securities to the public. The grantor trust has invested the proceeds of
the trust preferred securities in junior subordinated debentures of the Company. The
trust preferred securities can be redeemed prior to maturity at the option of the
Company on or after December 17, 2008. The sole assets of the grantor trust are the
Junior Subordinated Deferrable Interest Debentures of the Company (the Debentures)
held by the grantor trust. The Debentures have the same interest rate (three month
LIBOR plus 2.85%, floating) as the trust preferred securities. The Company has the
right to defer interest payments on the Debentures at any time or from time to time
for a period not exceeding 20 consecutive quarters provided that no extension period
may extend beyond the stated maturity of the related Debentures. During any such
extension period, distributions on the trust preferred certificates would also be
deferred.Payment of periodic cash distributions and payment upon liquidation or redemption
with respect to the trust preferred securities are guaranteed by the Company to the
extent of funds held by the grantor trust (the Preferred Securities Guarantee).
The Preferred Securities Guarantee, when taken together with the Companys other
obligations under the Debentures, constitute a full and unconditional guarantee, on a
subordinated basis, by the Company of payments due on the trust preferred securities.The Company has available unused lines of credit with various financial institutions
totaling $81,850,000 at December 31, 2004. There were no other advances outstanding
at December 31, 2004 or 2003.




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 7.
    STOCK-BASED COMPENSATIONAt December 31, 2004, the Company has two stock-based employee compensation plans,
one for directors and one for employees. The director plan reserves 292,500 shares
of common stock and the employee plan reserves 825,000 shares of common stock for the
granting of stock options. The options are exercisable over a ten year period in
accordance with vesting schedules determined by the Board of Directors. Years Ended December 31,2004
    
    
    2003Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price(Employee Plan)Outstanding at beginning of year
    
    
    390,312
    
    
    $
    4.89
    
    
    
    
    
    
    $
    Granted (fixed)
    
    
    153,000
    
    
    
    9.00
    
    
    
    184,500
    
    
    
    4.89Granted (variable)
    
    
    113,470
    
    
    
    4.89
    
    
    
    205,812
    
    
    
    4.89Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Terminated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    656,782
    
    
    $
    5.85
    
    
    
    390,312
    
    
    $
    4.89Options exercisable at year-end
    
    
    202,160
    
    
    $
    5.51
    
    
    
    85,702
    
    
    $
    4.89Weighted-average fair value of options
granted during the year
    
    
    
    
    
    $
    6.55
    
    
    
    
    
    
    $
    1.54
  Information pertaining to employee options outstanding at December 31, 2004 is as
follows: Options Outstanding
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageRange of
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Prices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$4.89 - $9.00
    
    
    656,782
    
    
    8.35 years
    
    $
    5.85
    
    
    
    202,160
    
    
    $
    5.51




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 7.
    STOCK-BASED COMPENSATION (Continued) Years Ended December 31,2004
    
    
    2003Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price(Director Plan)Outstanding at beginning of year
    
    
    247,500
    
    
    $
    4.89
    
    
    
    
    
    
    $
    Granted (fixed)
    
    
    
    
    
    
    
    
    
    
    247,500
    
    
    
    4.89Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Terminated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    247,500
    
    
    $
    4.89
    
    
    
    247,500
    
    
    $
    4.89Options exercisable at year-end
    
    
    247,500
    
    
    $
    4.89
    
    
    
    247,500
    
    
    $
    4.89Weighted-average fair value of options
granted during the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1.54
  Information pertaining to director options outstanding at December 31, 2004 is as follows: Options Outstanding
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageRange of
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Prices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$4.89
    
    
    247,500
    
    
    8.25 years
    
    $
    4.89
    
    
    
    247,500
    
    
    $
    4.89
  The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average assumptions: Years Ended December 31,2004
    
    
    2003Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected life
    
    10 years
    
    10 yearsExpected volatility
    
    
    0.01
    %
    
    
    0.01
    %Risk-free interest rate
    
    
    4.52
    %
    
    
    3.82
    %
  NOTE 8.
    EMPLOYEE BENEFIT PLANThe Company has a 401(k) retirement plan covering substantially all employees.
Contributions to the plan charged to expense amounted to $104,132 and $43,450 for the
years ended December 31, 2004 and 2003, respectively.




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 9.
    INCOME TAXESIncome tax expense consists of the following: Years Ended December 31,2004
    
    
    2003Current
    
    $
    2,307,329
    
    
    $
    1,623,688Deferred
    
    
    (531,655
    )
    
    
    (781,612
    )Change in valuation allowance
    
    
    
    
    
    
    (379,699
    )Income tax expense
    
    $
    1,775,674
    
    
    $
    462,377
  The Companys income tax differs from the amounts computed by applying the federal
income tax statutory rates to loss before income taxes. A reconciliation of the
differences is as follows: Years Ended December 31,2004
    
    
    2003Income tax at statutory federal rate
    
    $
    1,627,939
    
    
    $
    767,139State taxes
    
    
    144,432
    
    
    
    70,257Change in valuation allowance
    
    
    
    
    
    
    (379,699
    )Other items
    
    
    3,303
    
    
    
    4,680Income tax expense
    
    $
    1,775,674
    
    
    $
    462,377
  The components of deferred income taxes are as follows: December 31,2004
    
    
    2003Deferred tax assets:Preopening and organization expenses
    
    $
    44,985
    
    
    $
    98,966Deferred gain on sale-leaseback
    
    
    726,368
    
    
    
    Deferred loan fees
    
    
    35,556
    
    
    
    59,784Loan loss reserves
    
    
    902,494
    
    
    
    1,109,733Stock compensation
    
    
    261,586
    
    
    
    34,319Nonaccrual loan interest
    
    
    1,721
    
    
    
    12,322Securities available for sale
    
    
    116,700
    
    
    
    2,089,410
    
    
    
    1,315,124Deferred tax liabilities:Depreciation
    
    
    272,761
    
    
    
    146,830Securities available for sale
    
    
    
    
    
    
    38,580272,761
    
    
    
    185,410Net deferred taxes
    
    $
    1,816,649
    
    
    $
    1,129,714




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 10.
    EARNINGS PER SHAREPresented below is a summary of the components used to
calculate basic and diluted earnings per common share. Years Ended December 31,2004
    
    
    2003Basic Earnings Per Share:Weighted average common shares outstanding
    
    
    5,404,968
    
    
    
    3,858,792Net income
    
    $
    3,012,382
    
    
    $
    1,793,913Basic earnings per share
    
    $
    0.56
    
    
    $
    0.47Diluted Earnings Per Share:Weighted average common shares outstanding
    
    
    5,404,968
    
    
    
    3,858,792Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the year
    
    
    371,370
    
    
    
    116,496Total weighted average common shares and
common stock equivalents outstanding
    
    
    5,776,338
    
    
    
    3,975,288Net income
    
    $
    3,012,382
    
    
    $
    1,793,913Diluted earnings per share
    
    $
    0.52
    
    
    $
    0.45
  NOTE 11.
    COMMITMENTS AND CONTINGENCIESLoan CommitmentsThe Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters of
credit. They involve, to varying degrees, elements of credit risk and interest
rate risk in excess of the amount recognized in the balance sheets. The majority
of all commitments to extend credit and standby letters of credit are variable rate
instruments.The Companys 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.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. A summary of the
Companys commitments is as follows: December 31,2004
    
    
    2003Commitments to extend credit
    
    $
    82,948,327
    
    
    $
    59,576,118Standby letters of credit
    
    
    1,689,625
    
    
    
    492,690$
    84,637,952
    
    
    $
    60,068,808




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 11.
    COMMITMENTS AND CONTINGENCIES (Continued)Loan Commitments (Continued)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. Commitments
generally have fixed expiration dates or other termination clauses and may require
payment of a fee. 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 the
Company upon extension of credit, is based on managements credit evaluation of the
party. Collateral held varies, but may include accounts receivable, inventory,
property and equipment, residential real estate and income-producing commercial
properties.Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees 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 held varies as specified above and is
required in instances which the Company deems necessary.At December 31, 2004 and 2003, the carrying amount of liabilities related to the
Companys obligation to perform under financial standby letters of credit was
insignificant. The Company has not been required to perform on any financial
standby letters of credit, and the Company has not incurred any losses on financial
standby letters of credit for the years ended December 31, 2004 and 2003.Employment AgreementsThe Company has entered into an employment agreement with its president with an
initial term of five years that requires an annual salary of $160,000. The
presidents annual salary as of December 31, 2004 is $300,000. The agreement is
automatically extended for an additional year on the initial termination date and
each anniversary thereafter. The president is entitled to receive an annual salary
increase and is eligible to incentives and performance bonuses as may be determined
by the Companys Board of Directors.The Company has also entered into employment agreements with three other officers
calling for annual salaries totaling $340,000. The three officers annual salaries
as of December 31, 2004 are $391,000. These agreements have the same annual salary
increase, incentive and performance bonuses as does the presidents employment
agreement.ContingenciesIn the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the Companys financial
statements.




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 12.
    CONCENTRATIONS OF CREDITThe Company originates primarily commercial and commercial real estate, residential
real estate, and consumer loans to customers in Fulton County and surrounding
counties. The ability of the majority of the Companys customers to honor their
contractual loan obligations is dependent on the economy in these areas.Ninety-seven percent of the Companys loan portfolio is secured by real estate, of
which a substantial portion is secured by real estate in the Companys primary market
area. Accordingly, the ultimate collectibility of the loan portfolio is susceptible
to changes in market conditions in the Companys primary market area.The Company, as a matter of policy, does not generally extend credit to any single
borrower or group of related borrowers in excess of 25% of the lesser of the Banks
statutory capital or net assets as defined, or approximately $10,875,000.NOTE 13.
    REGULATORY MATTERSThe Bank is subject to certain restrictions on the amount of dividends that may be
declared without prior regulatory approval. At December 31, 2004, approximately
$1,846,000 of dividends could be declared without regulatory approval.The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect on the
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices.
Capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.Quantitative measures established by regulation to ensure capital adequacy require
the Company and Bank to maintain minimum amounts and ratios of Total and Tier I
capital to risk-weighted assets, as defined, and of Tier I capital to average assets,
as defined. Management believes, as of December 31, 2004 and 2003, the Company and
Bank met all capital adequacy requirements to which they are subject.As of December 31, 2004, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the Banks category. Prompt
corrective action provisions are not applicable to bank holding companies.




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 13.
    REGULATORY MATTERS (Continued)The Company and Banks actual capital amounts and ratios are presented in the
following table: To Be WellFor Capital
    
    
    Capitalized UnderAdequacy
    
    
    Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in Thousands)December 31, 2004:Total Capital to Risk Weighted AssetsConsolidated
    
    $
    53,186
    
    
    
    12.50%
    
    
    $
    34,029
    
    
    
    8%
    
    
    $
    42,537
    
    
    
    10%Bank
    
    $
    51,615
    
    
    
    12.18%
    
    
    $
    33,909
    
    
    
    8%
    
    
    $
    42,387
    
    
    
    10%Tier I Capital to Risk Weighted AssetsConsolidated
    
    $
    49,753
    
    
    
    11.70%
    
    
    $
    17,015
    
    
    
    4%
    
    
    $
    25,522
    
    
    
    6%Bank
    
    $
    48,182
    
    
    
    11.37%
    
    
    $
    16,955
    
    
    
    4%
    
    
    $
    25,432
    
    
    
    6%Tier I Capital to Average AssetsConsolidated
    
    $
    49,753
    
    
    
    11.62%
    
    
    $
    17,121
    
    
    
    4%
    
    
    $
    21,401
    
    
    
    5%Bank
    
    $
    48,182
    
    
    
    11.30%
    
    
    $
    17,052
    
    
    
    4%
    
    
    $
    21,315
    
    
    
    5%December 31, 2003:Total Capital to Risk Weighted AssetsConsolidated
    
    $
    29,186
    
    
    
    10.88%
    
    
    $
    21,468
    
    
    
    8%
    
    
    $
    26,835
    
    
    
    10%Bank
    
    $
    27,834
    
    
    
    10.41%
    
    
    $
    21,393
    
    
    
    8%
    
    
    $
    26,741
    
    
    
    10%Tier I Capital to Risk Weighted AssetsConsolidated
    
    $
    25,829
    
    
    
    9.63%
    
    
    $
    10,734
    
    
    
    4%
    
    
    $
    16,101
    
    
    
    6%Bank
    
    $
    24,488
    
    
    
    9.16%
    
    
    $
    10,697
    
    
    
    4%
    
    
    $
    16,045
    
    
    
    6%Tier I Capital to Average AssetsConsolidated
    
    $
    25,829
    
    
    
    9.71%
    
    
    $
    10,635
    
    
    
    4%
    
    
    $
    13,294
    
    
    
    5%Bank
    
    $
    24,488
    
    
    
    9.26%
    
    
    $
    10,578
    
    
    
    4%
    
    
    $
    13,223
    
    
    
    5%




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 14.
    FAIR VALUE OF FINANCIAL INSTRUMENTSThe fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair value is
best determined based upon quoted market prices. However, in many instances, there
are no quoted market prices for the Companys various financial instruments. In
cases where quoted market prices are not available, fair value is based on discounted
cash flows or other valuation techniques. These techniques are significantly
affected by the assumptions used, including the discount rate and estimates of future
cash flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. SFAS No. 107, Disclosures about Fair Value
of Financial Instruments,excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented may not necessarily represent the underlying fair value of the
Company.The following methods and assumptions were used by the Company in estimating the fair
value of its financial instruments.Cash, Due From Banks and Interest-Bearing Deposits in Banks:The carrying amounts of
cash, due from banks and interest-bearing deposits in banks approximate fair values.Securities:Fair values for securities are based on available quoted market prices.
The carrying values of equity securities with no readily determinable fair value
approximate fair values.Loans:The carrying amount of variable-rate loans that reprice frequently and have
no significant change in credit risk approximates fair value. The fair value of
fixed-rate loans is estimated based on discounted contractual cash flows, using
interest rates currently being offered for loans with similar terms to borrowers with
similar credit quality. The fair value of impaired loans is estimated based on
discounted contractual cash flows or underlying collateral values, where applicable.Deposits:The carrying amount of demand deposits, savings deposits, and
variable-rate certificates of deposit approximates fair value. The fair value of
fixed-rate certificates of deposit is estimated based on discounted contractual cash
flows using interest rates currently being offered for certificates of similar
maturities.Federal Funds Purchased and Other Borrowings:The carrying amount of variable rate
borrowings, federal funds purchased, and securities sold under repurchase agreements
approximate fair value. The fair value of fixed rate other borrowings are estimated
based on discounted contractual cash flows using the current incremental borrowing
rates for similar type borrowing arrangements.Accrued Interest:The carrying amounts of accrued interest approximate their fair
values.Off-Balance sheet Instruments:The carrying amount of commitments to extend credit
and standby letters of credit approximates fair value. The carrying amount of the
off-balance sheet financial instruments is based on fees charged to enter into such
agreements.




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 14.
    FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)The carrying amount and estimated fair value of the Companys financial instruments
were as follows: December 31, 2004
    
    
    December 31, 2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash, due from banks and interest-
bearing deposits in banks
    
    $
    1,562,673
    
    
    $
    1,562,673
    
    
    $
    1,807,109
    
    
    $
    1,807,109Federal funds sold
    
    
    
    
    
    
    
    
    
    
    2,439,000
    
    
    
    2,439,000Securities
    
    
    49,160,433
    
    
    
    49,160,433
    
    
    
    27,852,502
    
    
    
    27,852,502Loans
    
    
    382,472,652
    
    
    
    383,480,184
    
    
    
    235,346,005
    
    
    
    240,013,338Accrued interest receivable
    
    
    1,823,693
    
    
    
    1,823,693
    
    
    
    981,167
    
    
    
    981,167Financial liabilities:Deposits
    
    
    373,272,251
    
    
    
    373,840,499
    
    
    
    231,777,722
    
    
    
    232,089,284Federal funds purchased
    
    
    4,279,000
    
    
    
    4,279,000
    
    
    
    10,000,000
    
    
    
    10,000,000Other borrowings
    
    
    21,186,000
    
    
    
    21,186,000
    
    
    
    16,000,000
    
    
    
    16,000,000Accrued interest payable
    
    
    1,299,366
    
    
    
    1,299,366
    
    
    
    358,678
    
    
    
    358,678
  NOTE 15.
    SUPPLEMENTAL FINANCIAL DATAComponents of other operating expenses in excess of 1% of revenue are as follows: Years Ended December 31,2004
    
    
    2003Board of Director fees
    
    $
    379,500
    
    
    $
    122,000Data processing
    
    
    276,366
    
    
    
    199,182Consulting fees
    
    
    120,747
    
    
    
    200,044




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 16.
    PARENT COMPANY FINANCIAL INFORMATIONThe following information presents the condensed balance sheets as of December 31,
2004 and 2003 and statements of income and cash flows of Integrity Bancshares, Inc.,
Inc. for the years ended December 31, 2004 and 2003. CONDENSED BALANCE SHEETS 2004
    
    
    2003AssetsCash
    
    $
    227,321
    
    
    $
    434,420Interest-bearing deposits in banks
    
    
    53,129
    
    
    
    52,808Investment in subsidiary
    
    
    47,983,460
    
    
    
    24,551,205Securities available for sale
    
    
    690,000
    
    
    
    690,000Other assets
    
    
    800,716
    
    
    
    221,819Total assets
    
    $
    49,754,626
    
    
    $
    25,950,252LiabilitiesOther borrowings
    
    $
    6,186,000
    
    
    $
    6,000,000Other liabilities
    
    
    13,800
    
    
    
    57,982Total liabilities
    
    
    6,199,800
    
    
    
    6,057,982Stockholders equity
    
    
    43,554,826
    
    
    
    19,892,270Total liabilities and stockholders equity
    
    $
    49,754,626
    
    
    $
    25,950,252




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 16.
    PARENT COMPANY FINANCIAL INFORMATION (Continued) CONDENSED STATEMENTS OF INCOME 2004
    
    
    2003Interest income
    
    $
    8,817
    
    
    $
    1,419Expenses:Stock compensation
    
    
    602,259
    
    
    
    90,945Interest
    
    
    288,675
    
    
    
    34,232Other
    
    
    212,521
    
    
    
    83,079Total expenses
    
    
    1,103,455
    
    
    
    208,256Loss before income tax benefits and
undistributed income of subsidiary
    
    
    (1,094,638
    )
    
    
    (206,837
    )Income tax benefits
    
    
    (413,070
    )
    
    
    (118,110
    )Loss before equity in undistributed
income of subsidiary
    
    
    (681,568
    )
    
    
    (88,727
    )Equity in undistributed income of subsidiary
    
    
    3,693,950
    
    
    
    1,882,640Net income
    
    $
    3,012,382
    
    
    $
    1,793,913




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 16.
    PARENT COMPANY FINANCIAL INFORMATION (Continued) CONDENSED STATEMENTS OF CASH FLOWS 2004
    
    
    2003OPERATING ACTIVITIESNet income
    
    $
    3,012,382
    
    
    $
    1,793,913Adjustments to reconcile net income to net
cash used in operating activities:Equity in undistributed income of subsidiary
    
    
    (3,693,950
    )
    
    
    (1,882,640
    )Net other operating activities
    
    
    165,181
    
    
    
    (72,892
    )Net cash used in operating activities
    
    
    (516,387
    )
    
    
    (161,619
    )INVESTING ACTIVITIESNet (increase) decrease in interest-bearing deposits in banks
    
    
    (321
    )
    
    
    305,128Investment in subsidiary
    
    
    (20,000,000
    )
    
    
    (10,100,000
    )Purchase of securities available for sale
    
    
    
    
    
    
    (690,000
    )Net cash used in investing activities
    
    
    (20,000,321
    )
    
    
    (10,484,872
    )FINANCING ACTIVITIESNet proceeds from other borrowings
    
    
    
    
    
    
    6,000,000Net proceeds from sale of common stock
    
    
    20,309,609
    
    
    
    4,563,376Purchase of treasury stock
    
    
    
    
    
    
    (168,972
    )Net cash provided by financing activities
    
    
    20,309,609
    
    
    
    10,394,404Net decrease in cash
    
    
    (207,099
    )
    
    
    (252,087
    )Cash at beginning of year
    
    
    434,420
    
    
    
    686,507Cash at end of year
    
    $
    227,321
    
    
    $
    434,420
  NOTE 17.
    STOCK SPLITThe Company declared a three-for-two stock split in November, 2004, in the form of a
common stock dividend. The stock split was payable on January 24, 2005 to
shareholders of record as of the close of business on January 10, 2005. All per
share figures included in the accompanying financial statements have been adjusted to
reflect the stock split.