U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~March~~ June 3130, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33005

Integrity Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Georgia		58-2508612
(State or other jurisdiction of		(IRS Employer
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
incorporation or organization)		Identification No.)

11140 State Bridge Road, Alpharetta, Georgia 30022 (Address of principal executive offices)

(770) 777-0324

(Address of principal executive offices)

(770) 777-0324

(Issuer’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the issuer (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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

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 þ Non-accelerated filer o

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of ~~May~~ 4September 5, 2007: 15,511,014 of common stock, no par value.

INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY

INDEX

	~~Page~~		Page
PART I. FINANCIAL INFORMATION
PART I.	FINANCIAL INFORMATION
~~Item 1. Financial Statements~~	Item 1. Financial Statements
Consolidated Balance Sheets — March 31, 2007 and December 31, 2006		3
	Consolidated Balance Sheets – June 30, 2007 and December 31, 2006			3
Consolidated Statements of Income and Comprehensive Income Three Months Ended March 31, 2007 and 2006		4
	Consolidated Statements of Operations and Comprehensive Income (Loss) Three and Six Months Ended June 30, 2007 and 2006			4
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2007 and 2006		5
	Consolidated Statements of Cash Flows - Six Months Ended June 30, 2007 and 2006			5
~~Notes to Consolidated Financial Statements~~	Notes to Consolidated Financial Statements	6		6
~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	9		10
~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~	Item 3. Quantitative and Qualitative Disclosures About Market Risk	16		20
~~Item 4. Controls and Procedures~~	Item 4. Controls and Procedures	16		20
PART II. OTHER INFORMATION
PART II.	OTHER INFORMATION
~~Item 1. Legal Proceedings~~	Item 1. Legal Proceedings	17		22
~~Item 1A. Risk Factors~~	Item 1A. Risk Factors	17		22
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	17		22
~~Item 3. Defaults Upon Senior Securities~~	Item 3. Defaults Upon Senior Securities	17		23
~~Item 4. Submission of Matters to a Vote of Security Holders~~	Item 4. Submission of Matters to a Vote of Security Holders	17		23
~~Item 5. Other Information~~	Item 5. Other Information	17		23
~~Item 6. Exhibits~~	Item 6. Exhibits	17		23
~~Signatures~~	Signatures	18		24
EX-31.1 CERTIFICATION OF THE CEO PURSUANT TO SECTION 302
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 CERTIFICATE OF PFO PURSUANT TO SECTION 302
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32 CERTIFICATION OF THE CEO AND PFO PURSUANT TO SECTION 906
EX-32 SECTION 906 CERTIFICATION OF THE CEO AND CFO

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
INTEGRITY BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,
	June 30,
	2007			December 31,
(Dollars in thousands)	(Unaudited)			2006
ASSETS:
Cash and due from banks	$	133,~~255~~963		$	5,719
Interest-bearing deposits in banks		~~114~~506			85
Securities available for sale, at fair value		~~148~~150,~~452~~129			133,923
Restricted equity securities, at cost		45,~~717~~392			1,727
Loans		~~997~~1,~~396~~026,796			941,580
Less: allowance for loan losses		(1024,~~898~~445	)		(9,825	)
Net loans		~~986~~1,~~498~~002,351			931,755
Premises and equipment		2021,~~950~~510			15,372
Other real estate owned		~~905~~6,978			542
Bank owned life insurance		2021,~~944~~204			20,687
Other assets		16,756			15,011
Deferred taxes		4,940			5,442
Total assets	$	1,212,591		$	1,124,821
Other assets		25,174			9,569
Total assets	$	1,242,147		$	1,124,821
LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES:
Deposits:
Noninterest-bearing demand	$	1516,~~937~~446		$	20,146
Interest-bearing:
Demand		~~128~~113,~~527~~466			125,446
Savings		3532,~~729~~718			31,963
Time, $100,000 and over		~~176~~195,~~814~~249			169,615
Other time		~~568~~634,~~273~~512			581,617
Total deposits		~~925~~992,~~280~~391			928,787
Federal funds purchased and repurchase agreements		7750,~~341~~589			46,551
Federal Home Loan Bank advances		6075,000			5,000
Subordinated long-term debentures		52,022			52,022
Other liabilities		1018,~~956~~285			12,089
Total liabilities		1,~~125~~188,~~599~~287			1,044,449
STOCKHOLDERS’ EQUITY:
Common stock, no par value; 50,000,000 shares authorized; 15,511,014 and 14,764,538 shares issued and outstanding, respectively		64,~~195~~253			60,723
Retained earnings		23,226			20,280
Accumulated (deficit) earnings		(8,691	)		20,280
Accumulated other comprehensive loss		(~~429~~1,702	)		(631	)
Total stockholders’ equity		8653,~~992~~860			80,372
Total liabilities and stockholders’ equity	$	1,~~212~~242,~~591~~147		$	1,124,821

See Accompanying Notes to Condensed Consolidated Financial Statements.

INTEGRITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME ~~STATEMENTS~~ (~~Unaudited~~LOSS)

	Three months
	ended March 31,
(Dollars in thousands, except share and per share amounts)	2007		2006
Interest income
Loans, including fees	$	22,484	$	15,573
Interest-bearing deposits in banks		2		1
Federal funds sold		20		91
Taxable investment securities		1,727		907
Total interest income		24,233		16,572
Interest expense
Time deposits, $100,000 and over		2,339		1,626
Other deposits		9,384		5,682
Federal Home Loan Bank advances		522		8
Other borrowings		631		33
Long-term debentures		976		390
Total interest expense		13,852		7,739
Net interest income		10,381		8,833
Provision for loan losses		1,073		1,291
Net interest income after provision for loan losses		9,308		7,542
Other income
Service charges on deposit accounts		18		20
Income from bank owned life insurance		258		—
Other operating income		86		110
Total other income		362		130
Other expense
Salaries and employee benefits		2,839		2,310
Occupancy and equipment expenses		637		501
Other operating expenses		1,556		1,286
Total noninterest expense		5,032		4,097
Income before income taxes		4,638		3,575
Income tax expense		1,692		1,398
Net income	$	2,946	$	2,177
Other comprehensive income
Unrealized gains (losses) on securities available-for- sale arising during period, net of tax		203		(207	)
Comprehensive income	$	3,149	$	1,970
Basic earnings per common share	$	.19	$	.15
Diluted earnings per common share	$	.18	$	.14
Cash dividends per common share	$	—	$	—

(Unaudited)


	Three months						Six months
	ended June 30,						ended June 30,
(Dollars in thousands, except share and per share amounts)	2007			2006			2007			2006

Interest income
Loans, including fees	$	19,597		$	17,966		$	42,081		$	33,539
Interest-bearing deposits in banks		6			1			8			2
Federal funds sold		2			137			22			228
Taxable investment securities		2,032			1,161			3,759			2,068

Total interest income		21,637			19,265			45,870			35,837


Interest expense
Time deposits, $100,000 and over		2,568			1,963			4,907			3,590
Other deposits		9,823			6,980			19,207			12,660
Federal Home Loan Bank advances		906			16			1,428			24
Other borrowings		806			25			1,437			58
Long-term debentures		986			504			1,962			894

Total interest expense		15,089			9,487			28,941			17,226



Net interest income		6,548			9,778			16,929			18,611

Provision for loan losses		48,415			848			49,488			2,139

Net interest income (loss) after provision for loan losses		(41,867	)		8,930			(32,559	)		16,472


Other income
Service charges on deposit accounts		19			21			37			41
Income from bank owned life insurance		259			171			517			171
Other operating income		131			161			217			270

Total other income		409			353			771			482


Other expense
Salaries and employee benefits		2,468			2,525			5,307			4,835
Occupancy and equipment expenses		579			651			1,216			1,152
Other operating expenses		1,936			1,548			3,492			2,833

Total other expense		4,983			4,724			10,015			8,820


Income (loss) before income taxes (benefits)		(46,441	)		4,559			(41,803	)		8,134

Income tax expense (benefit)		(14,524	)		1,778			(12,832	)		3,176

Net income (loss)	$	(31,917	)	$	2,781		$	(28,971	)	$	4,958


Other comprehensive income (loss)
Unrealized losses on securities available-for- sale arising during period, net of tax benefit		(1,274	)		(788	)		(1,071	)		(995	)

Comprehensive income (loss)		(33,191	)		1,993			(30,042	)		3,963


Basic earnings (loss) per common share	$	(2.06	)	$	.19		$	(1.88	)	$	.34
Diluted earnings (loss) per common share	$	(2.06	)	$	.18		$	(1.88	)	$	.32
Dividends per share	$	—		$	—		$	—		$	—

See Accompanying Notes to Condensed Consolidated Financial Statements.

INTEGRITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ~~(Unaudited)~~

	Three months
	ended March 31,
(Dollars in thousands)	2007			2006
Cash flows from operating activities:
Net income	$	2,946		$	2,177
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, accretion and amortization		392			152
Stock compensation		172			244
Increase in interest receivable		(1,381	)		(392	)
Increase in interest payable		1,526			1,345
Excess tax benefits from exercise of options		(1,308	)		—
Provision for loan losses		1,073			1,291
Income from bank owned life insurance		(258	)		—
Net gains on sales of premises and equipment		(39	)		(32	)
Net loss on sale of other real estate		2			—
Net other operating activities		(1,553	)		(1,322	)
Net cash provided by operating activities		1,572			3,463
Cash flows from investing activities:
Net (increase) decrease in interest-earning deposits in banks		(29	)		8
Net decrease in federal funds sold		—			5,325
Proceeds from maturities and paydowns of securities available-for-sale		3,942			2,918
Purchases of restricted equity securities		(2,990	)		(613	)
Purchases of securities available for sale		(18,484	)		(11,541	)
Net loans made to customers, net of principal collected on loans		(56,266	)		(120,720	)
Purchases of premises and equipment		(5,792	)		(863	)
Net cash used in investing activities		(79,619	)		(125,486	)
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits		(4,210	)		4,395
Net increase in interest-bearing deposits		703			91,729
Net increase in federal funds purchased and repurchase agreements		30,790			—
Proceeds from exercise of stock options		1,992			564
Excess tax benefits from exercise of options		1,308			—
Net increase in Federal Home Loan Bank advances		55,000			27,836
Net cash provided by financing activities		85,583			124,524
Net increase in cash and due from banks		7,536			2,501
Cash and due from banks at beginning of period		5,719			5,068
Cash and due from banks at end of period	$	13,255		$	7,569
Supplemental disclosures of cash paid during the period:
Interest	$	12,326		$	6,394
Income taxes	$	312		$	638
Supplemental disclosures of noncash investing activities:
Transfer of loans to other real estate owned	$	447		$	1,215

(Unaudited)


	Six months
	ended June 30,
(Dollars in thousands)	2007			2006

Cash flows from operating activities:

Net income (loss)	$	(28,971	)	$	4,958
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, accretion and amortization		654			265
Stock compensation		229			485
Increase in interest receivable		(931	)		(1,562	)
Increase in interest payable		2,469			2,290
Excess tax benefits from exercise of options		(1,308	)		(535	)
Provision for loan losses		49,488			2,139
Income from bank owned life insurance		(517	)		(171	)
Net gains on sales of premises and equipment		(39	)		(137	)
Net (gains) losses on sale of other real estate		(22	)		142
Write-downs of other real estate		25			160
Net other operating activities		(8,576	)		(1,958	)

Net cash provided by operating activities		12,501			6,076

Cash flows from investing activities:

Net increase in interest-earning deposits in banks		(421	)		(14	)
Net decrease in federal funds sold		—			6,243
Proceeds from maturities and paydowns of securities available-for-sale		10,203			7,269
Purchases of restricted equity securities		(3,664	)		(1,738	)
Purchases of securities available for sale		(28,272	)		(30,835	)
Purchase of bank owned life insurance		—			(20,000	)
Net loans made to customers, net of principal collected on loans		(128,953	)		(164,689	)
Purchases of premises and equipment		(6,610	)		(1,663	)
Proceeds from sale of other real estate		2,518			1,073

Net cash used in investing activities		(155,199	)		(204,354	)

Cash flows from financing activities:

Net (decrease) increase in noninterest-bearing deposits		(3,700	)		2,561
Net increase in interest-bearing deposits		67,304			133,955
Net increase in federal funds purchased and repurchase agreements		4,038			8,375
Proceeds from exercise of stock options		1,992			850
Excess tax benefits from exercise of options		1,308			535
Net increase in Federal Home Loan Bank advances		70,000			25,000
Issuance of subordinated debt		—			27,836

Net cash provided by financing activities		140,942			199,112

Net (decrease) increase in cash and due from banks		(1,756	)		834
Cash and due from banks at beginning of period		5,719			5,068


Cash and due from banks at end of period	$	3,963		$	5,902

Supplemental disclosures of cash paid during the period:
Interest	$	26,472		$	14,937
Income taxes	$	1,310		$	3,952

Supplemental disclosures of noncash investing activities:
Transfer of loans to other real estate owned	$	8,868		$	1,375

See Accompanying Notes to Condensed Consolidated Financial Statements.

INTEGRITY BANCSHARES, INC.
AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. BASIS OF PRESENTATION

Integrity Bancshares, Inc. (the “Company), prepared the condensed consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the information in the condensed consolidated financial statements reflects all adjustments necessary to present fairly the Company’s financial position, results of operations, and cash flows for such interim periods. Management believes that all interim period adjustments are of a normal recurring nature, with the exception of the adjustments related to the additions to the allowance for loan losses and the charge-offs realized during the period. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

The condensed consolidated financial statements include the accounts of the Company. All intercompany accounts and transactions have been eliminated in consolidation.

The Company operates through one segment, providing a full range of banking services to individual and corporate customers through its subsidiary bank.

The results of operations for the three and six month ~~period~~periods ended ~~March~~June 3130, 2007 are not necessarily indicative of the results to be expected for the full year.

NOTE 2. ACCOUNTING POLICIES

The Company’s significant accounting policies are described in the notes to ~~consolidated~~ consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

NOTE 3. STOCK COMPENSATION PLANS

AsOn of March 3121, 2007, the Company ~~has~~adopted ~~two~~its ~~stock-based~~2007 ~~compensation~~Omnibus ~~plans~~Stock ~~that~~Ownership and ~~allow~~Long ~~for~~Term ~~grants~~Incentive Plan reserving 1,000,000 shares of ~~incentive~~common stock ~~options~~for ~~and~~issuance under ~~nonqualified~~the ~~stock~~plan, ~~options.~~which ~~Our~~was approved by the Company’s stockholders on May 16, 2007. ~~stock-based~~Options ~~compensation~~that ~~plans~~were ~~are~~outstanding ~~described~~under inthe ~~Note~~prior 82003 ofStock ~~our~~Option ~~financial~~Plan ~~statements~~remain valid, ~~included~~although inno ~~our~~new ~~last~~options ~~annual~~will ~~report~~be ongranted ~~Form~~under ~~10-K~~the old plan. The ~~compensation~~new ~~cost~~Plan ~~charged against~~allows ~~income~~ for grants ~~the~~of ~~Company’s~~incentive stock ~~option~~options, ~~plans~~nonqualified ~~was~~stock ~~$172~~options,~~000~~ and ~~$244,000~~restricted ~~for~~stock. ~~the~~Our ~~three~~new ~~months~~stock-based ~~ended~~compensation ~~March 31,~~plan is described in the 2007 ~~and~~Proxy ~~2006~~Statement, ~~respectively.~~and a ~~Income~~copy ~~tax~~of ~~benefits recognized~~the ~~for~~full text of the ~~three~~2007 ~~month~~Plan ~~periods~~is ~~were~~attached ~~$39,000~~to ~~and~~the ~~$56,000,~~same ~~respectively~~Proxy Statement as Appendix D.

The compensation cost charged against income for the Company’s stock option plans was $258,000 and $485,000 for the six months ended June 30, 2007 and 2006, respectively. Income tax benefits recognized for the six-month periods were $41,000 and $181,000, respectively.

The following table shows option activity of the ~~Employee~~employee ~~Plan~~options ~~for~~as ~~the~~of ~~first~~and for ~~quarter~~the ofsix months ended June 30, 2007.

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value ($000)
Outstanding at December 31, 2006		1,214,466		$	4.89
Granted		—			—
Exercised		(738,466	)		2.58
Forfeited		—(15,000	)		—11.00
Outstanding at March 31, 2007		476,000		$	8.46		7.86	$	1,964
Outstanding at June 30, 2007		461,000		$	8.38		7.60	$	607
Exercisable at March 31, 2007		259,255		$	5.95		7.25	$	1,679
Exercisable at June 30, 2007		272,089		$	6.24		7.08	$	554

Cash received from the exercise of employee options was $1~~,905,000~~.9 million and $~~255~~328,000 for the ~~three~~six months ended ~~March~~June 3130, 2007 and 2006, respectively. Total intrinsic value of employee options ~~exercised~~at exercise date was $8.0 million and $1.1 million for the ~~three~~six months ended ~~March~~ June 3130, 2007 and 2006, respectively.

There ~~were~~have been no employee options granted into ~~the~~date ~~first~~in ~~quarter of~~ 2007. The weighted average grant-date fair value of employee options granted infor the ~~first~~six ~~quarter~~months ofended June 30, 2006 was $54.8696.

In addition to the 2003 employee option plan and the 2007 Omnibus Plan we also have a director stock option plan that was adopted in 2003. The following table shows option activity of the ~~Director~~director ~~Plan~~options as of and for the ~~first quarter~~six ofmonths ended June 30, 2007.

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value ($000)
Outstanding at December 31, 2006		297,000		$	4.52
Granted		—			—
Exercised		(8,000	)		11.00
Forfeited		—			—
Outstanding at March 31, 2007		289,000		$	4.34		6.5	$	2,312
Outstanding at June 30, 2007		289,000		$	4.34		6.20	$	937
Exercisable at March 31, 2007		289,000		$	4.34		6.5	$	2,312
Exercisable at June 30, 2007		289,000		$	4.34		6.20	$	937

Cash received from the exercise of director options was $88,000 and $~~309~~418,~~000~~750 for the ~~three~~six months ended ~~March~~June 3130, 2007 and 2006, respectively. Total intrinsic value of director options ~~exercised~~at exercise date was $21,000 and $1.4 million for the ~~three~~six months ended ~~March~~June 3130, 2007 and 2006, respectively.

There were no director options granted ~~under the Director Plan~~ during the ~~quarters~~six-month periods ended June ~~March 31~~30, 2007 or 2006.

NOTE 4. EARNINGS (LOSS) PER SHARE

Presented below is a summary of the components used to calculate basic and diluted earnings (loss) per common share.

	Three Months Ended					Six Months Ended
	March 31,
	June 30,					June 30,
	2007			2006		2007			2006
Basic Earnings Per Share:
Weighted average common shares outstanding		15,~~274~~511,~~312~~014			14,~~456~~607,~~382~~842		15,393,317			14,532,423
Net income	$	2,945,606		$	2,176,983
Net income (loss)	$	(31,916,624	)	$	2,780,953	$	(28,971,018	)	$	4,957,936
Basic earnings per share	$	0.19		$	0.15
Basic earnings (loss) per share	$	(2.06	)	$	0.19	$	(1.88	)	$	0.34
Diluted Earnings Per Share:
Diluted Earnings (Loss) Per Share:
Weighted average common shares outstanding		15,~~274~~511,~~312~~014			14,~~456~~607,~~382~~842		15,393,317			14,532,423
Net effect of the assumed exercise of stock options based on the treasury stock method using average market prices for the period		~~694,969~~—			1629,~~217,178~~831		—			923,505
Total weighted average common shares and common stock equivalents outstanding		15,~~969~~511,~~281~~014			15,~~673~~237,~~560~~673		15,393,317			15,455,928
Net income	$	2,945,606		$	2,176,983
Net income (loss)	$	(31,916,624	)	$	2,780,953	$	(28,971,018	)	$	4,957,936
Diluted earnings per share	$	0.18		$	0.14
Diluted earnings (loss) per share	$	(2.06	)	$	0.18	$	(1.88	)	$	0.32

NOTE 5. ~~RECENT~~Recent ~~ACCOUNTING~~Accounting ~~PRONOUNCEMENTS~~Pronouncements

In ~~February~~September ~~2007~~2006, the FASB issued SFAS No. ~~159~~157, “~~The~~ Fair Value ~~Option~~Measurements,” which ~~for~~clarifies how companies should use fair value measurements in accordance with ~~Financial~~US ~~Assets~~GAAP ~~and~~for ~~Financial~~recognition ~~Liabilities~~and disclosure.” SFAS ~~159~~No. 157 ~~permits~~establishes ~~companies~~a tocommon ~~fair~~definition of fair value ~~certain~~and ~~financial~~a ~~assets~~framework ~~and~~for ~~liabilities~~measuring onfair anvalue ~~instrument-by-instrument~~under ~~basis~~ US GAAP, along with expanding ~~changes~~disclosures inabout fair value ~~recognized~~measurements to eliminate differences in current ~~earnings~~practice asthat ~~they~~exist ~~occur~~in measuring fair value under the existing accounting standards. The ~~election~~definition of fair value in SFAS No. 157 retains the notion of exchange price; however, it focuses on the price that would be received to sell the asset or paid to transfer the liability (i.e., an exit price), rather than the price that would be paid to acquire the asset or received to assume the liability (i.e., an entry price). Under SFAS No. 157, a fair value ameasure ~~financial~~should reflect all of the assumptions that market participants would use in pricing the asset or liability, including isassumptions ~~generally~~about ~~irrevocable.~~the ~~This~~risk ~~statement~~inherent in a particular valuation technique, isthe ~~effective~~effect ~~January~~of a restriction on the sale or use of an asset, and the risk of nonperformance. To increase consistency and comparability in fair value measures, SFAS No. 1157 establishes a three-level fair value hierarchy to prioritize the inputs used in valuation techniques between observable inputs that reflect quoted prices in active markets, ~~2008~~inputs ~~for~~other ~~calendar~~than ~~year~~quoted ~~companies~~prices with observable market data, and unobservable data (e.g., ~~The~~a ~~Company~~company’s isown ~~currently~~data). SFAS No. 157 requires disclosures ~~evaluating~~detailing the ~~impact~~extent to which companies measure assets and liabilities at fair value, the methods and assumptions used to measure fair value, and the effect of fair value measurements on earnings. In February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits companies to elect on ~~its~~an instrument-by-instrument basis to fair value certain financial ~~position~~assets and ~~results~~financial ofliabilities with changes in fair value ~~operations~~recognized in earnings as they occur. The election to fair value is generally irrevocable. SFAS No. 157 and SFAS No. 159 are effective January 1, 2008 for

calendar year companies with the option to early adopt as of January 1, 2007. The Company has not elected to early adopt the provisions of these statements.

In June 2006, the FASB issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with early adoption allowed. The adoption of this interpretation did not have a material impact on the financial condition or the results of operations of the Company.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of certain significant factors which have affected the financial position and operating results of Integrity Bancshares, Inc. (the “Company”), and its bank subsidiary, Integrity Bank (the “Bank”), during the period included in the accompanying condensed consolidated financial statements.

Forward Looking Statements

Certain of the statements made in this Form 10-Q are forward-looking statements for purposes of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such may involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. Such forward looking statements include statements using words, such as “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “project,” “forecast,” “intend,” or other similar words and expressions of the future. Our actual results may differ significantly from the results we discuss in these forward-looking statements. We undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.

These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, without limitation: the effects of future economic conditions; governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and other interest-sensitive assets and liabilities; interest rate risks; the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally, and internationally, together with such competitors offering banking products and services by mail, telephone, computer, and the Internet.

Overview

We incurred substantial losses during the second quarter of 2007, resulting in a net loss of $31.9 million. The losses incurred were primarily due to the deteriorating situation involving a group of loans to various entities that were associated with or controlled by a single guarantor totaling approximately $83 million, which was disclosed in a previous filing. The majority of the additional provision for loan losses was attributed to the $31 million charge-off relating to this one relationship. As a result of the identification of deterioration in this relationship, we commenced a review of our allowance for loan losses, our loan evaluation procedures and other internal loan practices. The review identified material weaknesses in the systems we maintain to identify, administer and collect problem credits. As a result, we enhanced our risk rating methodology and, based on the new ratings system, re-graded and re-evaluated the entire loan portfolio with the assistance of an independent third-party consultant. We delayed the filing of this Form 10-Q until the completion of that process. In summary, the review resulted in an additional provision for loan losses of $14.3 million. More detailed discussion on the $31 million charge-off and on the subsequent review and its resulting loan loss provision is included in the Asset Quality and Allowance for Loan Losses sections of this report. The quarterly net loss resulted in a decrease in capital to $54 million at June 30, 2007 compared to $80 million at December 31, 2007. Consequently, the Bank’s total capital to risk-weighted assets ratio fell under the 10% requirement to be a “well-capitalized” Bank. At June 30, 2007 the Bank’s ratio was 9.68%, which reflects an “adequately-capitalized” status. We believe the Bank will be able to return to a “well-capitalized” status in the near future. Further detail about capital is included in the Liquidity and Capital Resources section below.

Critical Accounting Policies

~~The~~Our ~~Company’s~~ accounting and reporting policies are in accordance with accounting ~~principles~~ principles generally accepted in the United States of America as defined by the Public Company ~~Accounting~~ Accounting Oversight Board and conform to general practices within the banking industry. ~~Its significant~~Our significant accounting policies are described in the notes to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2006. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and ~~the~~we ~~Company~~consider ~~considers~~ these to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors that management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.

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

Allowance for loan losses. The allowance for loan losses is based on management’s opinion of an amount that is adequate to absorb losses inherent in the existing loan portfolio. ~~The~~We ~~allowance~~have used ~~for~~a ~~loan~~long-time ~~losses~~industry-accepted isrisk ~~established~~rating ~~through~~methodology amodel ~~provision~~since ~~for~~our ~~losses~~inception. ~~based~~We onare ~~management’s evaluation of~~currently ~~current~~in ~~economic~~the ~~conditions,~~process ~~volume and composition~~ of ~~the~~developing ~~loan~~and ~~portfolio,~~implementing ~~the~~a ~~fair~~revised ~~market~~methodology ~~value~~as ~~or the~~required ~~estimated~~by ~~net~~all ~~realizable value of underlying~~financial ~~collateral~~institutions, ~~historical~~which ~~charge~~we ~~off~~anticipate ~~experience,~~being ~~the~~in ~~level~~place ofby ~~nonperforming~~December 31, ~~and~~2007. ~~past~~The ~~due~~primary ~~loans,~~difference ~~and~~in ~~other~~the ~~indicators~~new ~~derived~~required ~~from~~methodology ~~reviewing~~is the ~~loan~~absence ~~portfolio.~~of ~~The~~industry ~~evaluation~~standard ~~includes~~reserve apercentages, ~~review~~mainly ofas it ~~loans~~relates onto ~~which~~impaired ~~full collection may not be~~loans.

The Bank’s loans are assigned a risk rating on a nine point scale. For loans that are not considered impaired, the allocated allowance for loan losses is determined based upon the loss percentage factors that correspond to each risk rating. The risk ratings are based on the borrowers’ credit risk profile, considering factors such as debt service history and capacity, inherent risk in the credit (e.g., based on industry type and source of repayment), and collateral position. Ratings 6 through 9 are modeled after the bank regulatory classifications of special mention, substandard, doubtful, and loss. Loss percentage factors are based on actual loss experience, industry averages, and include qualitative factors. The loss percentage factors consider the probability of default, the loss given default, and certain qualitative factors as determined by loan category and risk rating. The probability of default and loss given default are based on industry data. The qualitative factors consider credit concentrations, recent levels and trends in delinquencies and nonaccrual loans, growth in the loan portfolio, levels of classified loans, experience of loan officers in each of our branches, as well as current economic conditions that would have an affect on specific loans. The occurrence of certain events could result in changes to the loss factors. Accordingly, these loss factors are reviewed periodically and modified as necessary.

Each loan is assigned a risk rating during the approval process. This process begins with a rating recommendation from the loan officer responsible for originating the loan. The rating recommendation is subject to approvals from the loan committee and/or the Board of Directors depending on the size and type of credit. Ratings on our loans with balances over $1 million, loans past due over 30 days, and other specially selected loans are re-evaluated at least annually in connection with the loan review process. Typically over 60% of the entire loan portfolio is reviewed in this process.

Impaired Loans. Management considers a loan to be impaired when the collectibility of all amounts due according to the contractual terms of the loan agreement is not probable, and has consisted primarily of nonaccrual loans in the past. A significant amount of our impaired loans are collateral dependent. The impairment on the majority of these loans is determined based upon fair value estimates (net of selling costs) of the respective collateral while impairment on smaller balance homogeneous pools of loans is based upon other experience and qualitative factors. The actual losses on these loans could differ significantly if the fair value of the collateral is different from the estimates used in determining the impairment. The majority of our impaired loans are secured by real estate. The fair value of these real estate properties is generally determined based upon appraisals performed by a certified or licensed appraiser. We have obtained or are in the process of obtaining current appraisals on all significant impaired loans. Management also considers other qualitative factors and recent developments which could result in adjustments to the collateral value estimates indicated in the appraisals.

~~reasonably~~ Unallocated ~~assumed~~Loss Factors. ~~Should~~The ~~the~~unallocated ~~factors~~portion ~~that~~of ~~are considered~~our inallowance ~~determining~~considers ~~the~~current ~~allowance~~economic factors, ~~for~~changes ~~loan~~in ~~losses~~the ~~change~~experience, ~~over time~~ability, orand ~~should~~depth of lending management~~’s estimates~~ ~~prove~~and ~~incorrect~~staff, aand ~~different~~changes in ~~amount~~lending ~~may~~policies beand ~~reported~~procedures, ~~for~~including ~~the~~underwriting ~~allowance~~standards. ~~and~~Certain ~~the associated~~macro-economic ~~provision~~factors ~~for~~and ~~loan~~changes ~~losses.~~in ~~For~~business ~~example,~~conditions ifand ~~economic~~developments ~~conditions~~could inhave ~~our~~a ~~market~~material ~~area~~impact ~~experience~~on anthe ~~unexpected~~collectibility ~~and~~of ~~adverse~~the ~~change,~~overall weportfolio. ~~may~~This ~~need~~would toimpact ~~increase~~the ~~our~~ allowance for loan losses byand corresponding ~~taking~~credit costs. As an example, a ~~charge~~ ~~against~~rapidly ~~earnings~~rising ininterest ~~the~~rate ~~form~~environment ofcould anhave ~~additional~~a material ~~provision~~impact ~~for~~on ~~loan~~certain ~~loss~~borrowers’ ability to pay.

Liquidity and Capital Resources

We monitor our liquidity resources on an ongoing basis. Our liquidity is also monitored on a periodic basis by State and Federal regulatory authorities. During the ~~first~~second quarter of 2007, the ~~bank~~Bank experienced an approximate $7072 million increase in ~~average~~total ~~net~~loans, ~~loan growth~~ and a $202.4 million increase in ~~average~~its investment portfolio ~~growth~~. During this same period, core ~~deposit~~deposits ~~growth~~remained ~~was approximately $20 million~~steady, and management elected, due to pricing considerations, ~~not~~ to ~~gather~~ obtain wholesale deposits to fund ~~the $70 million difference. The $70 million growth difference was~~these ~~funded with debt at a more favorable cost structure than wholesale deposits. Since we chose to use available credit lines as opposed to~~ additional ~~wholesale deposits to fund the additional growth, liquidity was negatively affected~~assets. ~~However,~~As as of ~~March~~June 3130, 2007, our overall liquidity levels, as determined ~~under~~ ~~guidelines established~~ by ~~regulatory authorities and~~ internal policy, were ~~was~~ satisfactory.

Trust preferred securities of the Company totaled $34 million at ~~March~~June 3130, 2007, of which approximately $2918 million qualified as Tier I Capital for regulatory purposes. The remainder qualified as Tier II capital. Additionally, the ~~bank~~Bank has $18 million of subordinated debentures that ~~are~~ also ~~counted~~qualified as Tier II capital.

At ~~March~~June 3130, 2007, our capital ratios were adequate based on regulatory minimum capital requirements. The minimum capital requirements, as defined by regulatory guidelines, and ~~the~~our actual capital ratios on a consolidated and bank-only basis were as follows:

							Minimum
	Actual						Regulatory
							Regulatory
	Consolidated			Bank			Requirement*
	Actual						Requirement
Leverage capital ratios		10.10	%		9.86	%		5.00	%
										To Be Well
Risk-based capital ratios:
										Capitalized
Tier 1 capital		9.97			9.73			6.00
										Under Prompt
Total capital		12.78			12.21			10.00
							For Capital			Corrective
							Adequacy			Action
	Consolidated			Bank			Purposes			Provisions
Leverage capital ratios		5.97	%		6.63	%		4.00	%		5.00	%
Risk-based capital ratios:
Tier 1 capital		6.23			6.91			4.00			6.00
Total capital		10.22			9.68			8.00			10.00

* During ~~The~~the ~~percentages~~second ~~listed~~quarter of 2007 our capital ratios declined significantly as a result of the large ~~“Minimum~~loan ~~Regulatory~~loss ~~Requirement”~~provision ~~are~~we recorded. While the Bank’s ratios were still above levels required to be ~~maintain~~considered a“adequately-capitalized” at June 30, 2007, it is imperative that we monitor them closely in order to avoid falling below the minimum regulatory requirements in future quarters. An impact of not being “well-capitalized” ~~status~~is that it could limit the Bank’s ability to acquire needed funding through sources such as brokered deposits, Federal Home Loan Bank advances and unsecured federal funds credit lines, and could further tighten our liquidity through damages to our reputation in our deposit service areas. As an “adequately-capitalized” bank, we would be required to obtain a waiver to accept or replace maturing brokered deposits. We anticipate strengthening our capital position through sales of additional common stock. We will also limit future asset growth, or even shrink our assets in order to maintain appropriate regulatory capital levels. Our efforts, however, may be unsuccessful. Even if we are able to implement steps to improve our capital position, these steps could be offset by further increases in our allowance for loan losses which would be required if we experience further deterioration in our loan portfolio.

Commitments and Contractual Obligations

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance ~~sheets~~sheet.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

10 The following table reflects a summary of our commitments to extend credit, commitments under contractual leases and building contracts, as well as our contractual obligations, consisting of deposits, FHLB Advances and borrowed funds, by contractual maturity date:


(Dollars in Thousands)	2007		2008		2009		2010		2011		Thereafter

Demand and Savings	$	162,630	$	—	$	—	$	—	$	—	$	—

Time Deposits		401,647		384,446		26,380		7,484		6,621		3,183

FHLB Advances		25,000		—		—		15,000		—		35,000

Other borrowed funds		5,589		—		—		—		—		45,000

Long-term debentures		—		—		—		—		—		52,022
Commitments to customers under lines and letters of credit		67,194		181,901		48,692		11,990		18		99

Commitments under lease agreements		41		61		31		—		—		—
Commitments under building contracts		321


	$	662,422	$	566,408	$	75,103	$	34,474	$	6,639	$	135,304

~~The~~Commitments ~~following~~to ~~table~~extend ~~reflects~~credit are agreements to lend to a ~~summary~~customer as long as there is no violation of any condition established in the ~~Company’s~~contract. Since many of the commitments are expected to ~~extend~~expire ~~credit~~without being drawn upon, particularly in light of the recent slowdown in real estate ~~commitments~~development, ~~under~~the ~~contractual~~total ~~leases~~commitment amounts do not necessarily represent future cash requirements, and asmanagement ~~well~~believes asthat ~~the~~it ~~Company’s~~would ~~contractual~~be ~~obligations~~highly unlikely that all commitments would be drawn upon simultaneously. Historically, ~~consisting~~the total amount of commitments outstanding to customers under lines and letters of ~~deposits~~credit has remained stable, ~~FHLB~~although, ~~Advances~~because ~~and~~our ~~borrowed~~loan ~~funds~~production has begun to slow in recent months, byit ~~contractual~~is ~~maturity~~more ~~date~~likely that this total commitment amount will decline. The impact of this slowdown will most likely affect loan growth in the next few quarters. Management is closely monitoring loan growth in an effort to return to a “well-capitalized” financial institution.

(Dollars in Thousands)	2007		2008		2009		2010		2011		Thereafter
Demand and Savings	$	180,193	$	—	$	—	$	—	$	—	$	—
Time Deposits		503,553		199,569		25,614		6,846		6,770		2,735
FHLB Advances		25,000		—		—		—		—		35,000
Other borrowed funds		32,341		—		—		—		—		45,000
Long-term debentures		—		—		—		—		—		52,022
Commitments to customers under lines and letters of credit		325,550		—		—		—		—		—
Commitments under lease agreements		34		—		—		—		—		—
	$	1,066,671	$	199,569	$	25,614	$	6,846	$	6,770	$	134,757

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which we deem necessary.

Financial Condition

~~Our~~Total ~~total~~ assets ~~grew~~increased ~~$87~~10.~~8 million, or 8~~43%, in the first ~~quarter~~six months of 2007 to $1.2 billion. ~~Most~~ ~~of this growth was attributed to an increase in~~ Total loans ofgrew by $~~55.8~~85 million, or 5.9.1%, to $~~997.4 million at quarter end. Loan growth consisted mainly of residential and commercial construction loans, which made up $33.~~1 ~~million and $17~~.80 ~~million~~billion ofduring the ~~growth,~~same ~~respectively~~period. ~~While~~Net ~~our net increase in loans in the past has typically been stronger than this, our~~ loan ~~portfolio~~growth ~~has grown~~was to$16 million aduring ~~level~~the ~~where~~second ~~it takes a significant amount of new loan production to offset maturities and payoffs, even before we add growth~~quarter. ~~Despite~~Loan ~~rumors of a slumping real estate market, our new loan~~ production has ~~not~~slowed ~~reflected~~significantly ~~a significant slowdown to date. The reason for~~ this ~~is most likely~~quarter ~~that~~compared ~~we are located in an area of metro Atlanta that is continuing~~ to ~~grow~~previous ~~at a strong pace~~quarters. ~~Our two~~Total ~~new~~loans ~~loan production offices are not even up to full speed yet. As these offices become more~~were ~~established we believe that they will increase our loan production. We are constantly searching for additional strong lending talent to help us continue our organic growth plans.~~

~~We purchased $21 million of investment securities during the quarter for a total of $153~~13 million at March 31, 2007. Fixed assets also increased significantly, $5.6 million, due to the purchase of the Bank’s administrative building, previously leased, which houses the accounting, loan operations, and executive offices of the Company.

Deposits decreased $3.5 million during the current quarter to $925 million, due to a decline in non-interest-bearing demand deposits. Commercial checking accounts tend to be more volatile than consumer accounts simply due to the nature of business cycles. Based on average demand deposits, the balances have been very consistent over the past year. Time deposits and other interest-bearing deposits remained basically unchanged this quarter at $909 million compared to $908 million at December 31, 2006. This lack of growth was largely due to an effort by management to lower our cost of funds by taking advantage of other attractively-priced funding sources. Subsequently, other borrowed funds increased $85.8 million to fund asset growth. These funding sources included Federal Home Loan Bank advances, structured repurchase agreements and federal funds purchased. Total deposits

atoffset ~~March 31,~~by ~~2007~~charge-offs ~~included $223 million~~ of ~~brokered time deposits, down~~ $2634.9 million ~~from December 31~~, ~~2006.~~primarily ~~The~~relating ~~majority~~to ofthe ~~this~~loan ~~decrease~~situation ~~was~~discussed ~~due~~above. toThe ~~pre~~charged-~~paying~~off ~~some~~loans consisted of ~~the~~$17.1 million ~~higher~~of ~~priced~~commercial ~~brokered~~loans ~~deposits~~and ~~prior~~$17.8 million toof ~~maturity in order to redirect those~~real ~~funding~~estate-secured ~~sources~~loans. toInvestment ~~lower-priced~~securities ~~other~~have ~~borrowings~~increased 12.1% ~~Our~~this ~~ratio~~year ofthrough ~~gross~~June 30 ~~loans~~ to ~~deposits and other~~a ~~borrowings~~total ~~was~~of ~~92% at March~~$150 31million, ~~2007,~~and ~~down~~fixed ~~from~~assets ~~94%~~increased ~~at December~~$6.1 ~~31,~~million ~~2006~~to $21.5 million.

~~Other~~The increase in fixed assets ~~increased~~this ~~$2.2 million~~year ~~during~~was due to the ~~first~~purchase ~~quarter~~of the Bank’s administrative building and the construction costs of ~~2007,~~the ~~primarily~~new ~~due~~financial ~~to increases~~center opening in ~~accrued~~the ~~interest~~third ~~receivable~~quarter of 2007. Additional costs to complete the financial center were estimated to be $~~1.4~~321,000 at June ~~million~~30, 2007. Other ~~liabilities~~assets ~~decreased~~increased $115.16 million in during the first ~~three~~six months of the year, mainly due to an ~~the~~increase ~~offsetting~~in ofincome ataxes ~~deferred~~receivable ~~gain~~which onis ~~sale~~directly ofrelated ~~bank~~to ~~property~~the additional charge-offs. As ~~with~~a result of the ~~costs~~net ofloss ~~re-purchasing~~realized ~~the~~this ~~property~~quarter, aswe ~~discussed~~recorded ~~above~~federal and state income tax receivables totaling $16.3 million ~~Total~~on ~~equity~~a consolidated basis. Other real estate owned increased $6.64 million ~~largely~~during ~~due~~the tocurrent ~~year~~six-month period. Most of the increase was attributed to~~-date~~ ~~net~~property ~~income~~from one loan of $24.97 million, ~~paid-~~which we subsequently sold in ~~capital~~August 2007, ~~from~~recording a gain on the ~~exercising~~ sale of $58,000. ~~stock~~The ~~options~~balance ofin other real estate at June 30, 2007 was $26.09 million and, ~~paid-in~~excluding ~~capital~~the $4.7 million ~~from~~property, ~~share-based~~consisted ~~payment~~of ~~expense~~17 ofproperties ranging from $~~1.3 million~~35,000 to $536,000 in carrying ~~and~~values. anPreviously ~~after-tax~~held ~~decrease~~foreclosed properties that consisted of residential properties have been generally sold in ~~the~~a ~~unrealized~~relatively ~~loss~~short onperiod ~~securities~~of ~~available-for-sale~~time with little or no losses. However, foreclosed development lots have been slower to liquidate. As of ~~$203~~June 30,~~000~~ 2007 other real estate held included $1.2 million in 40 development lots.

~~The~~Deposits ~~following~~grew ~~table~~$67 million ~~details~~during ~~selected~~the ~~components~~second quarter to $992 million at June 30, 2007. This increase was attributed to time deposits which grew $85 million, and was partially offset by decreases in interest-bearing demand deposits of ~~the~~$15 million ~~Company’s~~and ~~average~~savings ~~balance~~accounts ~~sheets~~of ~~for~~$3 million ~~the~~comparing ~~current~~June 30 ~~period~~balances to March 31, 2007 totals. Total deposits at June 30, 2007 increased $64 million since December 31, 2006 and ~~the~~included ~~same~~$273 million ~~period~~of ~~last~~brokered time deposits, up $24 million from year end. Other funding sources have also increased since year end, primarily Federal Home Loan Bank (“FHLB”) advances, which have increased $70 million to ~~illustrate~~fund asset growth. While $50 million of these advances were longer-term in nature, the ~~resulting~~remaining ~~change~~$20 million ~~over~~in overnight borrowings could be called by the ~~past~~FHLB due to the Bank’s failure to maintain a “well-capitalized” ~~year:~~status. However, subsequent to June 30, 2007, these overnight borrowings were paid off due to increased time deposit growth. Our ratio of gross loans to deposits and other borrowings was 87.8% at June 30, 2007, down from 91.2% at December 31, 2006. The decrease was due, in part, to the loans that were charged off this quarter.

	March 31,				%
(In thousands)	2007		2006		Change
Total investment securities	$	135,913	$	75,181		80.8	%
Loans, net		956,115		699,534		36.7
Earning assets		1,104,329		789,750		39.8
Total assets		1,154,427		811,809		42.2
Non-interest-bearing deposits		16,519		14,851		11.2
Interest-bearing deposits		895,710		696,931		28.5
Borrowed funds		146,859		23,285		530.7
Total interest-bearing liabilities		1,059,088		735,067		44.1
Total equity		84,530		68,385		23.6

Other liabilities increased $6.2 million comparing June 30, 2007 to December 31, 2006, mainly due to the timing of payments due to participating banks on purchased loans at the end of June. Payments totaling approximately $6.5 million were made in early July to participant banks. Total equity decreased $27 million this year due to the net loss of $29 million, an after-tax increase in the unrealized loss on securities available-for-sale of $1.1 million, offset by increases in common stock from the exercising of stock options of $2.0 million, tax benefit from the exercises of stock options of $1.3 million and $229,000 of increases in common stock related to stock compensation expense.

The following table details selected components of our average balance sheets for the current quarter and the same period last year to illustrate the resulting change over the past twelve months. Although our total average equity increased, our actual shareholders’ equity at June 30, 2007 was 25% below our shareholders’ equity at June 30, 2006 as a result of the additional $48 million loan loss provision recorded in June 2007. Since the provision was made at the end of the second quarter of 2007, it had little impact on the average balance for the quarter.


	June 30,				%
(Dollars in thousands)	2007		2006		Change

Total investment securities	$	157,859	$	92,548		70.6	%
Loans, net		1,012,682		764,374		32.5
Earning assets		1,182,603		877,180		34.8
Total assets		1,239,013		911,946		35.9

Non-interest-bearing deposits		16,651		14,673		13.5
Interest-bearing deposits		935,395		779,639		20.0
Borrowed funds		188,164		37,136		406.7
Total funds		1,140,210		831,448		37.1

Total equity		88,536		71,106		24.5

Asset Quality

~~There~~We ~~was~~experienced andeterioration ~~increase~~ in ~~nonaccrual~~our ~~loans~~loan ofportfolio ~~$6.7 million~~which ~~during~~led ~~first~~to ~~quarter~~significant ~~2007. The~~provisions ~~increase~~and ~~consisted~~charge-offs ofin ~~eleven~~the ~~loans~~second ~~ranging~~quarter ~~from $56,500 to $3~~2007.~~5 million.~~ WeAs ~~believe~~previously ~~that~~disclosed ~~all eleven~~in ~~loans~~earlier ~~are well secured by real estate. Since March 31st~~filings, wea ~~have~~group ~~foreclosed on~~of ~~collateral~~related ~~securing~~loans atotaling approximately $~~4.7~~83 million ~~loan~~became ~~included~~90 days indelinquent for the ~~loans~~first ~~that were classified nonaccrual in~~time ~~the~~mid-second ~~fourth~~ quarter ~~of 2006~~. ~~The~~A ~~property~~significant isportion ~~under~~of ~~contract~~the ~~and,~~total ifrelationship ~~the~~became ~~sale~~impaired ~~goes~~with ~~through according~~respect to ~~the~~our ~~contract,~~ability weto ~~will~~fully berecover ~~able~~on toprincipal ~~satisfy~~and ~~the~~interest ~~full~~in ~~balance~~accordance ofwith the loans,’ ascontractual terms. ~~well~~As ~~as record~~ a ~~$300,000~~ ~~gain~~result onof ~~the~~a ~~sale~~total assessment of ~~other~~the ~~real~~relationship, ~~estate.~~including ~~Total~~the ~~nonaccrual~~collateral ~~loans were~~ pledged, $~~20.1~~42 million atof ~~the end~~these ofloans ~~March 2007~~were ~~compared~~reclassified to ~~$277,000~~nonaccrual atstatus ~~March~~in June 312007, ~~2006.~~and ~~Additionally,~~we ~~loans~~added ~~past due 30 days and~~$33.3 ~~still~~million ~~accruing~~to ~~interest~~the ~~increased~~allowance ~~during~~for ~~the~~loan ~~current~~losses ~~quarter~~and towrote athe ~~total~~loans ofdown by $~~74.1~~31 million,. ~~which~~We are seeking ~~represents~~to ~~7.4%~~take possession of ~~the~~collateral ~~loan~~that ~~portfolio~~secures ~~compared~~a tolarge ~~.26%~~majority atof ~~December 31,~~these ~~2006~~loans. ~~The~~If ~~increase~~possession ~~was due~~is ~~primarily~~obtained, to the ~~delinquent~~properties ~~status~~would ofbe arecorded ~~group~~at ofthe ~~loans~~lower toof ~~various~~carrying ~~entities~~value ~~that~~or ~~are~~their ~~controlled~~fair byvalue aless ~~single~~estimated ~~guarantor~~selling costs. ~~Management~~No ~~believes~~additional ~~these~~material ~~particular~~adjustments ~~loans~~ are ~~well~~anticipated ~~collateralized~~in ~~and~~this ~~that~~regard. noWe ~~material~~would ~~loss~~seek ~~will~~to ~~ultimately~~liquidate bethe ~~realized~~collateral onas ~~them~~quickly as possible. ~~However,~~Additional ifcharge-offs ~~payments~~consisted of $3.9 million on ~~these~~six loans ~~are~~that ~~not received~~had inbeen ~~the~~identified ~~near~~as ~~future,~~nonaccrual weat ~~may~~March 31, ~~have~~2007. toIncluded ~~take~~in our aallowance ~~substantial~~for loan ~~loss~~losses ~~provision.~~prior Ifto ~~foreclosure becomes~~charge-off ~~necessary~~of these loans at June 30, ~~resolution~~2007, ~~through~~a ~~this~~total ~~process~~of ~~will~~$2.0 million ~~take~~had abeen ~~considerable~~allocated ~~amount~~for ofthese ~~time~~loans.

~~There~~Total nonaccrual ~~were no~~ loans ~~past~~were ~~due~~$67.9 million ~~ninety~~at ~~days~~the orend ~~more~~of ~~and~~June 2007 ~~still~~compared ~~accruing~~to ~~interest~~$13.4 million at ~~March~~ December 31, ~~2007~~ 2006. ~~The~~Nonaccrual ~~addition~~loans toat ~~the~~June 30, ~~allowance~~2007 consisted ~~for~~of ~~loan~~30 ~~loss~~loans, ~~for~~including ~~first~~a ~~quarter~~$29.6 million ~~was~~loan and a $~~1.1~~5 million. ~~Although~~loan ~~we may~~due ~~have~~ to ~~make~~the ~~additional~~single ~~provisions~~guarantor asrelationship ~~outlined~~previously ~~above,~~discussed. Of ~~management~~the ~~believes~~remaining ~~the~~28 ~~total~~loans, of22 ~~$10.9 million~~were inassociated ~~the~~with ~~allowance~~one ~~for~~housing ~~loan~~development ~~losses~~ranging atfrom ~~March 31~~$23,000 ~~2007~~to $647,000 orand ~~1.09~~comprised only 3% of ~~total~~the ~~outstanding~~dollar ~~loans,~~increase. ~~is adequate~~As toa ~~absorb~~result ~~risks~~of inplacing the ~~portfolio.~~aforementioned loans ~~The~~on ~~allowance~~nonaccrual ~~for~~status, ~~loan~~loans ~~losses~~past ~~has~~due ~~been~~30 days ~~increased~~and asstill ~~a percentage~~accruing ofinterest ~~total~~decreased ~~loans~~to ~~over~~$37.3 million ~~the past year~~ from $74.~~87%~~1 million at March 31, ~~2006~~2007. toLoans ~~address~~past ~~the~~due ~~increase~~30 days inor ~~potential~~more ~~problem~~at ~~loans.~~June 30, ~~Our charge-off history remains~~2007 ~~very~~represented ~~good~~3.6% ~~with~~of ~~no charge-offs in~~ the ~~past~~loan ~~twelve months~~portfolio. NoThere ~~assurance~~were ~~can~~no beloans ~~given,~~past ~~however,~~due ~~that increased~~ninety ~~loan~~days ~~volume, adverse economic conditions,~~ or ~~other~~more ~~circumstances~~and ~~will~~still accruing ~~not~~interest ~~result~~at ~~in increased~~June 30, ~~losses~~2007 inor ~~our~~December 31, ~~loan portfolio~~2006.

12 In view of identified losses in the one relationship, recent negative economic conditions and declining housing market trends, management conducted a thorough review of our entire loan portfolio with the assistance of an independent third party consulting firm. Our review found that the risk management function failed to recognize all problem credits and related probable losses within complex lending arrangements and all problem credits and related probable losses in loans directly affected by the current economic environment. The current economic environment is a result of the recent slowdown in the areas of acquisition, development, and construction loans, in which our loan portfolio is heavily concentrated. Consequently, we enhanced our risk rating methodology and, based on the new ratings system, re-graded and re-evaluated the entire loan portfolio. As a result of that process, and in consideration of the softening real estate market, which has had a detrimental impact on our development borrowers, additional lending relationships were downgraded within our risk classification system, thus requiring additional provisions for loan losses. These additional provisions took into account relevant factors related to specific borrowers such as, loan performance, collateral positions, loan documentation, appraisals, economic conditions, as well as recent rising levels of delinquencies and nonaccrual loans. The additional provision for loan losses related to this review was $14.3 million.

~~Information~~The ~~with~~provision ~~respect~~for loan losses for second quarter totaled $48.4 million. Net charge-offs for the current quarter totaled $34.9 million, leaving $24.4 million in the allowance for loan losses at June 30, 2007, or 2.40% of total outstanding loans. The allowance for loan losses as a percentage of total loans was 1.04% at December 31, 2006. Due to the significant amounts of delinquent and nonaccrual, ~~past~~loans ~~due~~in early second quarter, ~~restructured~~and the deterioration of the large borrower relationship mentioned previously, management re-evaluated the estimated losses attributable to all internally and ~~potential~~externally ~~problem~~classified loans atas of June 30, 2007. This ~~March~~re-evaluation caused a significant increase in our allowance for loan losses. During the second quarter, we also recognized significant charge-offs. Based on our most recent evaluation combined with our normal evaluation of the entire loan portfolio, management believes that the allowance for loan losses is adequate to cover probable loan losses in the portfolio at June 3130, 2007. We also plan to continue enhancing our loan loss reserve methodology to better reflect the risks inherent in a real estate-based loan portfolio. To properly implement this enhanced methodology, if outdated, current appraisals were ordered for all adversely classified loans and ~~2006~~certain other loans related to larger borrowing relationships. However, no assurance can be given that increased loan volume, adverse economic conditions, regulatory action, financial distress of borrowers, our enhanced reserve methodology, or other circumstances will not result in increased losses in our loan portfolio or increased balances required in the allowance for loan losses. Year to date, we have begun to experience a decline in new loan growth that is directly related to the slowdown in the real estate market. We expect our growth to flatten or even continue to decline over the remainder of the year as ~~follows:~~we seek to reduce our concentrations within borrowers and industries, particularly construction-related credits.

	March 31,
(Dollars in Thousands)	2007		2006
Nonaccrual loans	$	20,061	$	277
Loans contractually past due ninety days or more as to interest or principal payments and still accruing		0		0
Restructured loans		0		0
Potential problem loans		388		5,635
Interest income that would have been recorded on nonaccrual and restructured loans under original terms		397		24
Interest income that was recorded on nonaccrual and restructured loans		0		0

Information with respect to nonaccrual, past due, restructured, and potential problem loans as of and for the six months ended June 30, 2007 and 2006, is as follows:

Potential problem loans are defined as loans about which we have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may cause the loan to be placed on nonaccrual status, to become past due more than ninety days, or to be restructured. There are also currently $74.1 million in loans past due between 30 and 90 days that were not classified as potential problem loans at March 31, 2007. If payment on these loans is not received by mid-May then potential problem loans will increase substantially as will loan loss provision expense and the allowance for loan losses.


	June 30,
(In thousands)	2007		2006

Nonaccrual loans	$	67,891	$	542
Loans contractually past due ninety days or more as to interest or principal payments and still accruing		0		3,679
Restructured loans		0		0
Potential problem loans		29,815		820
Interest income that would have been recorded on nonaccrual and restructured loans under original terms		2,652		4
Interest income that was recorded on nonaccrual and restructured loans		0		0

Potential problem loans are defined as loans about which we have doubts as to the ability of the borrower to comply with the present loan repayment terms and which may cause the loan to be placed on nonaccrual status, to become past due more than ninety days, or to be restructured. Although these loans are still performing, we have reason to believe, based on further analysis relative to the financial condition of the borrowers, deteriorating economic conditions, lower appraisal values, trends in certain development sectors, etc., that they are potential problems to be watched closely. The total potential problem loans increased significantly in the second quarter in conjunction with the re-evaluation of the entire loan portfolio as explained previously and in the following Allowance for Loan Losses section and the accelerating deterioration of the local real estate market. Based on our evaluation of impaired and potential problem loans, we have allocated approximately $8 million in our allowance for loan losses related to nonaccrual and potential problem loans as of June 30, 2007.

It is our policy to discontinue the accrual of interest income when, in the opinion of management, collection of such interest becomes doubtful. This status is accorded consideration when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected and (2) the principal or interest is more than ninety days past due, unless the loan is both well-secured and in the process of collection.

~~Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention~~16 that have not been included in the table above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources. Except as discussed above, management is not aware of any information that causes it to have serious doubts as to the ability of borrowers to comply with the loan repayment terms.

Results of Operations for the Three Months Ended March 31, 2007 and 2006

Our net income for the first quarter of 2007 was $2.9 million, or $0.18 per diluted share. This reflected an increase of 35.3% over first quarter 2006 net income of $2.2 million. Diluted earnings per share increased 28.6% over last year’s first quarter diluted earnings per share of $0.14. Net interest income for the first quarter of 2007 was $10.4 million, an increase of 17.5% over same period last year. The increase in net interest income was due to a combination of the growth in both the loan and investment portfolios, as well as an increase in the prime rate in the second quarter of 2006. The average balance of loans and investments grew $260 million and $60 million, respectively, from March 31, 2006 to March 31, 2007, and the yield on earning assets increased to 8.90% from 8.49% quarter over quarter. Offsetting a portion of the increase in interest income was an increase in our cost of funds. Rising interest rates have also resulted in higher priced funding vehicles, causing our cost of funds to increase to 5.39% in first quarter 2007 from 4.36% in first quarter 2006. The 103 basis point increase in our interest expense far outpaced the 41 basis point increase in our interest income, and the result was a decline in our net interest margin to 3.81% for first quarter 2007 from 4.53% for first quarter 2006. While our net interest margin has declined since first quarter 2006, it actually stabilized in first quarter 2007 compared to the 3.82% margin for fourth quarter 2006. Our use of alternative funding has helped in this effort to mitigate the pressure on the net interest margin. We do plan to continue our efforts to grow core deposits, as well, which would also contribute to funding without higher costs.

The provision for loan losses, at $1.1 million for the first quarter of 2007, decreased by $217,978 compared to the same period in 2006. This decrease is due primarily to slower growth in the gross loan portfolio of $55.8 million in the first quarter of 2007, vs. $119.3 million in the first quarter of 2006. There have been no charge-offs during first quarter 2007.

Allowance for Loan Losses

Information regarding certain loans and allowance for loan loss data for the periods ending ~~March~~June 3130, 2007 and 2006 is as follows:

	Three Months Ended
	Six Months Ended
	March 31,
	June 30,
(Dollars in Thousands)	2007			2006
Average amount of loans outstanding	$	~~966~~995,~~228~~169		$	~~705~~738,~~323~~477
Balance of allowance for loan losses at beginning of period	$	9,825		$	5,612
Loans charged off
Commercial and financial		0(17,093	)		0—
Real estate mortgage		0(17,775	)		(160	)
Installment		0—			0—
		0			160
		(34,868	)		(160	)
Loans recovered
Commercial and financial		0—			0—
Real estate mortgage		0—			0—
Installment		0—			0—
		0			0
		—			—
Net charge-offs		0(34,868	)		(160	)
Additions to allowance charged to operating expense during period		149,~~073~~488			12,~~291~~139
Balance of allowance for loan losses at end of period	$	1024,~~898~~445		$	67,~~743~~591
Ratio of net loans charged off during the period to average loans outstanding		03.5	%		0.02	%

The allowance for loan losses is maintained at a level that is deemed appropriate by management to adequately cover all known and inherent risks in the loan portfolio. ~~Management’s evaluation~~In of the ~~loan portfolio includes a loan classification program. Under the program~~past, aswe ~~each~~used ~~loan is made we assign a loan grade. Each loan grade is assigned~~ an ~~allowance~~industry-accepted ~~percentage based~~risk onrating ~~our experience specifically and the historical experience of the banking industry generally~~methodology. ~~Loan~~Beginning ~~classifications~~in ~~are then subject to periodic review by~~ the ~~responsible~~second ~~lending officers and by senior management based upon their judgment~~quarter, ~~our loan loss experience~~however, ~~current~~we ~~economic~~identified ~~conditions~~a ~~that~~material ~~may~~weakness ~~affect~~in the ~~borrower’s~~internal ~~ability~~controls relating to ~~repay, lender requirements,~~ the ~~underlying~~ ~~collateral~~evaluation ~~value~~ of ~~the~~our ~~loans,~~allowance for ~~and~~loan ~~other appropriate information~~losses. ~~Management~~As ~~relies predominantly~~a onresult, ~~this~~we ~~ongoing~~enhanced ~~review~~our ofrisk ~~the~~rating ~~loan~~system ~~portfolio~~and toexpanded ~~assess~~ the ~~risk characteristics of~~rating ~~the~~categories ~~portfolio in the aggregate and~~ to ~~determine~~better ~~adjustments,~~identify ~~if any,~~risks toin our ~~allowance for~~ loan ~~losses~~portfolio. Based ~~upon~~on this ~~ongoing~~new ~~review~~rating system, we ~~may identify loans that~~ ~~could~~re-graded ~~be impaired. A loan is considered impaired when it is probable that we will be unable to collect all principal~~ and ~~interest~~re-evaluated ~~due in accordance with~~ the ~~contractual~~bank’s ~~terms~~entire ~~of the~~ loan ~~agreement.~~ ~~When~~portfolio wewith ~~identify a loan as impaired,~~ the ~~allowance~~assistance ~~for loan losses is increased if we determine that the amount~~ of ~~impairment~~an ~~is in excess of the allowance determined under our loan~~independent ~~classification~~third ~~program~~party consultant.

14 One of the factors considered during the re-evaluating process was the slowdown of the housing market that could have a direct and negative impact on our residential acquisition and development and construction borrowers. Loans to these borrowers comprise 39% of our total current loan portfolio. Based on current economic data from the local metropolitan Atlanta area, vacant developed residential lot supply has increased 38% from 26 months in the fourth quarter of 2006 to 36 months in the second quarter of 2007. House closings were also down 20% for the same comparable periods. Future lot inventory, which consists of those lots that were in the process of being developed, increased 21% to 63,500 comparing second quarter 2007 to fourth quarter 2006. The downturn in the housing market, as demonstrated by these statistics, has caused many developers to slow their progress on development and builders to slow construction, as well. Consequently our overall risk in this sector of our loan portfolio was increased and available economic data provides some additional information to support the basis for

additional loan loss provision on these types of loans in the second quarter of 2007. Please see the Critical Accounting Policies section for further detail on our allowance for loan loss methodology.

Results of Operations for the Three and Six Months Ended June 30, 2007 and 2006

Net losses for the second quarter of 2007 were $31.9 million, or ($2.06) per diluted share. These losses were primarily due to loan loss provisions of $48.4 million recorded in the second quarter, as discussed earlier. Net earnings for the second quarter of 2006 were $2.8 million, or $.18 per diluted share. The large provisions taken in the second quarter were necessary primarily for two reasons — to write down the value of the large borrowing relationship to the value of the hard real estate collateral securing it and to properly adjust our allowance for loan losses on our loan portfolio based on a reassessment of the entire portfolio given the recent downturn in the real estate market, increasing delinquency ratios and increased nonaccrual loan balances over the past quarter. For the first six months of 2007, cumulative net losses were $29 million compared to net earnings of $5 million for the same period last year. Diluted losses per share for the year to date were ($1.88) compared to earnings per share of $.32 for the same period last year.

Net interest income for the current quarter was $6.5 million, a decrease of 33% from the same period last year. The decrease in net interest income was primarily due to the reversal of approximately $3.8 million in current year interest income resulting from the reclassification of certain loans related to the previously mentioned loan relationship and certain other loans to nonaccrual status as required by our loan policy. This also greatly impacted our yield on earning assets, which fell to 7.34% for second quarter compared to 8.90% in first quarter and 7.66% for the same quarter last year. The cost of funds remained unchanged from first quarter 2007 at 5.39%. For the year to date, the cost of funds has increased 87 basis points, or 19.2%, compared to the same period year to date in 2006. While this increase can be attributed to deposits repricing at higher rates over the last year, it is also due to our increase in short-term funds, which have risen an average of $10.6 million in the last twelve months. We also purchased $18 million of subordinated debentures priced at prime in the fourth quarter of 2006. The cost of funds is expected to remain stable as the benefits of obtaining more favorable alternative funds earlier in the year take affect. However, if the Bank is unable to return to a “well-capitalized” status in the short-term, then its cost of funds may increase since certain funding sources, including brokered deposits, may no longer be available or may increase in cost. The net interest margin declined in second quarter to 2.22%, a decrease of 42% from first quarter’s net interest margin of 3.81% and 46% below the net interest margin of 4.08% for the same quarter last year. Year to date through June 30, 2007, the net interest margin was 2.98%. Our net interest margin for both periods has been significantly impacted by the reversal of interest income as discussed above. The net interest margin for the same period last year to date was 4.50%.

The provision for loan losses was $48.4 million for the second quarter and $49.5 million year to date. The significant increase in provision for loan losses was due to the charge-off of $34.9 million of loans and the re-grading and re-evaluation of the entire loan portfolio as discussed in the Asset Quality section. The loan loss provision for the second quarter of 2006 was $848,000 and $2.1 million for the six-month period of 2006. While management believes the current provision is sufficient to cover probable losses in the loan portfolio, no assurance can be given that increased loan volume, adverse economic conditions, regulatory action, financial distress of borrowers, our enhanced reserve methodology, or other circumstances will not result in increased losses in our loan portfolio or increased provision for loan losses.

Non-interest Income

~~Noninterest~~Total noninterest income increased $56,000 in the ~~first~~second quarter of 2007 compared to the same period in 2006. byThe ~~$232,000,~~increase was mainly due to the income on $21 million of bank owned life insurance (BOLI), which ~~wasn’t~~ was purchased ~~until~~in ~~second~~May ~~quarter~~ of 2006. ~~The~~Compared ~~total~~to ~~increase in value of~~ the ~~BOLI~~first insix ~~first quarter~~months ~~was~~of ~~$258~~2006,~~000~~ total ~~and~~noninterest ~~was offset by the fact there was no rental~~ income increased in ~~this~~2007 ~~period~~by ~~while there was~~ $45289,000, ofalso ~~rental~~due ~~income in the first quarter of 2006. Space that was previously sublet in the administrative building was renovated in fourth quarter 2006~~ to ~~house~~ the ~~growing~~income ~~loan operations~~on ~~functions of~~ the ~~Bank, as well as the executive offices of the Company~~BOLI. Other ~~fee~~ fee income, including ATM network fees, official check fees, and wire transfer fees, increased $1423,000 ~~quarter~~ ~~over~~comparing ~~quarter~~the first six months of 2007 and 2006.

~~Noninterest Expenses~~18

Noninterest expenses increased in the first quarter of 2007 compared to the same period in 2006 by $935,000, due to increased salaries and employee benefits of $529,000, increased occupancy and equipment expenses of $136,000, and increased other operating expenses of $270,000. Salaries and employee benefits increased primarily due to an increase in the number of full time equivalent employees to 81 at March 31, 2007, from 67 at March 31, 2006, and to normal annual salary increases. The increase in the number of employees was to support our strong overall growth and to staff a new branch financial center that opened in August 2006 and a new loan production office that opened in December 2006. The increase in occupancy and equipment expense was also due to those same factors, as well as increased costs (approximately $40,000) related to monthly service contracts for our upgraded video conferencing system. The largest increases in current other noninterest expenses over the same period in 2006 consisted of legal fees related to loan collection efforts of $117,000, non-profit contributions of $118,000, marketing and advertising expenses of $59,000, data processing expenses of $43,000, and audit and exam fees of $34,000. The increase in non-profit contributions was a direct function of the bank’s policy to tithe 10% of its prior-year net income, donating these funds to our Foundation that contributes to faith-based, military, and humanitarian organizations in our community and world-wide. Other expense increases were largely growth-related as we continue to build our organization. Offsetting these increases was a decrease related to expenses of other real estate owned of $66,000. This decrease was mainly due to a loan that had been moved to other real estate in January 2006 and the expenses related to the foreclosure and efforts to sell the property. Although we currently have several properties held in other real estate, the expenses related to them were either paid in late 2006 or will be paid when incurred later in 2007.

The Company recorded income tax expense of $1.7 million in the first quarter of 2007 compared to $1.4 million in the first quarter of 2006. The rate of tax as a percentage of pretax income was 36.5% for 2007 and 39.1% for 2006. The decrease in the effective tax rate is due to the income related to bank owned life insurance, which is not taxed.

We are not aware of any known trends, events, or uncertainties, other than the effect of events as described above, that will have or that are reasonably likely to have a material effect on our liquidity, capital resources, or operations. We are also not aware of any current recommendations by the regulatory authorities which, if they were implemented, would have such an effect.

Non-interest Expenses

Total noninterest expenses increased $259,000 during the second quarter of 2007 compared to the same period in 2006. These increases were not related to salaries and employee benefits, as was common in past quarters. In fact, salaries and employee benefits actually decreased this quarter compared to second quarter 2006 by $57,000. Net decreases in salaries and benefits were the result of a decrease in stock compensation expense recognized: $87,000 in second quarter 2007 compared to $241,000 in second quarter 2006, partially offset by costs related to a growing staff. We had 83 employees at June 30, 2007, up from 76 at June 30, 2006. Additional costs can be anticipated as we continue to improve our infrastructure, particularly in the credit administration and risk management areas of the Bank. The increase in noninterest expenses this quarter were attributed to higher other operating expenses. The largest increase came from legal and professional fees, which have increased $305,000 compared to second quarter 2006. Most of the increase in legal fees was loan-related, especially with our foreclosed property having also increased to $6.9 million compared to none in the second quarter of 2006. Another significant increase was due to FDIC deposit insurance premium assessments, up $171,000 over second quarter 2006, since the FDIC is once again assessing premiums to well-capitalized banks, which hasn’t been a practice in almost a decade. Due to the Bank’s adequately-capitalized position, this expense will increase in the future. These increases were partially offset by a decrease in occupancy and equipment expenses, particularly related to building lease expense, which was down $134,000 from second quarter 2006. Our administrative building, which was previously leased and had rent payments of $47,000 a month, was purchased in January of this year with depreciation running approximately $10,000 a month.

During the first six months of 2007, compared to the same period in 2006, noninterest expenses increased approximately $1.2 million. The largest overall increases occurred in salaries and employee benefits, legal and professional fees, FDIC assessments, and non-profit contributions, which increased by $472,000, $434,000, $177,000, and $122,000, respectively. Increases in salaries and employee benefits was primarily growth related, with an increase in staff size as mentioned above to staff two new loan production offices and a new full-service branch scheduled to open soon. Legal and professional fees have escalated as loan collection efforts have intensified. Other fluctuations comparing the first half of 2007 to 2006 consisted of data processing expenses (up $81,000), audit and exam fees (up $76,000), and occupancy and equipment expenses (up $64,000). These increases were largely growth related as our branches and facilities have expanded.

Due to the net loss sustained in this quarter, the previous quarter’s income tax expense of $1.7 million was eliminated as a tax benefit of $14.5 million was recorded. The total tax benefit year to date is $12.8 million. The effective tax benefits for the 3-month and 6-month periods ended June 30, 2007 were 31.3% and 30.7%, respectively. The effective tax rates for the respective comparable periods in 2006 were 39.0% and 39.1%. The decreases were due to the realization of future tax benefits. Depending on the outcome of the next two quarters, any resulting tax benefits for the year can be carried back to previous years to recover taxes paid previously.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of ~~March~~June 3130, 2007, there were no substantial changes from the interest rate ~~sensitivity~~ sensitivity analysis or the market value of portfolio equity from various changes in interest rates ~~since~~ since December 31, 2006. The foregoing disclosures related to the market risk of the Company should be read in conjunction with the Company’s audited consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2006, included in the Company’s 2006 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

~~Based~~Item 4. ~~upon~~Controls ~~an evaluation of our disclosure controls~~ and ~~procedures as of the end of the~~Procedures period covered by this report, under the supervision and with the participation of management, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s Exchange Act filings. There have been no significant changes in internal controls over financial reporting or in other factors that could significantly affect internal controls over financial reporting during the first quarter of 2007.

16Evaluation of Disclosure Controls and Procedures

As of June 30, 2007, the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed under the supervision and with the participation of the Company’s management, including the prior Chief Executive Officer and the Chief Financial Officer. Based on that evaluation and the identification of the material weaknesses in the Company’s internal control over financial reporting as described below under “Changes in Internal Control over Financial Reporting”, the Company’s Interim Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including the Interim Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

As disclosed under Item 2 of this Form 10-Q, during the second quarter of 2007 the Company experienced a substantial deterioration in a group of related loans that totaled approximately $83 million in the aggregate. As a result of this deterioration, the Company commenced a thorough review of its loan administration procedures and other internal policies. This review was performed with the assistance of an independent third party consulting firm. The review identified material weaknesses in certain lending policies and risk management functions, including weaknesses in the systems and processes that are used to identify, administer and collect problem credits. These weaknesses, coupled with rapid growth and the recent slowdown in acquisition, development, and construction activity, where our loan portfolio is heavily concentrated, resulted in increased problem credits and augmented the allowance for loan losses. The Company has taken the following steps to improve its systems:

	•		The Board of Directors took steps to make major changes in the Bank’s management structure and organization. Currently, efforts are underway to hire additional qualified staff and management in key leadership and the risk management area to eliminate these weaknesses in internal controls.

	•		The Company has enhanced its risk rating methodology and, based on the new ratings system, re-graded and re-evaluated the entire loan portfolio with the assistance of the independent third-party consultant.

	•		The Board of Directors has substantially reduced the Bank’s internal lending limit on loans to a single related borrower.

•

The Board of Directors has hired qualified independent consultants and advisors to provide professional assistance in the loan administration, credit risk, and other management functions.

These positive actions commenced during the latter part of the second quarter of 2007 and continued into the third quarter. We anticipate additional ongoing improvements to occur in the third quarter and beyond that will continue to strengthen our internal controls related to the weaknesses identified.

Except as discussed above, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The Company is not a party to any pending legal proceeding (nor is any property of the Company subject to any legal proceeding) other than routine litigation that is incidental to the business.

ITEM 1A. RISK FACTORS

~~There~~The ~~have~~following ~~been~~represent no material changes from risk factors as previously disclosed in ~~the~~our ~~Company’s~~ Form 10-K ~~covering~~filed with the ~~year~~SEC ~~ended~~on ~~December~~March 3115, ~~2006.~~2007:

~~ITEM~~ We 2.may ~~UNREGISTERED~~face ~~SALES~~liquidity OFconstraints ~~EQUITY~~and ~~SECURITIES~~experience ~~AND~~higher ~~USE~~costs OFof ~~PROCEEDS~~funding if we are unable to return to a “well-capitalized” status in the near future.

~~The~~During ~~Company~~the ~~did~~second ~~not~~quarter ~~sell~~of ~~equity~~2007 ~~securities~~the ~~during~~Bank’s ~~the~~capital ~~first~~ratios ~~quarter~~declined significantly as a result of the loan losses we sustained and significant additional provisions to our allowance for loan losses. While the Bank’s ratios were still above levels required to be considered “adequately-capitalized” at June 30, 2007, ~~that~~we were not considered “well-capitalized”. The impact ~~registered~~of ~~under~~not ~~the~~maintaining ~~Securities~~a ~~Act~~“well-capitalized” status is of ~~1933~~concern in that it could jeopardize the Bank’s ability to acquire needed funding through sources such as brokered deposits, Federal Home Loan Bank advances or unsecured federal funds credit lines, and could tighten our liquidity through damages to our reputation in our deposit service areas. ~~The~~It ~~Company~~is ~~did~~imperative ~~not~~that ~~repurchase~~we ~~any~~monitor ~~equity~~these ~~securities~~ratios ~~during~~closely in order to avoid falling below the ~~first~~minimum ~~quarter~~regulatory requirements in future quarters, which would result in even more regulatory sanctions. In response to our declining capital position, we could improve our capital position with additional common stock issuances. We may also limit or postpone future asset growth, or even shrink our assets in order to maintain appropriate regulatory capital levels. Our efforts, however, may be unsuccessful. Our goal is to return to a “well-capitalized” bank status by the end of fourth quarter 2007. However, even if we are able to implement steps to improve our capital position, we may still not be able to return to a “well-capitalized” status by the end of the fourth quarter.

~~ITEM~~ Losing 3.key ~~DEFAULTS~~personnel ~~UPON~~will ~~SENIOR~~negatively ~~SECURITIES~~affect us.

In August 2007, the Company reported that Steven M. Skow, its president and CEO, and Todd Foster, EVP of Risk Management, who also served on the executive management team of the Bank, were no longer employed by the Company. The Board of Directors appointed Harold “Kelly” Klem, previously the Company’s COO, as Interim President and CEO of the Company and the Bank until a permanent replacement can be made. The Board has been very active in interviewing qualified candidates. While the lack of leadership has been mitigated with Mr. Klem’s appointment, the Bank will have an increased level of risk until a qualified person can be hired to head the Risk Management function. None of the current members of the executive management team are under employment contracts, and the loss of additional key personnel could have a negative impact on the Company and its future results of operation. In the meantime, capable industry consultants are supplementing our management team.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The Company did not sell equity securities during the second quarter of 2007 that were not registered under the Securities Act of 1933. The Company did not repurchase any equity securities during the second quarter of 2007.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

There have been no defaults in the payment of principal, interest, a sinking or purchase fund installment, or any other default with respect to any indebtedness of the Company.

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

No(a) ~~matter~~The Company’s Annual Meeting of Stockholders was ~~submitted~~held toon aMay ~~vote~~16, 2007. (b) See (c) below for the name of ~~security~~each ~~holders~~director ~~during~~elected at the ~~first~~meeting ~~quarter~~and the name of ~~2007~~each other director whose term of office as a director continued after the meeting. (c) The following matters, which were previously identified in proxy materials sent to each shareholder, were voted on at the meeting. The shares represented at the meeting (11,513,384 or 74.23% of the total outstanding shares on the record date) voted as follows:

~~ITEM 5~~1. ~~OTHER~~Proposal ~~INFORMATION~~ to elect three Class II directors to serve for a three-year term.


					Withheld/
Director	For		Against		Abstain
Don C. Hartsfield		11,411,434		101,950		0
Jack S. Murphy		11,411,357		102,027		0
Richard H. Peden, Sr.		11,431,624		81,760		0

Proposal to approve the Integrity Bancshares, Inc. 2007 Omnibus Stock Ownership and Long Term Incentive Plan and the reservation of 1,000,000 shares of Common Stock for issuance thereunder.


	Withheld/
For	Against		Abstain
6,821,216		1,208,214		3,483,954

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS

The following exhibits are furnished with this report:

	31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2		Certificate of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32		Certification of the Chief Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

10.1 2007 Omnibus Stock Ownership and Long Term Incentive Plan (incorporated by reference to Appendix D to the registrant’s definitive proxy statement filed with the SEC on April 18, 2007)

1731.1 Certification of the Interim Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certificate of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 Certification of the Interim Chief Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	INTEGRITY BANCSHARES, INC. (Registrant)
DATE: May 8, 2007	BY: /s/ Steven M. Skow
DATE: September 11, 2007	BY:	/s/ Harold A. Klem
	Steven M. Skow, President and C.E.O.
		Harold A. Klem, Interim President and C.E.O.
	~~(Principal Executive Officer)~~	(Principal Executive Officer)
DATE: September 11, 2007	BY:	/s/ Suzanne Long
		Suzanne Long, Senior VP & C.F.O.
		(Principal Financial and Accounting Officer)

DATE: May 8, 2007	BY: /s/ Suzanne Long
	Suzanne Long, Senior VP & C.F.O.
	(Principal Financial and Accounting Officer)

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Filing Compare · INTEGRITY BANCSHARES INC