INTEGRITY BANCSHARES, INC.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

Commission file number: 333-95335

INTEGRITY BANCSHARES, INC.


Georgia		58-2508612
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

11140 State Bridge Road
P.O. Box 2008
Alpharetta, Georgia 30022
(Address of Principal Executive Offices)

(770) 777-0324
(Issuer’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No þ

Check whether the issuer (1) filed all reports required 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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):


Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No o

As of June 30, 2005, the aggregate market value of the Common Stock held by persons other than directors and executive officers of the registrant was $123,520,896, as determined by reference to the quoted purchase price for the Common Stock in the Over-the-Counter Market on June 30, 2005 (the registrant believes, however, that it qualifies as a non-accelerated filer because it is entitled to use small business issuer reports for periods relating to 2005). The exclusion of all directors and executive officers of the registrant for purposes of this calculation should not be construed as a determination that any particular director or executive officer is an affiliate of the registrant.

There were 14,506,342 shares of Common Stock outstanding as of March 13, 2006

DOCUMENTS INCORPORATED BY REFERENCE
Part III information is incorporated herein by reference, pursuant to Instruction G to Form 10-K, from Integrity’s Proxy Statement for its 2006 Annual Shareholders’ Meeting.

INTEGRITY BANCSHARES, INC.

FORM 10-K CROSS-REFERENCE INDEX


		Page
		Number
Part I
1.	Description of Business	3

1A.	Risk Factors	17

1B.	Unresolved Staff Comments	19

2.	Description of Property	20

3.	Legal Proceedings	21

4.	Submission of Matters to a Vote of Security Holders	21

Part II
5.	Market for the Common Equity, Related Shareholder Matters, and Issuer Repurchases of Equity Securities	21

6.	Selected Financial Data	22

7.	Management’s Discussion and Analysis of Financial Condition And Results of Operation	23

7a.	Quantitative and Qualitative Disclosures About Market Risk	44

8.	Financial Statements and Supplementary Data	45

9.	Not applicable	45

9A.	Controls and Procedures	45

9B.	Other Information	47

Part III
10.	Directors and Executive Officers of the Registrant	48

11.	Executive Compensation	48

12.	Security Ownership of Certain Beneficial Owners and Management	48

13.	Certain Relationships and Related Transactions	48

14.	Principal Accountant Fees and Services	48

Part IV
15.	Exhibits and Financial Statement Schedules	49

	Signatures	50
EX-3.2 ARTICLES OF AMENDMENT
EX-13.1 INTEGRITY BANCSHARES, INC. FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005
EX-23 CONSENT OF MAULDIN & JENKINS, LLC
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE PFO
EX-32.1 SECTION 906, CERTIFICAITON OF THE CEO
EX-32.2 SECTION 906, CERTIFICATION OF THE PFO

Cautionary Notice Regarding Forward-Looking Statements

Various matters discussed in this Annual Report on Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements may involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of Integrity Bancshares, Inc. (“Integrity” or the “Company”) to be materially different from the results described in such forward-looking statements.

Actual results may differ materially from the results anticipated in forward-looking statements in our Form 10-K due to a variety of factors including, without limitation:

	•		The effects of future economic conditions in our market areas and generally in the United States;

	•		United States governmental and international monetary and fiscal policies;

	•		Legislative and regulatory changes;

	•		The effects of changes in interest rates on the level and composition of deposits, loan demand, the value of loan collateral, and interest rate risks; and

	•		The effects of competition from commercial banks, thrifts, consumer finance companies, and other financial institutions operating in our market area and elsewhere.

All forward-looking statements attributable to the Company are expressly qualified in their entirety by this cautionary notice. The Company disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Integrity Bancshares, Inc.

Integrity Bancshares, Inc. (“we” or “us”) was organized in November, 1999 as a Georgia corporation for the purpose of acquiring all of the common stock of Integrity Bank (“the Bank”), a Georgia bank which opened for business on November 1, 2000. We are a bank holding company within the meaning of the Bank Holding Company Act of 1956 and the Georgia Bank Holding Company Act.

We were organized to facilitate the Bank’s ability to serve its customers’ requirements for financial services. The holding company structure provides flexibility for expansion of our banking business through the possible acquisition of other financial institutions and the provision of additional banking-related services which the traditional commercial bank may not provide under present laws. We have no present plans to acquire any operating subsidiaries other than the Bank. However, we may make acquisitions in the future if such acquisitions are deemed to be in the best interest of our shareholders. Any acquisitions will be subject to certain regulatory approvals and requirements. Future expansion is planned by opening one or two new branches of the Bank each year in a high-growth area of metro Atlanta.

Integrity Bank

Integrity Bank is a full service commercial bank headquartered at 11140 State Bridge Road, Alpharetta, Fulton County, Georgia 30022. The Bank’s primary service area is Northern Fulton County, Georgia. However, the Bank also serves the adjacent counties, or parts thereof, of Cobb, Gwinnett, and Forsyth to a lesser extent.

The principal business of the Bank is to accept deposits from the public and to make loans and other investments. The principal source of funds for the Bank’s loans and other investments are customer deposit accounts, which include non-interest bearing demand accounts, time deposits, savings and other interest bearing transaction accounts, and amortization and prepayments of loans and investments. Other sources of funds include time deposits issued through an Internet advertising network, Federal Home Loan Bank borrowings, and trust

preferred securities. The amount and term of each funding source is dependent on our funding needs for loans and investments. When funding needs are identified, each funding source is evaluated to determine which mix would be the best source for the funding need.

The principal sources of income for the Bank are interest and fees collected on loans, and interest and dividends collected on other investments. The principal expenses of the Bank are interest paid on interest bearing deposits and other borrowings, employee compensation, office expenses and other overhead expenses.

Types of Loans

Below is a description of the principal categories of loans made by the Bank and the relative risks involved with each category.

Construction and Development Loans

The Bank makes residential construction and development loans to customers in our market area. Loans are granted for both speculative projects and those being built with end buyers already secured. This type of loan is subject primarily to market and general economic risk caused by inventory build-up in periods of economic prosperity. During times of economic stress this type of loan has typically had a greater degree of risk than other loan types. To mitigate that risk, the board of directors and management reviews the entire portfolio on a monthly basis. The percentage of our portfolio being built on a speculative basis is tracked very closely. On a quarterly basis the portfolio is segmented by market area to allow analysis of exposure and a comparison to current inventory levels in these areas. To further mitigate risk, this type of loan is accorded a larger percentage loan loss allowance than other loan types. Loan policy also provides for limits on speculative lending by borrower and by real estate project.

Construction and development loans totaled $385 million as of December 31, 2005, which equaled approximately 59% of the total loan portfolio.

Commercial and Residential Real Estate

The Bank grants loans to borrowers secured by commercial and residential real estate located in our market area. In underwriting these types of loans we consider the historic and projected future cash flows of the real estate. We make an assessment of the physical condition and general location of the property and the effect these factors will have on its future desirability from a tenant standpoint.

Commercial real estate offers some risks not found in traditional residential real estate lending. Repayment is dependent upon successful management and marketing of properties and on the level of expense necessary to maintain the property. Repayment of these loans may be adversely affected by conditions in the real estate market or the general economy. Also, commercial real estate loans typically involve relatively large loan balances to single borrowers. To mitigate these risks, we monitor our loan concentration, and loans are audited by a third party auditor. This type of loan generally has a shorter maturity than other loan types, giving the Bank an opportunity to reprice, restructure or decline to renew the credit.

Commercial and residential real estate loans totaled $219 million as of December 31, 2005, which was approximately 34% of the total loan portfolio.

Commercial and Industrial Loans

To a lesser degree, the Bank makes loans to small and medium-sized businesses in our primary trade area for purposes such as new or upgrades to plant and equipment, inventory acquisition and various working capital purposes. Commercial loans are granted to borrowers based on cash flow, ability to repay and degree of management expertise. This type of loan may be subject to many different types of risk, which will differ depending on the particular industry a borrower is engaged in. General risks to an industry, or segment of an industry, are monitored by senior management on an ongoing basis. On a regular basis, commercial and industrial borrowers are required to submit statements of financial condition relative to their business to the Bank for review.

This type of loan will usually be collateralized by general intangibles, inventory, equipment or real estate. Collateral is subject to risk relative to conversion to a liquid asset, if necessary, as well as risks associated with

degree of specialization, mobility and general collectability in a default situation. To mitigate this risk to collateral, these types of loans are underwritten to strict standards including valuations and general acceptability based on the Bank’s ability to monitor its ongoing health and value.

Commercial and industrial loans amounted to $46 million as of December 31, 2005, which was approximately 7% of the total loan portfolio.

Consumer Loans

On a limited basis, the Bank offers a variety of consumer loans to retail customers in the communities we serve. Consumer loans in general carry a moderate degree of risk compared to other loans. Risk on consumer type loans is generally managed through policy limitations on debt levels consumer borrowers may carry and limitations on loan terms and amounts depending upon collateral type.

Various types of consumer loans include the following:

	•		Home equity loans — open and closed end

	•		Vehicle financing

	•		Loans secured by deposits

	•		Overdraft protection lines

	•		Secured and unsecured personal loans

Consumer loans amounted to $1.4 million as of December 31, 2005, which was less than 1% of the total loan portfolio.

Loan participations

The Bank sells loan participations in the ordinary course of business when an originated loan or loan relationship exceeds its internal loan limit or its legal lending limit as defined by state banking laws. These loan participations are sold to other financial institutions without recourse, and the Bank retains a portion of the interest income as a fee for servicing the sold loans.

As of December 31, 2005 the Bank had 83 sold loan participations with a total principal amount of $97 million, which equaled approximately 14.8% of our total loan portfolio.

The Bank will also purchase loan participations from time to time from other banks in the ordinary course of business, usually without recourse. Purchased loan participations are underwritten in accordance with the Bank’s loan policy and represent a source of loan growth to the Bank. The Bank believes that the risk related to purchased loan participations is consistent with other similar type loans in the loan portfolio. If a purchased loan participation defaults, the Bank usually has no recourse against the selling bank but will take other commercially reasonable steps to minimize its loss.

As of December 31, 2005 the Bank had 10 purchased loan participations. The total principal amount of these participations was $16 million, which was approximately 3% of the total loan portfolio.

Loan participations are also a component of the Bank’s liquidity management. Loans can be purchased as a means of increasing interest income when excess liquidity is available, since loans typically yield a higher rate of interest than short-term cash investments. Conversely, loans can be sold as needed as a means of obtaining liquidity.

Management’s policy for determining the loan loss allowance

The allowance for loan losses represents management’s assessment of the risk associated with extending credit and its evaluation of the quality of the loan portfolio. In calculating the adequacy of the loan loss allowance, management evaluates the following factors:

	•		The asset quality of individual loans.

	•		Changes in the national and local economy and business conditions/development, including underwriting standards, collections, charge off and recovery practices.

	•		Changes in the nature and volume of the loan portfolio.

	•		Changes in the experience, ability and depth of the lending staff and management.

	•		Changes in the trend of the volume and severity of past dues and classified loans and trends in the volume of non-accrual loans, troubled debt restructurings and other modifications.

	•		Possible deterioration in collateral segments or other portfolio concentrations.

	•		Historical loss experience (when available) used for pools of loans (i.e. collateral types, borrowers, purposes, etc.)

	•		Changes in the quality of the institution’s loan review system and the degree of oversight by the Bank’s Board of Directors.

	•		The effect of external factors such as competition and the legal and regulatory requirement on the level of estimated credit losses in the Bank’s current loan portfolio.

	•		Off-balance sheet credit risks.

These factors are evaluated at least quarterly and changes in the asset quality of individual loans are evaluated more frequently as needed.

All of our loans are assigned individual loan grades when underwritten. The Bank, using guidance established by the FDIC and the State of Georgia Department of Banking and Finance, has established minimum general reserves based on the asset quality grade of the loan. General reserve factors applied to each rating grade are based upon management’s experience and common industry and regulatory guidelines.

After a loan is underwritten and booked, loans are monitored or reviewed by the account officer, management, and external loan review personnel during the life of the loan. Payment performance is monitored monthly for the entire loan portfolio, account officers contact customers during the course of business and may be able to ascertain if weaknesses are developing with the borrower, external loan personnel perform an independent review annually, and federal and state banking regulators perform periodic reviews of the loan portfolio. If weaknesses develop in an individual loan relationship and are detected then the loan is downgraded and higher reserves are assigned based upon management’s assessment of the weaknesses in the loan that may affect full collection of the debt. If a loan does not appear to be fully collectible as to principal and interest then the loan is recorded as a non-accruing loan and further accrual of interest is discontinued while previously accrued but uncollected interest is reserved against income. If we believe that a loan will not be collected in full then the allowance for loan and lease losses is increased to reflect management’s estimate of potential exposure of loss.

Our net loan losses to average total loans was 0.26% percent for the year ended 2005 and 0.92% for 2004. Historical performance is not an indicator of future performance and forward results could differ materially, but management believes that based upon historical performance, known factors, management’s judgment, and regulatory methodologies, that the current methodology used to determine the adequacy of the allowance for loan and lease losses is reasonable.

Our allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer banks identified by the regulators. During their routine examinations of banks regulatory agencies may require a bank to make additional provisions to its allowance for loan losses when, in the opinion of the regulators, credit evaluations and allowance for loan loss methodology differ materially from those of management.

While it is our policy to charge off in the current period loans for which a loss is considered probable, there are additional risks of future losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, management’s judgment as to the adequacy of the allowance is necessarily approximate and imprecise.

Management’s policy for investing in securities

Funds that are not otherwise needed to meet the loan demand of the Bank may be invested in accordance with the Bank’s investment policy. The purpose of the investment policy is to provide a guideline by which these funds can best be invested to earn the maximum return for the Bank, yet still maintain sufficient liquidity to meet fluctuations in the Bank’s loan demand and deposit structure. The investment policy adheres to the following objectives:

	•		Provide an investment medium for funds which are not needed to meet loan demand or deposit withdrawal.

	•		Optimize income generated from the investment account consistent with the stated objectives for liquidity and quality standards.

	•		Meet regulatory standards.

	•		Provide collateral which the financial institution is required to pledge against public monies.

	•		Provide an investment medium for funds which may be needed for liquidity purposes.

	•		Provide an investment medium which will balance market and credit risk for other assets and the financial institution’s liability structure.

Industry and competition

The Bank currently has four branch offices. Three of the branches are full-service. Two of the full-service branches are in Northern Fulton County. The third full-service branch is located in neighboring Cobb County. A loan production office is located in neighboring Gwinnett County. The loan production office is currently in a leased office space, but a full-service branch is expected to be completed in 2006 and will replace the loan production office. A second loan production office was opened in late 2005 in Forsyth County and is currently in a leased office space. A full-service branch serving Forsyth County is expected to be completed in 2006 and will also replace the loan production office.

All of these counties have a competitive banking market with established banks of all sizes. However, we believe that the growth in these counties will allow new branches to establish a loan and deposit base and allow them to become profitable in a reasonable period of time. A key component of our growth strategy is to hire experienced bankers in growing areas of Metropolitan Atlanta before we acquire building locations. New locations are then built in areas where the employee’s customer base is located.

Employees

The Bank had 62 full-time employees as of February 28, 2005. Integrity Bancshares, Inc. does not have any employees who are not also employees of the Bank.

Supervision and Regulation

General

We are subject to state and federal banking laws and regulations that impose specific requirements or restrictions and provide for general regulatory oversight over virtually all aspects of our operations. These laws and regulations generally are intended to protect depositors, not shareholders. This discussion is only a summary of various statutory and regulatory provisions. This summary is qualified by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on our business and prospects.

Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, numerous additional regulatory requirements have been placed on the banking industry during the past 15 years. On November 12, 1999, the President signed into law a financial services modernization act which effectively repealed the anti-affiliation provisions of the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act. Legislative changes and the policies of various regulatory authorities may affect our operations. We are unable to reasonably predict the nature or the extent of the effect on our business and earnings that fiscal or monetary policies, economic control or new federal or state legislation may have in the future.

Integrity Bancshares, Inc

Integrity Bancshares, Inc. is a bank holding company registered with the Board of Governors of the Federal Reserve System and the Georgia Department of Banking and Finance under the Bank Holding Company Act of 1956, as amended, and the Georgia Bank Holding Company Act. We are subject to the supervision, examination and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve, and the Georgia Bank Holding Company Act and the regulations of the Georgia Department of Banking and Finance.

The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

	•		it may acquire direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the bank;

	•		it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or

	•		it may merge or consolidate with any other bank holding company.

The Bank Holding Company Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States. In addition, the Federal Reserve will not approve a transaction the effect of which may be substantially to lessen competition or to tend to create a monopoly, or that in any other manner would be in restraint of trade. However, such transactions may be approved in the event the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the communities to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the communities to be served. Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues generally focuses on the parties’ performance under the Community Reinvestment Act of 1977.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 facilitates interstate branching and permits the establishment of agency relationships across state lines. The Interstate Banking Act also permits bank holding companies to acquire banks in any state without regard to whether the transaction is prohibited under the laws of such state, subject to certain state provisions, including minimum age requirements of banks that are the target of the acquisition. The minimum age of local banks subject to interstate acquisition is five years.

In response to the Interstate Banking Act, the Georgia General Assembly adopted the Georgia Interstate Banking Act, which provides that:

	•		interstate acquisitions by institutions located in Georgia will be permitted in states which also allow interstate acquisitions; and

	•		interstate acquisitions of institutions located in Georgia will be permitted by institutions located in states which allow interstate acquisitions.

Additionally, in 1996, the Georgia General Assembly adopted the Georgia Interstate Branching Act, which permits Georgia-based banks and bank holding companies owning banks outside of Georgia and all non-Georgia banks and bank holding companies owning banks in Georgia the right to merge any bank into an interstate branch network. The Georgia Interstate Branching Act also allows banks to establish de novo branches on an unlimited basis throughout Georgia, subject to the prior approval of the Georgia Department of Banking and Finance.

Except as amended by the Gramm-Leach-Bliley Act of 1999 discussed below, the Bank Holding Company Act generally prohibits a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries. Bank holding companies are also generally prohibited from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Activities determined by the Federal Reserve to fall within this category include acquiring or servicing loans, leasing personal property, conducting discount securities brokerage activities, performing certain data processing services, acting as agent or broker in selling certain types of credit insurance, and performing certain insurance underwriting activities. The BHC Act does not place territorial limitations on permissible non-banking activities of bank holding companies. The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any non-banking activity when it has reasonable cause to believe that continuation of such activity constitutes a serious risk to the safety and soundness of any bank subsidiary of that bank holding company.

Integrity Bank

Integrity Bank is incorporated under the laws of the State of Georgia and is subject to examination by the Georgia Department of Banking and Finance. The Georgia Department regulates all areas of the Bank’s commercial banking operations, including, without limitation, loans, deposits, reserves, mergers, reorganizations, issuance of securities, payment of dividends, and the establishment of branches.

The Bank is also a member of the Federal Deposit Insurance Corporation, and as such, the FDIC, to the maximum extent provided by law, insures its deposits. The Bank is also subject to numerous state and federal statutes and regulations that affect its business, activities, and operations. The FDIC and the Georgia Department of Banking and Finance regularly examine the operations of the Bank and have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Gramm-Leach-Bliley Act of 1999

On November 12, 1999, the President signed into law the Gramm-Leach-Bliley Act of 1999, which breaks down many of the barriers to affiliations among banks and securities firms, insurance companies, and other financial service providers. This new law provides financial organizations with the flexibility to structure new affiliations through a holding company structure or a financial subsidiary. As a result, the number and type of entities competing with us in our markets could increase.

The Gramm-Leach-Bliley Act also covers various topics such as insurance, unitary thrifts, privacy protection provisions for customers of financial institutions, the Federal Home Loan Bank system’s modernization, automatic teller machine reform, the Community Reinvestment Act and certain changes related to the securities industry.

The legislation amends the Bank Holding Company Act to clarify that a bank holding company may hold shares of any company that the Federal Reserve has determined to be engaged in activities that were sufficiently closely related to banking. This act also amends the Bank Holding Company Act to establish a new type of bank holding company — the “financial holding company.” Financial holding companies have the authority to engage in

financial activities in which other bank holding companies may not engage. Financial holding companies may also affiliate with companies that are engaged in financial activities. These financial activities include activities that are:

	•		financial in nature;

	•		incidental to an activity that is financial in nature; or

	•		complimentary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system in general.

The Federal Reserve and the Secretary of the Treasury may determine which activities meet these standards. However, the Gramm-Leach-Bliley Act explicitly lists certain activities as being financial in nature. For example, some of these activities are:

	•		lending, exchanging, transferring or investing for others;

	•		safeguarding money or securities;

	•		insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes in any state;

	•		providing financial, investment or economic advice;

	•		issuing or selling interests in pools of assets that a bank could hold directly;

	•		underwriting, dealing in or making markets in securities; and

	•		engaging within the United States in any activity that a bank holding company could engage in outside of the United States, if the Federal Reserve has found that the activity was usual in connection with banking or other financial operations internationally.

The Gramm-Leach-Bliley Act also directs the Federal Reserve to adopt a regulation or order defining certain additional activities as financial in nature, to the extent that they are consistent with that act. These include:

	•		lending, exchanging, transferring or investing for others or safeguarding financial assets other than money or securities;

	•		providing any device or other instrumentality for transferring financial assets; and

	•		arranging, effecting or facilitating financial transactions for third parties.

Not all bank holding companies may become financial holding companies. A bank holding company must meet three requirements before becoming a financial holding company:

	•		all of the bank holding company’s depository institution subsidiaries must be well capitalized;

	•		all of the bank holding company’s depository institution subsidiaries must be well managed; and

	•		the bank holding company must file with the Federal Reserve a declaration of its election to become a financial holding company, including a certification that its depository institution subsidiaries meet the prior two criteria.

With only a few exceptions, in order to exercise the powers granted to them under the Gramm-Leach-Bliley Act, a financial holding company or insured depository institution also must meet the Community Reinvestment Act’s requirements. If any insured depository institution did not receive a Community Reinvestment Act rating of at least “satisfactory” at its most recent examination, the regulatory agencies are to prevent the insured depository institution or financial holding company from exercising the new powers, either directly or through a subsidiary.

Payment of dividends

Integrity Bancshares, Inc. is a legal entity separate and distinct from our banking subsidiary. Our principal source of cash flow, including cash flow to pay dividends to our shareholders, is dividends from Integrity Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank, as well as by us to our shareholders.

If, in the opinion of the federal banking regulators, a depository institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such institution cease and desist from such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. See “Prompt Corrective Action.” Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.

In addition, the Georgia Financial Institutions Code and the regulations of the Georgia Department of Banking and Finance provide:

	•		that dividends of cash or property may be paid only out of the retained earnings of the bank;

	•		that dividends may not be paid if the bank’s paid-in capital and retained earnings which are set aside for dividend payment and other distributions do not, in combination, equal at least 20% of the bank’s capital stock; and

	•		that dividends may not be paid without prior approval of the Georgia Department of Banking and Finance if:

	•		the bank’s total classified assets exceed 80% of its equity capital;

	•		the aggregate amount of dividends to be declared exceeds 50% of the bank’s net profits after taxes but before dividends for the previous calendar year; or

	•		the ratio of equity capital to total adjusted assets is less than 6%.

Applying these dividend restrictions, and without prior approval of the Georgia Department of Banking and Finance, as of December 31, 2005, the Bank could pay a maximum dividend of $3,756,000 to us. Our ability to pay dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.

Capital adequacy

We are required to comply with the capital adequacy standards established by the Federal Reserve, and the Federal Deposit Insurance Corporation in the case of the Bank. Here are two basic measures of capital adequacy for bank holding companies that have been promulgated by the Federal Reserve: a risk-based measure and a leverage measure. All applicable capital standards must be satisfied for a bank holding company to be considered in compliance.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid, low-risk assets. Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The minimum guideline for the ratio of total capital to risk-weighted assets is 8.0%. At least half of total capital must be comprised of Tier 1 Capital, which is common stock, undivided profits, minority interests in the

equity accounts of consolidated subsidiaries and non-cumulative perpetual preferred stock, less goodwill and certain other intangible assets. The remainder may consist of Tier 2 Capital, which is subordinated debt, other preferred stock and a limited amount of loan loss reserves. As of December 31, 2005, the Bank’s total risk-based capital ratio and its Tier 1 risk-based capital ratio were 10.35% and 9.59%, respectively.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, of 3.0% for bank holding companies that meet specified criteria. All other bank holding companies generally are required to maintain a leverage ratio of at least 3%, plus an additional cushion of 100 to 200 basis points. The Bank’s leverage ratio as of December 31, 2005 was 9.80%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital leverage ratio” and other indicia of capital strength in evaluating proposals for expansion or new activities.

In 2003 we raised $6 million through the issuance of trust preferred securities. These securities have a 30-year maturity, are callable without penalty after five years, and pay a floating rate based on three-month LIBOR plus 285 basis points. The principal balance of these securities is includable in tier one capital.

The capital ratios required for a well-capitalized status are: (i) Total Capital of 10.0% or greater, (ii) Tier I Capital of 6.0% or greater, and (iii) a Leverage Capital Ratio of 5.0% or greater. We exceeded all of the required ratios as of December 31, 2005. The Bank is also subject to risk-based and leverage capital requirements adopted by the Federal Deposit Insurance Corporation, which are substantially similar to those adopted by the Federal Reserve for bank holding companies. The Bank was in compliance with applicable minimum capital requirements as of December 31, 2005.

In February 2006 we raised an additional $27 million through the issuance of trust preferred securities. These securities have a 30-year maturity, are callable without penalty after five years, and pay a floating rate based on three-month LIBOR plus 144 basis points.

Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the Federal Deposit Insurance Corporation, a prohibition on the taking of brokered deposits, and certain other restrictions on its business. As described below, substantial additional restrictions can be imposed upon FDIC-insured depository institutions that fail to meet applicable capital requirements. See “Prompt Corrective Action.”

The federal bank regulators continue to indicate their desire to raise capital requirements applicable to banking organizations beyond their current levels. In this regard, the Federal Reserve and the Federal Deposit Insurance Corporation have recently adopted regulations requiring regulators to consider interest rate risk in the evaluation of a bank’s capital adequacy. The bank regulatory agencies have recently established a methodology for evaluating interest rate risk which sets forth guidelines for banks with excessive interest rate risk exposure to hold additional amounts of capital against such exposures.

Support of subsidiary institution

Under Federal Reserve policy, we are expected to act as a source of financial strength for, and to commit resources to support, the Bank. This support may be required at times when, absent such Federal Reserve policy, we may not be inclined to provide such support. In addition, any capital loans by a bank holding company to its banking subsidiary are subordinate in right of payment to deposits and to certain other indebtedness of such bank. In the event of a bank holding company’s bankruptcy, any commitment by a bank holding company to a federal bank regulatory agency to maintain the capital of a banking subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Prompt corrective action

The Federal Deposit Insurance Corporation Improvement Act of 1991 was enacted in large measure to improve the supervision and examination of insured depository institutions in an effort to reduce the number of bank failures and the resulting demands on the deposit insurance system. This law establishes a system of prompt

corrective action to resolve the problems of undercapitalized institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and are required to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories. The severity of such actions depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.

Under the regulations, an FDIC-insured bank will be:

	•		“well capitalized” if it has a total capital ratio of 10.0% or greater, a tier 1 capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater and is not subject to any order or written directive by the appropriate regulatory authority to meet and maintain a specific capital level for any capital measure;

	•		“adequately capitalized” if it has a total capital ratio of 8.0% or greater, a tier 1 capital ratio of 4.0% or greater and a leverage ratio of 4.0% or greater (3.0% in certain circumstances) and is not “well capitalized”;

	•		“undercapitalized” if it has a total capital ratio of less than 8.0%, a tier 1 capital ratio of less than 4.0% or a leverage ratio of less than 4.0% (3.0% in certain circumstances);

	•		“significantly undercapitalized” if it has a total capital ratio of less than 6.0%, a tier 1 capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and

	•		“critically undercapitalized” if its tangible equity is equal to or less than 2.0% of average quarterly tangible assets.

A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating in any one of four categories. As a depository institution moves downward through the capitalization categories, the degree of regulatory scrutiny will increase and the permitted activities of the institution will decrease.

An FDIC-insured bank is generally prohibited from making any capital distribution, including dividend payments, or paying any management fee to its holding company if the bank would thereafter be “undercapitalized”. “Undercapitalized” banks are subject to growth limitations and are required to submit a capital restoration plan. The federal regulators may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the bank’s capital. In addition, for a capital restoration plan to be acceptable, the bank’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent company is limited to the lesser of an amount equal to 5.0% of the bank’s total assets at the time it became “undercapitalized” and the amount necessary to bring the institution into compliance with all applicable capital standards. If a bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized”. “Significantly undercapitalized” institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized”, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. A bank that is not “well capitalized” is subject to certain limitations relating to so-called “brokered” deposits.

As of December 31, 2005, the Bank had the requisite capital levels to qualify as “well capitalized.”

FDIC insurance assessments

The Federal Deposit Insurance Corporation has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The risk-based assessment system assigns an institution to one of three capital categories: well capitalized, adequately capitalized or undercapitalized. These three categories are substantially similar to the prompt corrective action categories described above, with the “undercapitalized” category including institutions that are undercapitalized, significantly undercapitalized and critically undercapitalized for prompt corrective action

purposes. The FDIC also assigns an institution to one of three supervisory subgroups within each capital group. The supervisory subgroup to which an institution is assigned is based on an evaluation provided to the FDIC by the institution’s primary federal regulator and information which the FDIC determines to be relevant to the risk posed to the deposit insurance funds. An institution’s insurance assessment rate is then determined based on the capital category and supervisory category to which it is assigned. The combination of capital groups and supervisory subgroups results in nine assessment risk classifications to which different assessment rates are applied.

The FDIC may terminate the insurance of the deposits of the Bank upon a finding that the Bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or condition the FDIC has imposed.

Safety and soundness standards

The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If an institution fails to submit or implement such a plan, the agency must issue an order directing action to correct the deficiency and may require other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions described above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Community Reinvestment Act

The Community Reinvestment Act requires federal bank regulatory agencies to encourage financial institutions to meet the credit needs of low- and moderate-income borrowers in their local communities. An institution’s size and business strategy determines the type of examination that it will receive. Large, retail-oriented institutions will be examined using a performance-based lending, investment and service test. Small institutions will be examined using a streamlined approach. All institutions may opt to be evaluated under a strategic plan formulated with community input and pre-approved by the bank regulatory agency.

Community Reinvestment Act regulations provide for certain disclosure obligations. Each institution must post a notice advising the public of its right to comment to the institution and its regulator on the institution’s Community Reinvestment Act performance and to review the institution’s Community Reinvestment Act public file. Each lending institution must maintain for public inspection a public file that includes a listing of branch locations and services, a summary of lending activity, a map of its communities and any written comments from the public on its performance in meeting community credit needs. The Community Reinvestment Act requires public disclosure of a financial institution’s written Community Reinvestment Act evaluations. This promotes enforcement of Community Reinvestment Act requirements by providing the public with the status of a particular institution’s community reinvestment record.

The recently enacted Gramm-Leach-Bliley Act makes various changes to the CRA. Among other changes, CRA agreements with private parties must be disclosed and annual CRA reports must be made to a bank’s primary federal regulator. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under this Act may be commenced by a holding company if any of its bank subsidiaries received less than a “satisfactory” CRA rating in its latest CRA examination.

USA PATRIOT Act

On October 26, 2001 the President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account

relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures and controls generally require financial institutions to take reasonable steps:

	•		to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction; and

	•		to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions.

Under the USA PATRIOT Act, financial institutions must establish anti-money laundering programs. The USA PATRIOT Act sets forth minimum standards for these programs, including:

	•		the development of internal policies, procedures and controls;

	•		the designation of a compliance officer;

	•		an ongoing employee training program; and

	•		an independent audit function to test the programs.

Under the authority of the USA PATRIOT Act, the Secretary of the Treasury adopted rules on September 26, 2002 increasing the cooperation and information sharing between financial institutions, regulators and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Under the new rules, a financial institution is required to:

	•		expeditiously search its records to determine whether it maintains or has maintained accounts, or engaged in transactions with individuals or entities, listed in a request submitted by the Financial Crimes Enforcement Network (“FinCEN”);

	•		notify FinCEN if an account or transaction is identified;

	•		designate a contact person to receive information requests;

	•		limit use of information provided by FinCEN to: (1) reporting to FinCEN, (2) determining whether to establish or maintain an account or engage in a transaction and (3) assisting the financial institution in complying with the Bank Secrecy Act; and

	•		maintain adequate procedures to protect the security and confidentiality of FinCEN requests.

Under the new rules, a financial institution may also share information regarding individuals, entities, organizations and countries for purposes of identifying and, where appropriate, reporting activities that it suspects may involve possible terrorist activity or money laundering. Such information-sharing is protected under a safe harbor if the financial institution:

	•		notifies FinCEN of its intention to share information, even when sharing with an affiliated financial institution;

	•		takes reasonable steps to verify that, prior to sharing, the financial institution or association of financial institutions with which it intends to share information has submitted a notice to FinCEN;

	•		limits the use of shared information to identifying and reporting on money laundering or terrorist activities, determining whether to establish or maintain an account or engage in a transaction, or assisting it in complying with the Bank Security Act; and

	•		maintains adequate procedures to protect the security and confidentiality of the information.

Any financial institution complying with these rules will not be deemed to have violated the privacy requirements discussed above.

Future Legislation

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation’s financial institutions. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

ITEM 1A. RISK FACTORS

Risk Factors

Our business involves a high degree of risk. The following paragraphs describe some of the material risks that could affect the Company.

The markets for our services are highly competitive and we face substantial competition.

The banking business is highly competitive. We compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms soliciting business from residents of and businesses located in Alpharetta, Georgia and our entire primary service area, many of which have greater resources than we have. Many of our competitors enjoy competitive advantages, including greater financial resources, a wider geographic presence or more accessible branch office locations, the ability to offer additional services, more favorable pricing alternatives and lower origination and operating costs. This competition could result in a decrease in loans we originate and could negatively affect our results of operations.

In attracting deposits, we compete with insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Traditional banking institutions, as well as entities intending to transact business solely online, are increasingly using the Internet to attract deposits without geographic or physical limitations. In addition, many non-bank competitors are not subject to the same extensive regulations that govern us. These competitors may offer higher interest rates than we offer, which could result in either attracting fewer deposits or increasing our interest rates in order to attract deposits. Increased deposit competition could increase our cost of funds and could affect adversely our ability to generate the funds necessary for our lending operations, which would negatively affect our results of operations.

Changes in interest rates could have an adverse effect on our income.

Our profitability depends to a large extent upon our net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. Changes in interest rates also can affect the value of our loans. An increase in interest rates could adversely affect borrowers’ ability to pay the principal or interest on our loans. This may lead to an increase in our non-performing assets and could have a material and negative effect on our results of operations.

Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply and other factors beyond our control may also affect interest rates. Fluctuations in market interest rates are neither predictable nor controllable and may have a material and negative effect on our business, financial condition and results of operations.

Because a significant portion of our loan portfolio is secured by real estate, any negative conditions affecting real estate may harm our business.

A significant portion of our loan portfolio consists of commercial loans that are secured by various types of real estate as collateral, as well as real estate loans on commercial properties. Because these loans rely on real estate as collateral, either totally in the case of real estate loans or partially in the case of commercial loans secured by real estate, they are sensitive to economic conditions and interest rates. Real estate lending also presents additional credit related risks, including a borrower’s inability to pay and deterioration in the value of real estate held as collateral.

We have a significant amount of construction loans, which are subject to additional risks unique to the building industry that could negatively affect our net income.

Historically, our loan portfolio has included a significant number of construction loans consisting of one-to-four family residential construction loans, commercial construction loans and land loans for residential and commercial development. As of December 31, 2005, 59% of our total loan portfolio was in acquisition and development and construction loans. In addition to the risk of nonpayment by borrowers, construction lending poses additional risks in that:

	•		land values may decline;

	•		developers or builders may fail to complete or develop projects;

	•		municipalities may place moratoriums on building;

	•		developers may fail to sell the improved real estate;

	•		there may be construction delays and cost overruns;

	•		collateral may prove insufficient; or

	•		permanent financing may not be obtained in a timely manner.

Any of these conditions could negatively affect our net income and our financial condition.

If our allowance for loan losses is not adequate to cover actual losses, our net income may decrease.

We are exposed to the risk that our customers will be unable to repay their loans in a timely fashion and that collateral securing the payment of loans may be insufficient to assure repayment. Borrowers’ inability to repay their loans could erode our bank’s earnings and capital. We maintain an allowance for loan losses to cover loan defaults. We base our allowance for loan losses on various assumptions and judgments regarding the collectability of loans, including our prior experience with loan losses, as well as an evaluation of the risks in our loan portfolio. We maintain this allowance at a level we consider adequate to absorb anticipated losses. The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control.

Actual losses may exceed our estimates and we may have to increase the allowance for loan losses. This would cause us to increase our provision for loan losses, which would decrease our net income. Further, state and federal regulatory agencies, as an integral part of their examination process, review our loans and our allowance for loan losses. Regulators, when reviewing our loan portfolio, may require us to increase our allowance for loan losses, which would negatively affect our net income.

If economic conditions in our market areas deteriorate, our business may be negatively affected.

Our success depends on the general economic conditions of the markets we serve. Our operations are concentrated in Alpharetta, Georgia. We also have branches or loan production offices in Roswell, Smyrna, Duluth, and Cumming, Georgia. If economic conditions in these markets are unfavorable or deteriorate, the number of borrowers that are unable to repay their loans on a timely basis could increase. This could lead to higher rates of loss and loan payment delinquencies. These factors could have a negative effect on our business, financial condition and results of operations.

Losing key personnel will negatively affect us.

Competition for personnel is stronger in the banking industry than many other industries, and we may not be able to attract or retain the personnel we require to compete successfully. We currently depend heavily on the services of our Chief Executive Officer, Steven M. Skow, and a number of other members of our senior management team. Losing Mr. Skow’s services or those of other members of senior management could affect us in

a material and adverse way. Our success will also depend on attracting and retaining additional qualified management personnel.

We do not intend to pay dividends on our common stock.

We have never declared or paid cash dividends on our common stock. We have no current intentions to pay dividends and cannot assure that we will be able to pay dividends in the future. In addition, our ability to pay dividends is subject to regulatory limitations.

We have a limited operating history.

We opened for business just over five years ago. Although we have grown very rapidly, we have a relatively short operating history and we may not continue to perform as well in the future as we have in the past.

We encounter technological change continually and have fewer resources than many of our competitors to invest in technological improvements.

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to serving customers better, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our success will depend in part on our ability to address our customers’ needs by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we have. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers.

We are subject to significant government regulations, including new legislation, that affect our operations and may result in higher operating costs or increased competition for us.

Our success will depend not only on competitive factors, but also on state and federal regulations affecting banks and bank holding companies generally. Regulations now affecting us may change at any time, and these changes may adversely affect our business.

We are subject to extensive regulation by the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation and the Georgia Department of Banking and Finance. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than shareholders. These agencies examine bank holding companies and commercial banks, establish capital and other financial requirements and approve new branches, acquisitions or other changes of control. Our ability to establish new branches or make acquisitions is conditioned on receiving required regulatory approvals from the applicable regulators.

We believe that changes in legislation and regulations will continue to have a significant impact on the banking industry. Although some of the legislative and regulatory changes may benefit us and our bank, others will increase our costs of doing business and could assist our competitors, some of which are not subject to similar regulation.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. DESCRIPTION OF PROPERTY

Main Office and Administrative Building

The Bank owns its offices located at 11140 State Bridge Road, Alpharetta, Fulton County, Georgia. This location presently houses the administrative functions of the bank and holding company.

In 2003, the Company purchased an administrative building adjacent to its main office building from a director of the Company, at a cost of $2.6 million. We believe the purchase price was on substantially the same terms (or more favorable terms for us) as those prevailing at the time for comparable transactions with unrelated providers. In August, 2004 the Company sold 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 is being recognized over the life of the lease.

Roswell

A full-service branch (financial center) was opened in July, 2003 in Roswell (Fulton County), Georgia. The branch was constructed at a cost of $2.0 million, including the acquisition price of the land in the amount of $883,000 and construction costs of $819,000. The construction was provided by a company owned by a director. We believe that the construction was provided on substantially the same terms (or more favorable terms for us) as those prevailing at the time for comparable transactions with unrelated providers.

Vinings

Another financial center was opened in June, 2004 in Smyrna (Cobb County), Georgia at a total cost of $2.6 million, including the acquisition price of the land in the amount of $1.2 million and construction costs of $1.4 million. The construction was provided by the same company that built the Roswell financial center. As with the purchase of the office building and the construction of the branch described above, we believe that the construction was provided on substantially the same terms (or more favorable terms for us) as those prevailing at the time for comparable transactions with unrelated providers.

Duluth

In October, 2004 the Bank entered into a one-year operating lease for office space in Lawrenceville (Gwinnett County), Georgia for the purpose of opening a loan production office (LPO). The LPO opened in November, 2004. The lease was extended for a six-month period while a branch building was under construction. This permanent full-service financial center, in Duluth, Georgia is expected to open in the spring of 2006, replacing the loan production office. This facility is also in Gwinnett County. The construction is being provided by the same company that built the Roswell financial center. As with the purchase of the office building and the construction of the branches described above, we believe that the construction has been provided on substantially the same terms (or more favorable terms for us) as those prevailing at the time for comparable transactions with unrelated providers.

Cumming

In August, 2005 the Bank entered into a one-year operating lease for office space in Cumming (Forsyth County), Georgia for the purpose of opening an LPO. The LPO opened in October, 2005. A nearby full-service branch facility is scheduled to be built in 2006, which will then replace the LPO.

ITEM 3. LEGAL PROCEEDINGS

We are subject to claims and litigation in the ordinary course of business. We believe that any pending claims and litigation will not have a material adverse effect on our consolidated position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company’s shareholders, through the solicitation of proxies or otherwise, during the fourth quarter of 2005.

PART II

ITEM 5. MARKET FOR THE COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES

Market information

Morgan Keegan & Company, Inc. became a market maker for our common stock during the fourth quarter of 2003. Since then our common stock has been quoted in the “pink sheets” quotation system under the symbol “ITYC.” During the period beginning in March, 2004 and ending August, 2004, we issued 2,269,402 shares of common stock at a price of $9.00 per share through a public stock offering (adjusted for subsequent stock splits.) During the period beginning in May, 2005 and ending in June, 2005, we issued 1,304,348 shares of common stock at a price of $11.50 per share, split-adjusted, through a private placement offering (adjusted for subsequent stock splits.)

In January, 2005 we effected a 3-for-2 stock split of our common stock in the form of a common stock dividend payable on January 24, 2005 to shareholders of record as of the close of business on January 10, 2005. In December, 2005 we effected a 2-for-1 stock split of our common stock in the form of a common stock dividend payable on December 12, 2005 to shareholders of record as of the close of business on November 28, 2005.

Management has reviewed the limited information available as to the ranges at which our common stock has been sold. The following table sets forth two fiscal years. This information has been adjusted to reflect a 3-for-2 stock split on January 24, 2005, as well as a 2-for-1 stock split on December 12, 2005. The number of shares traded in 2004 does not include the 2,269,402 shares issued by us at a price of $9.00 per share during the public stock offering. The 1,304,348 shares issued by us at a price of $11.50 during our private placement offering were also not included. Market quotations from which the pricing information was taken reflect inter-dealer prices, without retail mark-up, mark-down, or commissions and therefore may not represent actual transactions.


	Number of shares traded		High selling price		Low selling price
2005:
First Quarter		371,900	$	11.00	$	8.00
Second Quarter		479,900		12.20		9.75
Third Quarter		164,700		12.75		10.75
Fourth Quarter		538,600		15.95		11.00

2004:
First Quarter		27,750	$	5.34	$	4.34
Second Quarter		178,254		5.10		4.34
Third Quarter		130,706		6.59		4.50
Fourth Quarter		390,822		11.34		6.17

At December 31, 2005 the Company had 14,361,542 shares of common stock outstanding held by approximately 1,258 shareholders of record. We have not declared any cash dividends on our common stock over the last two years.

The Company did not repurchase any equity securities during the fourth quarter of 2005.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below as of and for each of the five years ended December 31, 2005 is unaudited and has been derived from the Consolidated Financial Statements of the Company and its subsidiaries, and from records of the Company. The information presented below should be read in conjunction with the Consolidated Financial Statements, the Notes to Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Averages are derived from daily balances. Share and per share amounts for all years are adjusted for all relevant stock splits and stock dividends during the period.


	As of December 31,
(Dollars in thousands, except share and per share data)	2005		2004		2003		2002		2001

Balance Sheet Data
Total assets	$	753,075	$	446,175	$	279,748	$	144,364	$	57,994
Investment securities		74,810		49,161		27,853		10,750		10,049
Loans		651,778		385,906		238,919		128,008		43,963
Allowance for loan losses		5,612		3,433		3,573		1,105		392
Deposits		674,444		373,272		231,778		120,133		41,242
Federal Home Loan Bank advances		0		15,000		16,000		7,000		5,000
Other short-term borrowings		0		4,279		10,000		3,115		2,799
Long-term debentures		6,186		6,186		0		0		0
Stockholders’ equity		66,119		43,555		19,892		13,819		8,749


	Year Ended December 31,
	2005			2004			2003			2002			2001

Statement of Income Data
Interest income	$	44,156		$	22,456		$	14,190		$	6,815		$	3,105
Interest expense		18,684			7,571			4,964			2,884			1,695
Net interest income		25,472			14,885			9,226			3,931			1,410
Provision for loan losses		3,566			2,627			2,488			713			336
Net interest income after provision for loan losses		21,906			12,258			6,738			3,218			1,074
Noninterest income		762			612			189			88			54
Noninterest expenses		12,658			8,082			4,671			2,481			1,946
Income tax expense		3,688			1,776			462			0			0
Net income (loss)		6,322			3,012			1,794			825			(818	)

Per Share Data
Book value per share at year end	$	4.60		$	3.41		$	2.42		$	2.15		$	1.81
Basic earnings (losses) per share		.45			.28			.23			.14			(.17	)
Diluted earnings (losses) per share		.42			.26			.23			.14			(.17	)
Weighted-average shares outstanding — basic		14,050,847			10,809,936			7,717,584			5,695,170			4,848,584
Weighted-average shares outstanding — diluted		14,961,547			11,552,676			7,950,576			5,695,170			4,848,584
Dividends declared		0			0			0			0			0
Dividend payout ratio		0	%		0	%		0	%		0	%		0	%

Ratios
Return on average assets		1.05	%		.86	%		.81	%		.85	%		(2.05	)%
Return on average equity		11.37	%		9.15	%		9.72	%		7.30	%		(8.34	)%
Average equity/average assets		9.22	%		9.34	%		8.35	%		11.65	%		24.55	%
Net interest margin		4.33	%		4.39	%		4.37	%		4.23	%		3.79	%
Non-performing assets/total loans and other real estate		.25	%		.20	%		1.28	%		0	%		0	%
Allowance for loan losses/total loans		.86	%		.89	%		1.50	%		.86	%		.89	%
Noninterest expense/net interest income and noninterest income		48.25	%		52.15	%		49.61	%		61.74	%		132.92	%

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following is a discussion of our financial condition at December 31, 2005 and 2004 and the results of operations for the years then ended. The purpose of this discussion is to focus on information about our financial condition and results of operations that is not otherwise apparent from our audited consolidated financial statements. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis.

Forward-Looking Statements

We may from time to time make written or oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and reports to shareholders. Statements made in the Annual Report, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors, including governmental monetary and fiscal policies, deposit levels, loan demand, loan collateral values, securities portfolio values, interest rate risk management, the effects of competition in the banking business from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market funds and other financial institutions operating in our market area and elsewhere, including institutions operating through the Internet, changes in governmental regulation relating to the banking industry, including regulations relating to branching and acquisitions, failure of assumptions underlying the establishment of reserves for loan losses, including the value of collateral underlying delinquent loans, and other factors. We caution that such factors are not exclusive. We do not undertake to update any forward-looking statement that may be made from time to time by, or on behalf of, us.

Critical Accounting Policies

Our 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. Our significant accounting policies are described in the notes to the consolidated financial statements. 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 we consider 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.

We believe the following critical accounting policy requires the most significant estimates and assumptions that are particularly susceptible to a significant change in the preparation of our financial statements.

Allowance for Loan Losses

Our 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 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.

Fourth Quarter 2005

The supplemental quarterly financial data is as follows:


			Quarters ended
	March 31,		June 30,		September 30,		December 31,
(In thousands)	2005		2005		2005		2005

Interest income	$	8,287	$	9,994	$	11,369	$	14,506
Interest expense		3,206		4,118		4,926		6,434
Net interest income		5,081		5,876		6,443		8,072
Provision for loan losses		572		664		765		1,565
Net income		1,334		1,475		1,898		1,615
Net income per share — basic (1)		0.10		0.11		0.13		0.11
Net income per share — diluted (1)		0.09		0.10		0.12		0.11


			Quarters ended
	March 31,		June 30,		September 30,		December 31,
(In thousands)	2004		2004		2004		2004

Interest income	$	4,556	$	5,053	$	5,996	$	6,851
Interest expense		1,472		1,562		1,973		2,564
Net interest income		3,084		3,491		4,023		4,287
Provision for loan losses		141		572		1,609		305
Net income		887		864		256		1,005
Net income per share — basic (1)		0.11		0.09		0.02		0.08
Net income per share — diluted (1)		0.10		0.08		0.02		0.08


(1)		adjusted for the two-for-one stock split declared in fourth quarter 2005.

Throughout 2005, interest rates rose steadily with the increase of the prime rate. This has benefited our primarily floating rate loan portfolio, while our cost of funds has also increased this year. Interest income increased 111% to $14.5 million in fourth quarter 2005 compared to the same period in 2004. While rates have risen, the main impact on the increase in interest income was the growth of the loan portfolio. Average gross loans in the fourth quarter 2005 increased 73% over the comparable quarter in 2004. Additionally, with the increase in loan volume, there was an increase in loan fee income, which is included in interest income. Loan fees were $1,300,000 and $700,000 in fourth quarters 2005 and 2004, respectively.

Interest expense increased 151% to $6.4 million in fourth quarter 2005 over the same period in 2004. Our balance sheet is largely driven by our loan growth, and, consequently as funding is needed, increases to deposits have primarily been in higher costing time deposits. During 2005, the Bank began obtaining time deposits through the brokered funds market. While the rates for these funds were competitive with our retail market, they have contributed to the 135% increase in average time deposits comparing fourth quarter 2005 to the same period in 2004. Interest expense on the trust preferred securities issued in December 2003 also increased in fourth quarter 2005 to $113,000 compared to $81,000 for the same quarter in 2004 since the rate on this debt is tied to LIBOR. Since our assets have repriced somewhat faster than our liabilities, the net interest margin for the fourth quarter of 2005 improved to 4.55% from 4.13% in fourth quarter 2004. Net interest income increased to $8.1 million from $4.3 million comparing the fourth quarters of 2005 and 2004.

The loan loss provision increased in the fourth quarter of 2005 to nearly $1.6 million compared to $305,000 in the fourth quarter of 2004 due primarily to loan growth, as well as due to the write-down of one credit of $755,000 in December 2005. This loan was subsequently foreclosed upon and transferred to Other Real Estate in 2006. Noninterest income, at $186,000, was $13,000 lower in fourth quarter 2005 compared to the same period in 2004. In fourth quarter 2004, the Bank recognized $13,000 on the sale of other real estate owned while there were no such sales in 2005.

Noninterest expenses increased 61% to $4.2 million from $2.6 million comparing the fourth quarters of 2005 and 2004. This increase was due to the overall growth of the Bank. Salaries and benefits increased $946,000 for the comparable periods, due to growth of the Bank since we have added a loan production office and the staff to support the Duluth (Gwinnett County) full-service branch that will open in the first quarter of 2006. We have also added administrative positions to strengthen the infrastructure of the Bank. Increase in salaries in fourth quarter 2005 included an increase in compensation related to stock options of $385,000 for a total of $760,000. Other noninterest expenses increased 61% in the fourth quarter of 2005 compared to the same period in 2004. The increase included increases in consulting fees of $128,000 due to efforts to comply with the Sarbanes-Oxley Act and additional employee recruiting fees, increases in data processing fees of $67,000 due to the conversion to a more sophisticated core processing system, increases in loan collection fees of $64,000 largely related to one non-performing loan, and increases to non-profit contributions of $46,000 since our tithing is directly proportionate to our increased income each year.

Diluted net earnings per share for the fourth quarter were $.11 and $.08 for 2005 and 2004, respectively, adjusted for the January 2005 3-for-2 and December 2005 2-for-1 stock splits. Total assets grew 14%, or $91 million, during the fourth quarter 2005. Most of this growth was in the loan portfolio which increased 13% to $652 million. Funding for the loan growth during the current quarter was solely through deposit growth.

2005 Overview

Integrity Bancshares had a very successful 2005 year with strong asset growth, record net earnings, and the addition of a new loan production office in Cumming (Forsyth County), Georgia. Our primarily floating-rate loan portfolio grew significantly throughout the year and, in conjunction with a rising rate environment, produced a large increase in interest income, as well as loan fee income. The net interest margin remained strong at 4.33% despite a rising cost of funds necessary to accommodate the loan growth. Construction began this year on a full-service branch facility in Duluth (Gwinnett County) which is expected to open in early 2006. In late 2005, the Bank purchased a tract of land in Cumming, Georgia on which to build another full-service branch location to open in 2006. We declared a 3 for 2 stock split in the form of a 50% stock dividend in January. Additionally, we declared a 2 for 1 stock split in the form of a 100% stock dividend in December. Our primary market areas of Fulton County, Georgia and the surrounding counties of Cobb, Gwinnett, and Forsyth continue to grow, and we believe that we are strategically positioned to take advantage of the growth. The area’s growth should provide a base for continued profitability.

Financial Condition as of December 31, 2005 and 2004

The following is a summary of our balance sheets for the years indicated:


	December 31,
	2005		2004
	(Dollars in Thousands)

Cash and due from banks	$	5,135	$	1,563
Federal funds sold		6,243		—
Securities		73,924		47,928
Restricted equity securities		889		1,233
Loans, net		646,166		382,473
Premises and equipment		11,865		8,608
Other assets		8,853		4,370


	$	753,075	$	446,175


Total deposits	$	674,444	$	373,272
Federal funds purchased		—		4,279
Other borrowings		6,186		21,186
Other liabilities		6,326		3,883
Shareholders’ equity		66,119		43,555


	$	753,075	$	446,175

As of December 31, 2005, we had total assets of $753 million, an increase of 68.8% over December 31, 2004. Total interest-earning assets were $732.9 million as of December 31, 2005, or 97.3% of total assets as compared to $435.3 million or 97.5% of total assets as of December 31, 2004. Our primary interest-earning assets were loans, which made up 88.9% and 88.7% of total interest-earning assets as of December 31, 2005 and 2004, respectively. Our gross loan to deposit and other borrowings ratio was 95.8% as of December 31, 2005, as compared to 97.8% as of December 31, 2004. Deposits grew $301.2 million in 2005, or 81%. At December 31, 2005, we were in a net federal funds sold position with $6.2 million while we were in a net federal funds purchased position at December 31, 2004 with $4.3 million. Premises and equipment increased by $3.3 million in 2005.

Our securities portfolio, consisting of U.S. Government Agency mortgage-backed securities and equity securities, totaled $73.9 million as of December 31, 2005. Net unrealized losses on securities totaled $1,612,898 as of December 31, 2005 compared to net unrealized losses of $315,400 as of December 31, 2004. The change in the net unrealized losses was attributable primarily to changes in interest rates affecting the values of the mortgage-backed securities. These changes were recognized as an adjustment to shareholder’s equity and were included in other comprehensive income, net of tax. Management has not specifically identified any securities for sale in future periods that, if so designated, would require a charge to operations if the market value would not be reasonably expected to recover prior to the time of sale.

We have 92.7% of our loan portfolio collateralized by real estate, of which a substantial portion is located in our primary market area of Fulton County, Georgia and surrounding counties. Our real estate construction portfolio consists of loans primarily collateralized by nonresidential properties, and comprised 59.1% of the loan portfolio at December 31, 2005. Real estate mortgage loans secured by one to four family and multifamily residential properties comprised 4.3% of the loan portfolio, and nonresidential real estate mortgage loans consisting primarily of small business commercial properties totaled 29.3% of the loan portfolio. We generally require that loans collateralized by real estate not exceed 80%-85% of the collateral value. The remaining 7.3% of the loan portfolio consisted of commercial, consumer, and other loans.

The specific economic and credit risks associated with our loan portfolio, especially the real estate portfolio, include, but are not limited to, a general downturn in the economy that could affect unemployment rates in our market area, general real estate market deterioration, interest rate fluctuations, deteriorated or non-existing collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud and any violation of

banking protection laws. Construction lending can also present other specific risks to the lender such as whether the builders can sell the home to a buyer and whether the buyer can obtain permanent financing. Currently, real estate values and employment trends in our market area are stable with no indications of a significant downturn in the general economy.

We attempt to reduce these economic and credit risks not only by adhering to loan to value guidelines, but also by investigating the creditworthiness of the borrower and monitoring the borrower’s financial position. Also, we establish and periodically review our lending policies and procedures. State banking regulations limit exposure by prohibiting secured loan relationships that exceed 25% of the Bank’s statutory capital and unsecured loan relationships that exceed 15% of the Bank’s statutory capital. The Bank’s statutory capital as of December 31, 2005 and 2004 was $60.0 million and $43.5 million, respectively.

The $301 million growth in deposits during 2005 was primarily due to increased time deposit balances which grew $294 million comparing December 31, 2005 to December 31, 2004. Since funds were needed to accommodate the strong loan portfolio growth, the Bank began to supplement retail growth with brokered deposits during 2005. The costs of the brokered deposits were comparable to the retail business, and could be acquired in much larger blocks, as needed. At December 31, 2005, the Bank had $151 million of brokered time deposits.

The $141.5 million growth in deposits during 2004 was due to an overall growth in the number of deposit accounts. The growth was primarily in interest-bearing checking accounts ($51.9 million) and time deposits ($90.5 million). These accounts increased in number and amount due to the new branch that opened in June, 2004, which had $49.7 million in total deposits at December 31, 2004. The two existing full-service branches had substantially the same increase in deposit amounts during the year as the new branch.

During 2005, premises and equipment increased $3.3 million. A site for a new full-service branch location in Gwinnett County was purchased in August 2005 at a cost of $1.2 million. Construction was begun on the building and continues into 2006. The general contracting company on this project is owned by a director. We believe the transaction was made on substantially the same terms (or more favorable terms for the Bank) as those prevailing at the time for a comparable transaction with third party providers. As of December 31, 2005, costs incurred on this construction totaled approximately $1.1 million. Additionally, this contractor was hired to build out a portion of the administrative building located near the main office. This construction was completed in 2005 at a total cost of $464,000. In August 2005, the Bank changed its core processor which provides outsourced data processing and item processing services. This change resulted in an investment in computer software and additional equipment totaling approximately $300,000.

During 2004, premises and equipment decreased by $1.0 million. A new branch building was constructed in the Vinings area of Smyrna, Georgia, at a cost of $1.4 million (excluding land costs of $1.2 million that were included in the December 31, 2003 premises and equipment total). Construction was completed in June by a company owned by a director, with payments of $1.1 million made to the director’s company. We believe the transaction was made on substantially the same terms (or more favorable terms for the Bank) as those prevailing at the time for a comparable transaction with third party providers. In August, 2004 we sold an administrative building with a book value of $2.9 million for $5.0 million cash in a sale-leaseback transaction. A five year non-renewable operating lease on the building was entered into between the Bank and the buyer, with minimum annual lease payments of $560,000. The resulting $2.1 million gain on sale was deferred and will be recognized over the life of the lease. The net effect of the addition of the new branch and the sale of the administrative building were the primary reasons for the decrease in premises and equipment of $1.0 million, as noted above.

Stockholders’ equity increased by $22.6 million in 2005 due to net income of $6.3 million, net proceeds from the sale of common stock of $15 million, and paid-in capital from stock compensation expense of $2 million. These increases were offset by additional other comprehensive losses of $800,000 due to higher unrealized losses on securities available for sale. Stockholders’ equity increased by $23.7 million in 2004 due to net income of $3.0 million, net proceeds from the sale of common stock in a public offering of $20.3 million, increases of unrealized losses of securities available-for-sale, net of tax, of $262,000, and paid-in capital from stock compensation expense of $602,000.

Liquidity and Capital Resources

The purpose of liquidity management is to ensure that there are sufficient cash flows to satisfy demands for credit, deposit withdrawals and our other needs. Traditional sources of liquidity include asset maturities and growth in core deposits. We achieve our desired liquidity objectives from the management of assets and liabilities and through funds provided by operations. Funds invested in short-term marketable instruments and the continuous maturing of other earning assets are sources of liquidity from the asset perspective. The liability base provides sources of liquidity through deposit growth, the maturity structure of liabilities and accessibility to market sources of funds.

Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates and general economic conditions and competition. We attempt to price deposits consistent with local market conditions and to meet asset/liability objectives.

Our liquidity and capital resources are monitored on a periodic basis by management and state and federal regulatory authorities. As determined under guidelines established by regulatory authorities and internal policy, our liquidity was considered satisfactory.

As of December 31, 2005 and 2004, we had loan commitments outstanding of $221.4 million and $84.6 million, respectively. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. If needed, we have the ability on a short-term basis to borrow funds and purchase federal funds from other financial institutions. As of December 31, 2005 and 2004, we had arrangements with two commercial banks for additional short-term advances (federal funds) of up to $69.0 million in aggregate. In addition, the Bank can borrow funds from the Federal Home Loan Bank of Atlanta, secured by real estate loans and/or investment securities. We can also utilize the brokered deposit market to obtain funds as needed.

As of December 31, 2005, our capital ratios were considered well-capitalized based on regulatory capital requirements. Our shareholders’ equity increased due to the retention of all of our net income in 2005 and net proceeds from our stock offering of $15 million.

In the future, the primary source of funds available to the holding company will be the payment of dividends by the Bank. Banking regulations limit the amount of the dividends that may be paid without prior approval of the Bank’s regulatory agency. Currently, the Bank could pay $3,756,000 in dividends without regulatory approval.

The minimum capital requirements to be considered well capitalized under prompt corrective action provisions and the actual capital ratios for the Bank and consolidated Holding Company as of December 31, 2005 are as follows:


	Actual
							Regulatory
							Minimum
	Consolidated			Bank			Requirement

Leverage capital ratios		10.06	%		9.80	%		5.00	%
Risk-based capital ratios:
Tier one capital		9.85			9.59			6.00
Total capital		10.60			10.35			10.00

These ratios may decline as asset growth continues, but are expected to continue exceeding the regulatory minimum requirements.

We have also obtained regulatory approval and are in the process of building the new branch site in Gwinnett County, which we expect to open in 2006. We opened a loan production office in Forsyth County with the intention of purchasing land and building a full-service branch location nearby. We will file for regulatory approval for this location in early 2006. Our stated goal is to open new branches at the rate of one or two per year at an

approximate cost of $2.5 million per branch. However, except as noted above, no firm plans have been established for these additional branches. We do not expect these investments to have a material impact on our liquidity given our total size, funding sources, and the anticipation of attracting deposits to the new branches that will exceed the initial investment. Other than our proposed branch openings, we have no material commitments for capital expenditures.

We also buy and sell loan participations with other community and regional banks. Loan participations are sold to increase liquidity as needed or when the loan amount is above our regulatory lending limit. Sold loan participations made up 14.8% and 15.6% of our loan portfolio as of December 31, 2005 and 2004, respectively. Loan participations are purchased when the Bank has excess liquidity to invest. Purchased loan participations comprised 2.5% and 2.9% of the loan portfolio as of December 31, 2005 and 2004, respectively.

In May, 2005 we began a private placement offering of common stock to provide us with additional capital and liquidity for anticipated growth. The offering was completed in June, 2005 with 1,304,348 shares sold at an offering price of $11.50 per share. The number of shares and per share price were adjusted for the 2-for-1 stock split paid on December 12, 2005. Net proceeds from the sale totaled $15 million.

In March, 2004 we began a public offering of common stock to provide us with additional capital and liquidity for anticipated growth. The offering was completed in August, 2004 with 4,538,804 shares being sold at an offering price of $4.50/share. The number of shares and per share amount were adjusted to reflect a 3-for-2 stock split paid on January 24, 2005 and a 2-for-1 stock split paid on December, 12 2005. Net proceeds from the sale amounted to $20.3 million.

Off-Balance Sheet Arrangements

Our only material off-balance sheet arrangements consist of commitments to extend credit and standby letters of credit issued in the ordinary course of business. For a complete description of these obligations please refer to footnote number 11 to our financial statements included herein.

Effects of Inflation

The impact of inflation on banks differs from its impact on non-financial institutions. Banks, as financial intermediaries, have assets that are primarily monetary in nature and that tend to fluctuate in concert with inflation. A bank can reduce the impact of inflation if it can manage its rate sensitivity gap. This gap represents the difference between rate sensitive assets and rate sensitive liabilities. We, through our asset-liability committee, attempt to structure the assets and liabilities and manage the rate sensitivity gap, thereby seeking to minimize the potential effects of inflation. For information on the management of our interest rate sensitive assets and liabilities, see “Asset/Liability Management.”

Results of Operations for the Years Ended December 31, 2005, 2004 and 2003

The following is a summary of our results of operations for the years indicated.


	Year Ended December 31,
(Dollars in Thousands)	2005		2004		2003


Interest income	$	44,156	$	22,456	$	14,190
Interest expense		18,684		7,571		4,964

Net interest income		25,472		14,885		9,226

Provision for loan losses		3,566		2,627		2,488
Other income		762		612		189
Other expenses		12,658		8,082		4,671

Pretax income		10,010		4,788		2,256

Income taxes		3,688		1,776		462

Net income		6,322		3,012		1,794

Net Interest Income

Our chief source of revenue is net interest income. Net interest income is a function of the yields received on interest-earning assets and the rates paid on interest-bearing liabilities. Interest-earning assets include loans and investments, while interest-bearing liabilities are comprised of deposits and other borrowed funds.

Changes in net interest income from period to period reflect both the increases or the decreases in average interest-earning assets and average interest-bearing liabilities, as well as the increases or decreases in the interest rate spread. The level of mismatch in the maturity and repricing characteristics of our interest-earning assets and our interest-bearing liabilities has a direct effect on the interest rate spread.

Overall, average interest-earning assets for 2005 increased $249 million. The yield on these assets increased to 7.50% in 2005 from 6.62% in 2004. The largest dollar impact to net interest income in 2005 was the growth in the loan portfolio. Average loans during the year 2005 increased 75% over the year-end average balance of 2004. This significant increase in loan volume created a subsequent increase in interest income on loans of $17.3 million. In addition, over the course of the year 2005, the Federal Reserve raised the Prime Rate eight (8) times, from 5.25% in January 2005 to 7.25% in December 2005. The resulting increase in interest income on loans due to increases in yield was $3.2 million. Because 96.3% of the loan portfolio consists of variable rate loans, the yield on new loans originated was greater than it had been in 2004. The total impact of strong growth and an increasing rate environment was an increase to interest income on loans of $20.5 million.

Interest income from the investment portfolio increased due to the increase in average volume in 2005 over 2004 by 71%, resulting in an addition to interest income of $1.1 million. The yield on investment securities in 2005 was 4.46% compared to 4.47% in 2004, a very slight change.

Offsetting some of the increase in interest income in 2005 was an increase in interest expense. This was due primarily to the growth in average time deposits of $172 million. Brokered deposits made up 31% of total time deposits at December 31, 2005, while national market CD’s made up 4%. The rates on these types of time deposits were competitive with our local branch offerings. This growth in volume added $5.6 million to interest expense. In addition, the majority of the CD portfolio, approximately 90.4%, had a 12-month term to maturity. As prime rate increased over the course of 2005, new deposits were opened or rolled over at increasingly higher rates, resulting in an increase to interest expense of $2.2 million. Thus, total interest expense on time deposits increased $7.8 million in 2005 over the prior year.

Interest-bearing demand deposits, likewise, increased in average volume during 2005. The additional $46.2 million in average other interest-bearing deposits caused an increase in interest expense of $1.4 million in 2005 compared to 2004. Additionally, an increase of $1.1 million to interest on other interest-bearing deposits was due to higher rates paid in 2005 compared to 2004.

While the $249.3 million growth in interest-earning assets was more than the $224.1 million increase in interest-bearing liabilities comparing 2005 to 2004, the yield on these assets increased only 88 basis points during the same period. The rate on the interest-bearing liabilities increased 105 basis points. So, even though net interest income in 2005 increased $11.3 million due to increased volume, the higher cost of funds reduced net interest income by $725,000. The increased cost of funds also created pressure on the net interest margin, reducing it from the previous year. The net interest margin was 4.33% in 2005 and 4.39% in 2004.

In summary, as a result of the growth in interest-earning assets in a rising rate environment, offset by a growth in interest-bearing liabilities in the same environment, net interest income increased $10.6 million in 2005, compared to a $5.7 million increase in 2004. Net interest income increased 71% in 2005 compared to the prior year.

In 2004, the net interest margin on average interest-earning assets was 4.39%, compared to 4.37% in 2003. Average loans increased by $116.6 million, and remaining average interest-earning assets increased by $11.9 million. The total increase in interest-earning assets in 2004 was $128.5 million. The total increase to interest income in 2004 due to this growth in volume was $8.7 million. Though interest rates began to rise again in July 2004, overall asset yield continued to decline over the year. The rate earned on average interest-earning assets decreased to 6.62% in 2004 from 6.73% in 2003. The resulting decrease to interest income in 2004 due to yield was $451,000.

Average interest-bearing deposits increased by $94.3 million in 2004 compared to 2003, with average interest-bearing demand/savings and time deposits accounting for $74.4 and $19.9 million of this increase, respectively. Average other borrowings increased $18.1 million in 2004 compared to the prior year. The total impact to interest expense due to increases in volume was $2.8 million. The rate paid on average interest-bearing liabilities decreased to 2.47% in 2004 from 2.55% in 2003. The declining interest rates helped mitigate the increase in expense due to growth in volume, reducing that expense $210,000.

The increase in net interest income and the net interest margin on average interest-earning assets in 2004 was due primarily to the significant increase in volume of interest-earning assets in comparison to 2003. In 2004, yields on interest-earning assets decreased by 11 basis points, while the rate paid on interest-bearing liabilities decreased by 8 basis points for a combined increase in net interest income of $5.6 million.

Provision for Loan Losses

The provision for loan losses was $3.6 million in 2005, an increase of $1 million over the $2.6 million recorded in 2004. This increase was due primarily to the strong loan growth exhibited during the current year. Gross loans increased 69% over the previous year. Net charge-offs declined to $1.4 million in 2005 from $2.8 million in 2004. There were five loans that were charged off in 2005, of which $879,000 was secured with real estate, while the remainder was commercial loans. The ratio of net charge-offs to average loans outstanding was .26% in 2005 compared to .92% on 2004.

The provision for loan losses was $2.6 million in 2004, an increase over the $2.5 million recorded in 2003. A significant portion of each of the provisions for loan losses for these two years was due loans to a single borrower who filed for bankruptcy in late 2003. The Bank realized a loss of $1.1 million in 2004 and $1.2 million in 2003 related to this borrower. The remaining increase in the provision for loan losses in 2004 was due primarily to the growth of the loan portfolio and to inherent risk in the loan portfolio.

Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb possible losses on existing loans that may become uncollectible. This evaluation considers past due and classified loans, past experience, underlying collateral values and current economic conditions that may affect the borrower’s ability to repay. As of December 31, 2005, we had non-accrual loans totaling $1,651,700 compared to $779,400 as of December 31, 2004. The allowance for loan losses as a percentage of total loans as of December 31, 2005 and 2004 was .86% and .89%, respectively. The increase in the non-accrual loans was largely due to a $1.4 million loan that was secured by real estate. This property was foreclosed on in January 2006 and $1.2 million was transferred to other real estate (“ORE”), while the balance was taken against the allowance for loan losses.

It is our opinion that the current allowance for loan losses of $5.6 million is adequate to absorb known risks in the loan 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.

Noninterest Income

The following table presents the principal components of noninterest income for the years ended December 31, 2005, 2004, and 2003.


	2005		2004		2003


Gain (loss) on sale of fixed asset	$	410,308	$	147,923	$	(13,186	)
Rental income		191,674		160,563		93,132
Service charge income		22,513		15,142		16,363
Overdraft fees		38,496		39,639		47,495
Wire transfer fees		27,146		20,842		16,110
ATM network and surcharge fees		24,523		7,803		4,033
Other		47,742		220,817		25,651

Noninterest income		762,402		612,729		189,598

Noninterest income consists of service charges on deposit accounts and other miscellaneous service charges, fees, and income. Total noninterest income increased 24% during 2005 to $762,402. The increase was primarily due to the amortized gain recognized on the sale-leaseback of an administrative building of $413,000 compared to $144,000 recognized in 2004. A portion of the increase in noninterest income was offset by a decrease in other miscellaneous income since the other income in 2004 included a gain on the sale of foreclosed assets of $190,000. There were no sales of foreclosed assets in 2005.

Noninterest income increased to $612,729 in 2004 from $189,598 in 2003. The increase was primarily from the aforementioned gain on the sale of foreclosed assets of $190,000, amortized gains recognized on the sale-leaseback of an administrative building of $144,100, and an increase of $67,400 in rental income from sub-leasing the administrative building.

Noninterest Expense

The following table presents the principal components of noninterest expenses for the years ended December 31, 2005, 2004, and 2003.


	2005		2004		2003


Salaries and employee benefits	$	7,214,234	$	4,581,670	$	2,522,914
Net occupancy and equipment		1,722,280		1,098,100		584,236
Legal/professional services		625,008		180,988		248,631
Data processing		573,864		368,421		279,425
Directors’ fees		540,570		379,500		122,000
Non-profit contributions		379,915		196,831		85,149
Loan collection and origination		266,931		263,119		105,474
Marketing and community relations		249,486		235,264		147,722
Audit and exam fees		236,961		169,832		139,516
Supplies/printing		139,644		130,195		100,702
Occupational and business licenses		89,909		58,945		19,568
Telephone		85,112		58,554		41,215
Training and meeting		84,545		59,469		38,968
Other		448,900		300,957		235,099

Noninterest expense		12,657,359		8,081,845		4,670,619

Noninterest expenses increased 57% to $12.7 million in 2005 from $8.1 million in 2004, largely a reflection of the general growth of the organization in 2005. Salaries and employee benefits increased $2.6 million. Total full-time equivalent employees increased during the current year to 62 from 46 at December 31, 2004. This was the primary reason for the increase in salaries and benefits. Ten of the new employees were hired to staff the full-service branch in Duluth, Georgia (Gwinnett County) that is scheduled to open early in 2006, the loan production office that opened in August 2005 in Cumming, Georgia (Forsyth County), and increase representation in the existing branch locations. The remaining employees were hired to strengthen the infrastructure of the Bank as it grows. Additionally, compensation expense related to variable stock options increased $557,000 and bonuses and incentives increased $467,000 in 2005 compared to 2004, respectively. The Bank has a performance-based annual bonus plan whereby 10% of net earnings are paid to its employees. With the increase of net income this year, the amount of the annual bonus doubled to $750,000 in 2005 from the previous year. Other bonuses and incentives were paid throughout the year for special projects, business development and new employee sign-on payments.

Net occupancy and equipment expenses increased 57% to $1.7 million in 2005 from $1.1 million in 2004, also largely as a result of branch expansion and leasehold improvements on the administrative building to house additional employees. Equipment and software costs increased $300,000 in 2005 due to the conversion to a different core processor.

Legal and professional fees increased $444,000 in 2005 compared to 2004. In order to comply with the Sarbanes-Oxley Act, the Bank contracted with a third party accounting firm to assist in implementing the necessary documentation of existing processes and identifying areas needing strengthened procedures. The hard costs, classified as consulting fees, associated with this effort in 2005 alone totaled $185,000. Employees in every area of the Bank also assisted with this project. Other consulting fees included fees associated with recruiting talented, experienced bankers to support the Bank’s growth. In 2005, we utilized staffing firms more than in the past to accomplish this task. As a result, the increase in consulting fees included an increase in employee recruiting fees of $134,000 over fees incurred in 2004.

Non-profit contributions increased $183,000, or 93%, in 2005 over 2004 as the amount has typically increased proportionately with the Bank’s profitability each year. Integrity Bank is a faith-based organization. As such, we tithe 10% of our net income each year to a foundation, administered by the Bank, which then distributes those funds to faith-based organization, as well as other non-profit organizations. In addition to helping people in our community, we contribute funds to people in need all over the world. Director fees increased $161,000 since the fees for each monthly meeting were raised in March 2005. Other noninterest expenses, such as data processing, audit/exam fees, and business license expenses were also higher in 2005 compared to the previous year as a result of the Bank’s growth during the past year.

Other noninterest expenses were $8.1 million in 2004, compared to $4.7 million in 2003, an increase of $3.4 million. Salaries and employee benefits increased $2.1 million. This increase was due to the addition of 13 full-time equivalent employees during 2004, for a total of 46, an increase in compensation expense related to variable stock options of $512,000, and normal increases in salaries and benefits. The increase in the number of employees was due to the opening of a full-service branch in Smyrna (Cobb County), Georgia, a loan production office in Lawrenceville (Gwinnett County), Georgia, and additional administrative employees required due to our growth. Equipment and occupancy expenses increased by $514,000 as a result of additional depreciation and utility expenses related to the new branches. Future occupancy and equipment expenses will increase as new branches are built. Other operating expenses increased by $839,000 due partially to increased director fees of $257,000, an increase in loan collection and processing costs of $158,000, and increased non-profit contributions of $112,000. The increases in all other operating expenses were directly related to the overall growth of the Company.

Income Tax

We reported income tax expense of $3,688,300, $1,775,700, and $462,400 for 2005, 2004, and 2003, respectively. The effective tax rate for 2005, 2004, and 2003 was 36.8%, 37.1% and 20.5%, respectively. Due to our short operating history, the company had net operating loss carryforwards prior to 2003. Income tax expense in 2003 was substantially reduced due to the recognition of $380,000 of deferred tax assets previously accorded a valuation allowance. There were no loss carryforwards or valuation allowances in 2005 or 2004.

Asset/Liability Management

Our objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing and capital policies. Certain officers are charged with the responsibility for monitoring policies and procedures designed to ensure acceptable composition of the asset/liability mix. Our management’s overall philosophy is to support asset growth primarily through growth of core deposits of all categories made by local individuals, partnerships and corporations.

Our asset/liability mix is monitored on a regular basis with a report reflecting the interest rate-sensitive assets and interest rate-sensitive liabilities being prepared and presented to the board of directors on a quarterly basis. The objective of this policy is to monitor interest rate-sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on earnings. An asset or liability is considered to be interest rate-sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to affect net interest income adversely, while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. If our assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.

A simple interest rate “gap” analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, we also evaluate how the repayment of particular assets and liabilities is impacted by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps and floors”) that limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates.

Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates, and it is management’s intention to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur that would negatively affect our liquidity position.

As of December 31, 2005, our cumulative one year interest rate-sensitivity gap ratio was 1.03. Our targeted ratio is 0.80 to 1.20 in this time horizon. This indicates that our interest-earning assets will reprice during this period at a rate faster than our interest-bearing liabilities.

The following table sets forth the distribution of the repricing of our interest-earning assets and interest-bearing liabilities as of December 31, 2005, the interest rate-sensitivity gap, the cumulative interest rate-sensitivity gap, the interest rate-sensitivity gap ratio and the cumulative interest rate-sensitivity gap ratio. The table also sets forth the time periods in which interest-earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movements on the net interest margin as the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of our customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within this period and at different rates.


	0 — 3		4 — 6			7 — 12			1 — 5		Over 5
	Months		Months			Months			Years		Years		Total
	(Dollars in thousands)


Interest-earning assets:
Interest-bearing deposits in banks	$	67	$	0		$	0		$	0	$	0	$	67
Federal funds sold		6,243		0			0			0		0		6,243
Securities		—		85			—			63,037		10,802		73,924
Federal Home Loan Bank Stock		889		0			0			0		0		889
Loans		620,311		2,699			8,770			19,178		820		651,778

Total interest-earning assets	$	627,510	$	2,784		$	8,770		$	82,215	$	11,622	$	732,901


Interest-bearing liabilities:
Interest-bearing demand deposits	$	163,487	$	0		$	0		$	0	$	0	$	163,487
Savings and money markets		9,768		0			0			0		0		9,768
Time deposits		88,316		113,266			239,782			42,779		3,999		488,142
Subordinated debentures		6,186		0			0			0		0		6,186

Total interest-bearing liabilities	$	267,757	$	113,266		$	239,782		$	42,779	$	3,999	$	667,583


Interest rate sensitivity gap	$	359,753	$	(110,482	)	$	(231,012	)	$	39,436	$	7,623	$	65,318

Cumulative interest rate sensitivity gap	$	359,753	$	249,271		$	18,259		$	57,695	$	65,318

Interest rate sensitivity gap ratio		2.34		0.02			.04			1.92		2.91

Cumulative interest rate sensitivity gap ratio		2.34		1.65			1.03			1.09		1.10

Selected Financial Information and Statistical Data

The tables and schedules on the following pages set forth certain significant financial information and statistical data with respect to: the distribution of our assets, liabilities and shareholders’ equity; the interest rates we experience; our investment portfolio; our loan portfolio, including types of loans, maturities and sensitivities of loans to changes in interest rates and information on non-performing loans; summary of the loan loss experience and reserves for loan losses; types of deposits and the return on equity and assets.

Average balances, interest income, and interest expense

The following table contains condensed average balance sheets (using daily average balances) for the years indicated. In addition the amount of our interest income and interest expense for each category of interest-earning assets and interest-bearing liabilities and the related average interest rates, net interest spread and net yield on average interest earning assets are included.

Analysis of Net Interest Income
for the Years Ended December 31, 2005, 2004, and 2003


	2005								2004									2003
	Average			Income/		Yield/			Average				Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate			Balance				Expense		Rate			Balance			Expense		Rate
	(Dollars in thousands)
Assets:
Deposits in banks	$	209		$	5		2.39	%		$	301		$	4		1.33	%	$	757		$	10		1.29	%
Taxable investment securities		60,812			2,710		4.46				35,599			1,593		4.47			21,167			878		4.15
Federal funds sold		1,858			62		3.34				2,460			28		1.14			4,561			49		1.07
Loans (1)		525,836			41,379		7.87				301,040			20,831		6.92			184,430			13,253		7.19
Allowance for loan losses		(4,572	)								(3,639	)							(1,700	)
Cash and due from banks		3,575									2,634								2,876
Other assets		15,118									13,404								8,971

Total Assets	$	602,836								$	351,799							$	221,062

Total interest-earning assets	$	588,715			44,156		7.50			$	339,400			22,456		6.62		$	210,915			14,190		6.73

Liabilities:
Noninterest-bearing demand	$	11,961								$	9,971							$	7,047
Interest bearing demand and savings		183,121			5,974		3.26				137,661			3,432		2.49			63,312			1,429		2.26
Time		313,816			11,319		3.61				142,106			3,512		2.47			122,177			3,353		2.74

Total deposits		508,898									289,738								192,536
Other borrowings		34,040			1,391		4.09				27,100			627		2.31			8,952			183		2.04
Other liabilities		4,309									2,099								1,111
Shareholders’ equity		55,589									32,862								18,463

Total liabilities and shareholders’ equity	$	602,836								$	351,799							$	221,062

Total interest-bearing liabilities	$	530,977			18,684		3.52			$	306,867			7,571		2.47		$	194,441			4,965		2.55

Net interest income				$	25,472								$	14,885							$	9,225

Net interest margin (2)							4.33									4.39								4.37
Net interest spread (3)							3.98									4.15								4.18


(1)		Interest income from loans includes total fee income of approximately $4.4 million, $2.8 million, and $1.9 million for the years ended December 31, 2005, 2004 and 2003, respectively. The average balance of non-accrual loans included in average loans was $1,127,000, $2,138,000, and $273,000 in 2005, 2004 and 2003, respectively.

(2)		Net interest margin is net interest income divided by average interest-earning assets.

(3)		Interest rate spread is the weighted average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

Rate and Volume Analysis

The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected our interest income and expense during the year indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to:

	•		change in rate (change in rate multiplied by old volume); and

	•		change in volume (change in volume multiplied by old rate);

	•		a combination of change in rate and change in volume.

The changes in interest income and interest expense attributable to both volume and rate have been allocated proportionately on a consistent basis to the change due to volume and the change due to rate.


	Year Ended December 31,								Year Ended December 31,
				2005 vs. 2004					2004 vs. 2003
				Changes Due To:					Changes Due To:
	Volume			Rate			Total		Volume			Rate			Total


Increase (decrease) in:
Income from interest-earning assets:
Loans	$	17,358		$	3,190		$	20,548	$	8,095		$	(517	)	$	7,578
Investment securities		1,124			(7	)		1,117		652			63			715
Federal funds sold		(5	)		39			34		(24	)		3			(21	)
Deposits with other banks		(1	)		2			1		(6	)		—			(6	)


Total interest income		18,476			3,224			21,700		8,717			(451	)		8,266


Expense from interest-bearing liabilities:
NOW accounts		1,371			1,161			2,532		1,823			127			1,950
Money market accounts		(10	)		19			9		47			6			53
Savings accounts		0			1			1		1			(1	)		0
Time deposits		5,656			2,151			7,807		522			(363	)		159
Federal funds purchased		46			57			103		19			1			20
Federal Home Loan Bank advances		101			448			549		166			13			179
Subordinated debentures		0			112			112		238			7			245


Total interest expense		7,164			3,949			11,113		2,816			(210	)		2,606


Net interest income	$	11,312		$	(725	)	$	10,587	$	5,901		$	(241	)	$	5,660

Investment Portfolio

Types of Investments

The carrying amounts of securities at the dates indicated, which are all classified as available-for-sale, are summarized as follows:


			December 31,
(Dollars in Thousands)	2005		2004		2003

Mortgage-backed securities	$	73,234	$	47,238	$	26,513
Equity securities		1,579		1,923		1,340


	$	74,813	$	49,161	$	27,853

The mortgage-backed securities consist of government agency mortgage pool securities with stated maturities up to thirty years. However, the portfolio balance reduces monthly as the underlying mortgages are paid down. Most will have an effective life that is much shorter than the stated maturity of the security. Although the exact maturity date is uncertain, the portfolio is predicted to have an effective maturity of less than five years.

The equity securities in 2005 consist of $889,300 in Federal Home Loan Bank of Atlanta stock and a $690,000 common stock investment in Integrity Bank of Florida. The equity securities in 2004 consisted of $1,232,600 in Federal Home Loan Bank of Atlanta stock and a $690,000 common stock investment in Integrity Bank of Florida. The equity securities in 2003 consisted of $650,000 in Federal Home Loan Bank of Atlanta stock and the $690,000 investment in Integrity Bank of Florida. Banks with borrowings from Federal Home Loan Banks are required to buy stock in proportion to the amount of their outstanding advances and total assets. There is no

market for the stock, which is normally bought or sold to the Federal Home Loan Bank at a set price of $100 per share. The stock has historically paid a quarterly dividend, although the issuer is not required to pay dividends.

Maturities

The amounts of available for sale securities, including the weighted average yield in each category are shown in the following table according to contractual maturity classifications one through five years, after five through ten years and after ten years. There were no investment securities classified as held to maturity in 2005, 2004, or 2003.


(Dollars in
Thousands)	December 31, 2005							December 31, 2004				December 31, 2003
					Year-end
	Amortized		Fair		Weighted			Amortized		Fair		Amortized		Fair
	Cost		Value		Avg. Yield			Cost		Value		Cost		Value

Mortgage-backed securities Over one year through five years	$	3,120	$	3,045		4.17	%	$	4,038	$	4,072	$	415	$	427

Over five years through ten years		2,496		2,499		5.31			—		—		794		817

Over ten years		69,232		67,690		4.64			43,515		43,166		25,202		25,269

	$	74,848	$	73,234		4.64		$	47,553	$	47,238	$	26,411	$	26,513


(1)		Yields were computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security. The weighted average yield for each maturity range was computed using the carrying value of each security in that range.

Loan Portfolio

Types of Loans

The amount of loans outstanding at the indicated dates is shown in the following table according to the type of loan.


													December 31,
	2005						2004						2003						2002						2001
(Dollars in Thousands)				% of						% of						% of						% of						% of
	Amount			Loans			Amount			Loans			Amount			Loans			Amount			Loans			Amount			Loans

Commercial	$	46,296			7	%	$	11,181			3	%	$	16,071			7	%	$	11,751			9	%	$	3,558			8	%
Real estate-construction		384,990			59			214,104			56			123,882			52			51,715			40			22,522			51
Real estate-mortgage		219,374			34			160,101			41			98,401			41			63,940			50			17,134			39
Consumer installment and other		1,426			—			614			—			723			—			856			1			867			2

		652,086			100	%		386,000			100	%		239,077			100	%		128,262			100	%		44,081			100	%
Less:
Allowance for loan losses		(5,612	)					(3,433	)					(3,573	)					(1,104	)					(392	)
Deferred loan fees		(308	)					(94	)					(158	)					(255	)					(118	)


Net loans	$	646,166					$	382,473					$	235,346					$	126,903					$	43,571

Maturities and Sensitivities of Loans to Changes in Interest Rates

Total loans as of December 31, 2005 and 2004 are shown in the following table according to contractual maturity classifications one year or less, after one year through five years and after five years.


	December 31,		December 31,
(Dollars in Thousands)	2005		2004

Commercial
One year or less	$	16,036	$	8,622
After one through five years		28,202		2,228
After five years		2,058		331

		46,296		11,181

Construction
One year or less		81,371		129,544
After one through five years		298,639		81,726
After five years		4,980		2,834

		384,990		214,104

Real Estate Mortgage
One year or less		17,053		63,448
After one through five years		164,557		85,486
After five years		37,764		11,167

		219,374		160,101

Consumer & Other
One year or less		1,202		491
After one through five years		220		123
After five years		4		—

		1,426		614

	$	652,086	$	386,000

The following table summarizes loans as of December 31, 2005 and 2004 with the due dates after one year that have predetermined and floating or adjustable interest rates.


	December 31,		December 31,
(Dollars in Thousands)	2005		2004
Predetermined interest rates	$	1,092	$	12,984
Floating or adjustable interest rates		535,332		170,911


	$	536,424	$	183,895

Risk Elements

Information with respect to non-accrual, past due and restructured loans as of December 31, 2005 and 2004 is as follows:


(Dollars in Thousands)	December 31,
	2005		2004

Non-accrual loans	$	1,652	$	779
Loans contractually past due 90 days or more as to interest or principal payments and still accruing		0		0
Restructured loans		0		0
Loans, now current about which there are serious doubts as to the ability of the borrower to comply with loan repayment terms		817		307
Interest income that would have been recorded on non-accrual and restructured loans under original terms		186		19
Interest income that was recorded on non-accrual and restructured loans		0		0

Non-accrual loans have increased to $1,652,000 as of December 31, 2005 from $779,000 as of December 31, 2004. The increase is attributable to one loan that totaled $2.1 million when it was classified as non-accrual in late 2005. In December, due to the deteriorated status of the loan and a bankruptcy filing, $755,000 of this loan was charged-off, leaving a balance of $1.4 million. In January, the Bank foreclosed on the loan, placing the property securing the loan into Other Real Estate at $1.2 million, taking an additional $160,000 against allowance for loan losses. The property was on the market in the first quarter of 2006.

It is our policy to discontinue the accrual of interest income when, in the opinion of management, collection of interest becomes doubtful. A non-accrual status is applied when there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected, and the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection.

Loans now current about which there are serious doubts as to the ability of the borrower to comply with loan repayment terms increased to $568,000 at December 31, 2005 from $307,000 at December 31, 2004. The loans included in the 2005 total consisted of three loans ranging in amounts from $150,000 to $238,000. These loans were classified for regulatory purposes as loss, doubtful, or substandard, but are currently in compliance with their payment terms. They do not represent or result from trends or uncertainties that management reasonably expects will materially impact future operating results, liquidity or capital resources.

Summary of Loan Loss Experience

The following table summarizes average loan balances for the year determined using the daily average balances during the year; changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off; additions to the allowance which have been charged to operating expense; and the ratio of net charge-offs during the year to average loans.


				Year Ended December 31,
	2005			2004			2003			2002		2001
(Dollars in Thousands)
Average amount of loans outstanding	$	525,836		$	301,040		$	184,430		$	79,864	$	26,108


Balance of allowance for loan losses at beginning of year	$	3,433		$	3,573		$	1,104		$	392	$	56


Loans charged off:
Consumer		—			—			(20	)		—		—
Real estate mortgage		(879	)		(550	)		—			—		—
Commercial		(563	)		(2,292	)		—			—		—

		(1,442	)		(2,842	)		(20	)		—		—


Loans recovered:
Real estate mortgage		55			75			—			—		—

		55			75			—			—		—


Net charge-offs		(1,387	)		(2,767	)		(20	)		—		—


Additions to allowance charged to operating expense during year		3,566			2,627			2,489			712		336


Balance of allowance for loan losses at end of year	$	5,612		$	3,433		$	3,573		$	1,104	$	392

Ratio of net loans charged off during the year to average loans outstanding		0.26	%		0.92	%		0.01	%		—		—

Allowance for Loan Losses

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. Our evaluation of the loan portfolio includes a periodic review of loan loss experience, current economic conditions that may affect the borrower’s ability to pay and the underlying collateral value of the loans.

The allowance for loan losses represents management’s assessment of the risk associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain a level considered adequate to absorb anticipated loan losses. In assessing the adequacy of the allowance, management reviews the size, quality and risk of loans in the portfolio. Management also considers such factors as our loan loss experience,

the amount of past due and nonperforming loans, specific known risk, the status and amount of nonperforming assets, underlying collateral values securing the loans, current and anticipated economic conditions and other factors which affect the allowance for potential credit losses. An analysis of the credit quality of the loan portfolio and the adequacy of the allowance for loan losses is prepared by the loan committee on a quarterly basis.

Our allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer banks identified by the regulators. During their routine examinations of banks, regulatory agencies may require a bank to make additional provisions to its allowance for loan losses when, in the opinion of the regulators, credit evaluations and allowance for loan loss methodology differ materially from those of management.

All of our loans are assigned individual loan grades when underwritten. The Bank, under the guidance of the FDIC and the State of Georgia Department of Banking and Finance, has established minimum general reserves based on the asset quality grade of the loan. General reserve factors applied to each rating grade are based upon management’s experience and common industry and regulatory guidelines.

As of December 31, 2005 and 2004, we made no allocations of our allowance for loan losses to specific categories of loans. Based on our best estimate, the allocation of the allowance for loan losses to types of loans, as of the indicated dates, is as follows:


	December 31, 2005					December 31, 2004					December 31, 2003					December 31, 2002					December 31, 2001
			Percent					Percent					Percent					Percent					Percent of
			of loans					of loans					of loans					of loans					loans
			in					in					in					in					in
			each					each					each					each					each
			category					category					category					category					category
			to total					to total					to total					to total					to total
	Amount		loans			Amount		loans			Amount		loans			Amount		loans			Amount		loans
(Dollars in Thousands)

Commercial	$	427		7.10	%	$	243		2.90	%	$	1,368		6.73	%	$	101		9.16	%	$	32		8.07	%
Real estate-construction		3,156		59.04			1,828		55.46			1,087		51.85			446		40.32			200		51.09
Real estate-mortgage		2,018		33.64			1,357		41.48			1,112		41.12			551		49.85			152		38.87
Consumer installment loans and other		11		.22			5		0.16			6		.30			6		.67			8		1.97

	$	5,612		100.00		$	3,433		100.00		$	3,573		100.00		$	1,104		100.00		$	392		100.00

Deposits

Average amount of deposits (determined using daily average balances) and average rates paid thereon, classified as to non-interest-bearing demand deposits, interest-bearing demand deposits, savings deposits and time deposits is presented below.


						Year Ended December 31,
	2005					2004					2003
(Dollars in Thousands)	Amount		Percent			Amount		Percent			Amount		Percent


Non-interest-bearing demand deposits	$	6,769		—	%	$	9,971		—	%	$	7,047		—	%
Interest-bearing demand deposits		182,877		3.27			137,384		2.50			63,137		2.26
Savings deposits		244		0.82			277		0.47			175		0.55
Time deposits		313,816		3.61			142,106		2.47			122,177		2.74

Total		503,706					289,738					192,536

The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2005 are shown below by category, which is based on time remaining until maturity of three months or less, over three through six months, over six through twelve months and over twelve months.


(Dollars in Thousands)	December 31, 2005

Three months or less	$	14,684
Over three through six months		38,083
Over six through twelve months		78,172
Over twelve months		4,534

Total		135,473

The Bank had approximately $131 million in jumbo CD’s maturing in one year or less at December 31, 2005. We believe the large percentage, 43%, of jumbo CD’s in relation to total CD’s is attributable to our affluent customer base. It is our experience that a large portion of these deposits are retained by the Bank as they mature because our deposit interest rates are comparable to other rates in our market.

In 2005, the Bank obtained brokered funds in order to supplement retail deposits for the strong loan growth during the year. The rates paid on these funds, including fees, were comparable to retail time deposits issued at the same time. At December 31, 2005, the total in brokered funds was $150,586,000. The Bank had no deposits obtained through brokers in 2004.

Return on Assets and Shareholders’ Equity

The following rate of return information for the years indicated is presented below.


	Year Ended December 31,
	2005			2004


Return on assets (1)		1.05	%		0.86	%
Return on equity (2)		11.37			9.15
Dividend payout ratio (3)		0			0
Equity to assets ratio (4)		9.22			9.34


(1)		Net income divided by average total assets.

(2)		Net income divided by average equity.

(3)		Dividends declared per share of common stock divided by net income per share.

(4)		Average common equity divided by average total assets

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in either diminished current market values or reduced potential net interest income in future periods. The Company’s primary market risk exposure is currently the interest rate risk inherent in its lending and deposit taking activities. The structure of the Company’s loan and deposit portfolios is such that a significant decline in the prime rate may adversely impact net market values and interest income. The Company manages its interest rate risk through the use of various tools, including managing the composition and size of the investment portfolio so as to reduce the interest rate risk in the deposit and loan portfolios, at the same time maximizing the yield generated by the portfolio.

The table below presents the contractual balances and the estimated fair value of the Company’s financial instruments at their expected maturity dates as of December 31, 2005. The expected maturity categories for investment securities take into consideration historical prepayment experience, as well as Management’s expectations based on the interest rate environment as of December 31, 2005. For core deposits without contractual maturity (i.e., interest-bearing checking, savings, and money market accounts), the table presents principal cash flows based on Management’s judgment concerning their most likely runoff or repricing behaviors. Weighted average variable rates are based on implied forward rates in the yield curve as of December 31, 2005.


				Expected Maturity Date
(Dollars in thousands)	2006			2007			2008			2009			2010			Thereafter			Total			Fair Value


Assets
Investment Securities
Fixed rate	$	8,492		$	7,421		$	6,469		$	2,737		$	7,368		$	690		$	33,177		$	32,178
Average interest rate		4.77	%		4.77	%		4.77	%		4.75	%		4.75	%		—	%		4.77	%
Variable rate		4,753			5,292			4,595			7,443			16,823			3,454			42,360			41,746
Average interest rate		5.65	%		6.41	%		6.41	%		6.41	%		6.41	%		6.41	%		6.32	%
Loans
Fixed rate		14,650			11,440			485			206			575			153			27,509			24,106
Average interest rate		7.02	%		6.39	%		7.61	%		7.17	%		6.73	%		5.75	%		6.75	%
Variable rate		316,241			187,556			98,758			12,671			6,280			2,763			624,269			627,593
Average interest rate		7.92	%		7.92	%		7.93	%		8.01	%		7.90	%		3.53	%		7.90	%
Federal funds sold
Variable rate		6,243			—			—			—			—			—			6,243			6,243
Average interest rate		3.34	%		—			—			—			—			—			3.34	%
Interest-bearing deposits with other banks
Variable rate		67			—			—			—			—			—			67			67
Average interest rate		2.39	%		—			—			—			—			—			2.39	%
Liabilities
Interest-bearing deposits and savings
Variable rate		172,825			—			—			—			—			—			172,825			172,825
Average interest rate		3.73	%		—			—			—			—			—			3.73	%
Time deposits		442,148			32,383			10,043			3,999			—			—			488,573			488,186
Average interest rate		4.09	%		4.34	%		4.03	%		4.09	%		—			—			4.11	%
Variable rate long-term borrowings		—			—			—			—			—			6,186			6,186			6,186
Average interest rate		—			—			—			—			—			6.49	%		6.49	%

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The financial statements of the Company are incorporated herein by reference to Exhibit 13.1 of this Annual Report on Form 10-K for the year ended December 31, 2005.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

We have not had any change in accountants or disagreements with accountants on accounting and financial disclosure during the two most recent fiscal years.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company conducted an evaluation, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2005. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported on a timely basis. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2005 to give reasonable assurance in alerting them in a timely fashion to material information relating to the Company that is required to be included in the reports that the Company files under the Exchange Act.

Management’s Report on Internal Control over Financial Reporting

The management of Integrity Bancshares, Inc. and its subsidiary is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system has been designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of the Company’s published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The management of Integrity Bancshares, Inc. and subsidiary has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. To make this assessment, we used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that, as of December 31, 2005, the Company’s internal control over financial reporting met those criteria.

Our independent auditors have issued an attestation report on our assessment of the Company’s internal control over financial reporting, which immediately follows.


		/s/ Steven M. Skow

		Steven M. Skow
		President and Chief Executive Officer

		/s/ Suzanne Long

		Suzanne Long
		Chief Financial Officer

Report of Independent Registered Public Accounting Firm

To the Board of Directors
Integrity Bancshares, Inc.
Alpharetta, Georgia

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Integrity Bancshares, Inc. and subsidiary maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Integrity Bancshares, Inc. and subsidiary’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Integrity Bancshares, Inc. and subsidiary maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, Integrity Bancshares, Inc. and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Integrity Bancshares, Inc. and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005, and our report dated January 27, 2006 expressed an unqualified opinion.


		/s/ MAULDIN & JENKINS, LLC
Atlanta, Georgia
January 27, 2006

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Bank has adopted a code of ethics applicable to all of its officers and employees, which was last revised in November, 2004. The revised code of ethics satisfies the criteria set forth in Item 406(b) of the SEC’s Regulation S-B. We believe that it promotes ethical conduct and prevents conflicts of interest. We will provide to any person without charge, upon request, a copy of such code of ethics. Requests should be directed to: Corporate Secretary, Integrity Bancshares, Inc., 11140 State Bridge Road, Alpharetta, GA, 30022. If we make an amendment to, or a waiver from, a provision of our code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of the code of ethics definition enumerated in paragraph (b) to Item 406 of the SEC’s Regulation S-B we will post such information on our Internet website, which is www.myintegritybank.com. Additional information regarding the Company’s directors and executive officers is incorporated by reference to the Definitive Proxy Statement for the 2006 Annual Shareholders’ Meeting — See Page 2 of this document.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference to the Definitive Proxy Statement for the 2006 Annual Shareholders’ Meeting — See Page 8 of this document.

ITEM 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information relating to our 2003 Directors Stock Option Plan and our 2003 Stock Option Plan, which are our only equity compensation plans, as of December 31, 2005. The figures presented in the following table do not include additional options to purchase shares of our common stock that will accrue to Steven M. Skow, our President and Chief Executive Officer, by virtue of Mr. Skow’s option to purchase five percent of our total outstanding common stock on the date of exercise at an exercise price of $2.45 per share.

Equity Compensation Plan Table

(a)

(b)

(c)

Weighted-

Number of securities

average exercise

remaining available for

Number of securities

price of

future issuance under

to be issued upon

outstanding

equity compensation

exercise of

options,

plans (excluding

outstanding options,

warrants and

securities reflected in

Plan category

warrants and rights

rights

column (a))

Equity compensation plans approved by security holders

1,228,996

5.60

1,925

Equity compensation plans not approved by security holders

—

Total

1,228,996

5.60

1,925

Additional disclosure is incorporated by reference to the Definitive Proxy Statement for the 2006 Annual Shareholders’ Meeting — See Page 11 of this document.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to the Definitive Proxy Statement for the 2006 Annual Shareholders’ Meeting — See Page 13 of this document.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference to the Definitive Proxy Statement for the 2006 Annual Shareholders’ Meeting — See Page 19 of this document.

ITEM 15. EXHIBITS, LIST AND FINANCIAL STATEMENT SCHEDULES

(a) The following exhibits, which include all financial statements filed as a part of this report, are filed as a part of or incorporated by reference in this report:


Exhibit
Number				Description

3.1				Articles of incorporation, as amended (incorporated by reference to Exhibit 3.1 to Form SB-2 filed by the Registrant on January 25, 2000 — File No. 333-95335)

3.2				Articles of Amendment filed June 10, 2005.

3.3				Bylaws (incorporated by reference to Exhibit 3.2 to Form SB-2 filed by the Registrant on January 25, 2000 — File Nos. 333-95335)

10.1				Employment agreement with Steven M. Skow (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-QSB for the period ended June 30, 2003 as filed with the SEC on August 29, 2003)*

10.2				Employment agreement with Rita Gray (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-QSB for the period ended June 30, 2003 as filed with the SEC on August 29, 2003)*

10.3				2003 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-QSB for the period ended June 30, 2003 as filed with the SEC on August 29, 2003)*

10.4				Amendment No. 1 to 2003 Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Form 10-KSB for the period ended December 31, 2004 as filed with the SEC on March 30, 2005)*

10.5				Amendment No. 2 to 2003 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-KSB for the period ended December 31, 2004 as filed with the SEC on March 30, 2005)*

10.6				2003 Directors Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Form 10-QSB for the period ended June 30, 2003 as filed with the SEC on August 29, 2003)*

13.1				Integrity Bancshares, Inc. Financial Statements as of December 31, 2005

21				Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Registrant’s Form 10-KSB for the period ended December 31, 2004 as filed with the SEC on March 30, 2005)

23				Consent of Mauldin & Jenkins, LLC

31.1				Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2				Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1				Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2				Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*	Denotes management contract or compensatory plan or arrangement.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		INTEGRITY BANCSHARES, INC.
			(Registrant)

By:	/s/ Steven M. Skow

	Steven M. Skow
	President and Chief Executive Officer
	Date: March 15, 2006

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


/s/ Steven M. Skow		Date: March 15, 2006
Steven M. Skow, President,
Chief Executive Officer and Director
[Principal Executive Officer]

/s/ Suzanne Long		Date: March 15, 2006
Suzanne Long, Senior Vice-President & C.F.O
[Principal Financial Officer and Principal Accounting Officer]

/s/ Clinton M. Day		Date: March 15, 2006
Clinton M. Day, Director

/s/Alan K. Arnold		Date: March 15, 2006
Alan K. Arnold, Director

/s/James E. Bridges James E. Bridges, Director		Date: March 15, 2006

/s/ Joseph J. Ernest Joseph J. Ernest, Director		Date: March 15, 2006

/s/ Don C. Hartsfield Don C. Hartsfield, Director		Date: March 14, 2006

/s/ Jack S. Murphy Jack S. Murphy, Director		Date: March 15, 2006


/s/ Richard H. Peden, Sr.		Date: March 15, 2006
Richard H. Peden, Sr, Director

/s/ Charles J. Puckett		Date: March 14, 2006
Charles J. Puckett, Director

/s/ Gerald O. Reynolds		Date: March 14, 2006
Gerald O. Reynolds, Director

/s/ Robert S. Wholey		Date: March 15, 2006
Robert S. Wholey, Director

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS

Integrity Bancshares, Inc. expects to send a proxy statement to its shareholders with respect to the annual meeting of shareholders subsequent to the filing of this Form 10-K. It will furnish copies of such material to the Commission when the proxy statement is sent to shareholders.