# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 10-QSB

|[X]   | QUARTERLY REPORT UNDER SECTION 13 OR 15(D)      
                OF THE SECURITIES EXCHANGE ACT OF 1934 
|----- | --------------------------------------------------------------------------------------------------------
|      |                                                                                                         
|      | For the Quarterly Period ended March 31, 2006                                                           
|      |                                                                                                         
|      | OR                                                                                                      
|      |                                                                                                         
|[   ] | TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF       
               THE SECURITIES EXCHANGE ACT OF 1934
|      |                                                                                                         
|      | For the Transition Period from ___________ to _____________                                             

Commission File Number
333-121485

INDEPENDENCE BANCSHARES, INC.(Exact name of small business issuer as specified in its charter)

|South Carolina                                 |  | 20-1734180                          
|---------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation) |  | (I.R.S. Employer Identification No.)

500 East Washington StreetGreenville, South Carolina 29601
(Address of principal executive offices)

(864) 672-1776(Issuers telephone number, including area code)

---

Check whether the issuer (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past 90 days.  
YesX     No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         
                                                        
                                                        
     Yes   NoX

State the  number of shares  outstanding  of each of the  issuer's  classes  of common  equity,  as of the  latest
practicable date:  2,085,010 shares of common stock, par value $.01 per share, outstanding as of May 3, 2006.

Transitional Small Business Disclosure Format (check one):   
Yes   NoX

---

# Independence Bancshares, Inc.

# Part I  Financial
Information

# Item 1.   Financial Statements

# Consolidated Balance
Sheets (unaudited)

|                                                             | March 31, 2006 | December 31, 2005
|------------------------------------------------------------ | -------------- | -----------------
|
|Assets                                                       |                |                  
|Cash and due from banks                                      |                |                  
|Federal funds sold                                           |                |                  
|Investment securities available for sale                     |                |                  
|Non-marketable equity securities                             |                |                  
|Loans, net                                                   |                |                  
|Accrued interest receivable                                  |                |                  
|Property and equipment, net                                  |                |                  
|Other assets                                                 |                |                  
|                                                             |                |                  
|Total assets                                                 |                |                  
|                                                             |                |                  
|Liabilities and Shareholders' Equity                         |                |                  
|Liabilities                                                  |                |                  
|Deposits                                                     |                |                  
|Non-interest bearing                                         |                |                  
|Interest bearing                                             |                |                  
|                                                             |                |                  
|Total deposits                                               |                |                  
|                                                             |                |                  
|Securities sold under agreements to repurchase               |                |                  
|Accrued interest payable                                     |                |                  
|Accounts payable and accrued liabilities                     |                |                  
|                                                             |                |                  
|Total liabilities                                            |                |                  
|                                                             |                |                  
|Commitments and contingencies                                |                |                  
|                                                             |                |                  
|Shareholders' Equity                                         |                |                  
|Preferred stock, $.01 par value; 10,000,000 shares           |                |                  
|authorized; none issued and outstanding                      |                |                  
|Common stock, $.01 par value; 10,000,000 shares              |                |                  
|authorized; 2,085,010 shares issued and outstanding at March |                |                  
|31, 2006 and December 31, 2005                               |                |                  
|Additional paid-in capital                                   |                |                  
|Accumulated other comprehensive loss                         |                |                  
|Retained deficit                                             |                |                  
|                                                             |                |                  
|Total shareholders' equity                                   |                |                  
|                                                             |                |                  
|Total liabilities and shareholders' equity                   |                |                  
|                                                             |                |                  

The accompanying notes are an integral part of these financial statements.

2

---

# Independence
Bancshares, Inc.

# Consolidated Statements
of Operations For the three months ended (unaudited)

|                                                              | March 31, 2006 | March 31, 2005
|------------------------------------------------------------- | -------------- | --------------
|
|Interest income                                               |                |               
|Loans                                                         |                |               
|Investment securities                                         |                |               
|Federal funds sold and other                                  |                |               
|                                                              |                |               
|Total interest income                                         |                |               
|                                                              |                |               
|Interest expense                                              |                |               
|Deposits                                                      |                |               
|Borrowings                                                    |                |               
|                                                              |                |               
|Total interest expense                                        |                |               
|                                                              |                |               
|Net interest income (expense)                                 |                |               
|Provision for loan loss                                       |                |               
|                                                              |                |               
|Net interest income (expense) after provision for loan losses |                |               
|                                                              |                |               
|Noninterest income                                            |                |               
|                                                              |                |               
|Noninterest expenses                                          |                |               
|Compensation and benefits                                     |                |               
|Professional fees                                             |                |               
|Marketing                                                     |                |               
|Insurance                                                     |                |               
|Occupancy and equipment                                       |                |               
|Data processing and related costs                             |                |               
|Telephone and supplies                                        |                |               
|Other                                                         |                |               
|                                                              |                |               
|Total noninterest expenses                                    |                |               
|                                                              |                |               
|Loss before income tax benefit                                |                |               
|                                                              |                |               
|Income tax benefit                                            |                |               
|                                                              |                |               
|Net loss                                                      |                |               
|                                                              |                |               
|Loss per common share - basic and diluted                     |                |               
|                                                              |                |               
|Weighted average common shares outstanding - basic and        |                |               
|diluted                                                       |                |               
|                                                              |                |               

The accompanying notes are an
integral part of these financial statements.

3

---

# Independence
Bancshares, Inc.

# Consolidated Statement
of Changes in Shareholders Equity and Comprehensive Loss

# For the three months
ended March 31, 2006 and 2005

# (unaudited)

|                                    |  |  |  | Accumulated |  |  
|----------------------------------- |  |  |  | ----------- |  | -
|
|
|
|
|December 31, 2004                   |  |  |  | 10          |  | $
|Net loss for the three months       |  |  |  |             |  |  
|ended March 31, 2005                |  |  |  | -           |  |  
|                                    |  |  |  |             |  |  
|March 31, 2005                      |  |  |  | 10          |  |  
|                                    |  |  |  |             |  |  
|December 31, 2005                   |  |  |  | 2,085,010   |  | $
|                                    |  |  |  |             |  |  
|Grant of employee stock options     |  |  |  |             |  |  
|Net loss for the three months ended |  |  |  |             |  |  
|March 31, 2006                      |  |  |  | -           |  |  
|Unrealized loss on investment       |  |  |  |             |  |  
|securities available for sale,      |  |  |  |             |  |  
|net of tax                          |  |  |  | -           |  |  
|                                    |  |  |  |             |  |  
|Total comprehensive loss            |  |  |  | -           |  |  
|                                    |  |  |  |             |  |  
|March 31, 2006                      |  |  |  | 2,085,010   |  | $
|                                    |  |  |  |             |  |  

The accompanying notes are an integral part of these financial statements.

4

---

# Independence
Bancshares, Inc.

# Consolidated Statement
of Cash Flows For the three months ended (unaudited)

|                                                                       | March 31, 2006 | March 31, 2005
|---------------------------------------------------------------------- | -------------- | --------------
|
|Operating activities                                                   |                |               
|Net loss                                                               |                |               
|Adjustments to reconcile net loss to cash used in operating activities |                |               
|Provision for loan losses                                              |                |               
|Depreciation                                                           |                |               
|Accretion of securities discounts, net                                 |                |               
|Benefit for deferred income taxes                                      |                |               
|Compensation expense for employee stock options granted                |                |               
|Increase in other assets, net                                          |                |               
|Increase in other liabilities, net                                     |                |               
|                                                                       |                |               
|Net cash used in operating activities                                  |                |               
|                                                                       |                |               
|Investing activities                                                   |                |               
|Origination of loans, net                                              |                |               
|Purchase of non-marketable equity securities, net                      |                |               
|Repayments of investment securities available for sale                 |                |               
|Purchase of property and equipment                                     |                |               
|                                                                       |                |               
|Net cash used in investing activities                                  |                |               
|                                                                       |                |               
|Financing activities                                                   |                |               
|Increase in deposits, net                                              |                |               
|Decrease in short-term borrowings                                      |                |               
|Proceeds from sale of common stock, net                                |                |               
|Increase in line of credit                                             |                |               
|                                                                       |                |               
|Net cash provided by financing activities                              |                |               
|                                                                       |                |               
|Net increase in cash and cash equivalents                              |                |               
|                                                                       |                |               
|Cash and cash equivalents at beginning of the period                   |                |               
|                                                                       |                |               
|Cash and cash equivalents at end of the period                         |                |               
|                                                                       |                |               
|Supplemental information:                                              |                |               
|Cash paid for                                                          |                |               
|Interest                                                               |                |               
|                                                                       |                |               
|Schedule of non-cash transactions                                      |                |               
|Unrealized loss on securities, net of income taxes                     |                |               
|                                                                       |                |               

The accompanying notes are an integral part of these financial statements.

5

---

# Notes to Unaudited
Consolidated Financial Statements

# NOTE 1  NATURE OF
BUSINESS AND BASIS OF PRESENTATION

Independence
Bancshares, Inc. (the Company) is a South Carolina corporation
organized to operate as a bank holding company pursuant to the Federal Bank Holding
Company Act of 1956 and the South Carolina Bank Holding Company Act, and to own and
control all of the capital stock of Independence National Bank (the Bank). The
Bank is a national association organized under the laws of the United States to conduct
general banking business in Greenville, South Carolina. Since our inception in May 2004
and before our opening the Bank for business on May 16, 2005, we engaged in organizational
and pre-opening activities necessary to obtain regulatory approvals and to prepare our
subsidiary, Independence National Bank, to commence business as a financial institution.

# Basis of Presentation

The
accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-QSB. Accordingly, they do not
include all information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. However, in the opinion
of management, all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the three
month period ended March 31, 2006 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2006. For further information, refer to the
financial statements and footnotes thereto included in our Annual Report on Form 10-KSB
for 2005 as filed with the Securities and Exchange Commission.

Until
the Bank opened for business on May 16, 2005, the Company was accounted for as a
development stage enterprise as defined by Statement of Financial Accounting Standards No.
7, Accounting and Reporting by Development Stage Enterprises, as the Company
devoted substantially all of its efforts to establishing a new business, and thus,
comparison of the quarter ended March 31, 2006 to March 31, 2005 is not meaningful. The
operating results presented in the consolidated statements of operations for March 31,
2005 relate solely to organizational costs incurred during that period. When the Bank
opened, certain reclassifications and adjustments were made to the financial statements to
reflect that the Company is now accounted for as an operating company.

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

A
summary of these policies is included in our annual report on Form 10-KSB filed with the
Securities and Exchange Commission for the year ended December 31, 2005.  For further
information, refer to the financial statements and footnotes thereto included in our
Annual Report on Form 10-KSB for 2005 as filed with the Securities and Exchange
Commission.  Accounting standards that have been issued or proposed by the Financial
Accounting Standards Board that do not require adoption until a future date are not
expected to have a material impact on the consolidated financial statements upon adoption.

# Loss Per Share

Basic
loss per share represents net loss divided by the weighted-average number of common shares
outstanding during the period. Dilutive loss per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been issued.
Potential common shares that may be issued by the Company relate to outstanding stock
options and warrants, and are determined using the treasury stock method. For the quarters
ended March 31, 2006 and 2005, as a result of the Companys net loss, all of the
potential common shares were considered antidilutive.

6

---

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

# Stock Compensation Plans

Upon
completion of the offering, the Company agreed to issue warrants to the organizing
directors and organizer for the purchase of one share of common stock at $10.00 per share
for every one share purchased in the stock offering, up to a maximum of 25,000 warrants
per director or organizer. The Company issued a total of 412,500 warrants. The warrants
vest over a six month period from the date of issue. In addition, the Company has adopted
a stock option plan, and 41,950 options to purchase one share of common stock at $10.00
per share were granted as of July 26, 2005. The options vest over a three year period from
the date of grant. No additional options were granted in 2005. During the quarter ended
March 31, 2006, there were no stock option grants, and 12,000 stock options were forfeited
and cancelled.

On
January 1, 2006, the Company adopted the fair value recognition provisions of Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 123(R), Accounting for Stock-Based Compensation, to account for
compensation costs under its stock option plans. The Company previously utilized the
intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (as amended) (APB 25). Under the intrinsic value
method prescribed by APB 25, no compensation costs were recognized for the Companys
stock options because the option exercise price in its plans equals the market price on
the date of grant. Prior to January 1, 2006, the Company only disclosed the pro forma
effects on net income and earnings per share as if the fair value recognition provisions
of SFAS 123(R) had been utilized.

In
adopting SFAS No. 123, the Company elected to use the modified prospective method to
account for the transition from the intrinsic value method to the fair value recognition
method. Under the modified prospective method, compensation cost is recognized from the
adoption date forward for all new stock options granted and for any outstanding unvested
awards as if the fair value method had been applied to those awards as of the date of
grant. The following table illustrates the effect on net income and earnings per share as
if the fair value based method had been applied to all outstanding and unvested awards in
each period.

|                                                             | Three Months Ended March 31,
|------------------------------------------------------------ | ----------------------------
|
|Net loss as reported                                         |                             
|Add: Stock-based employee compensation expense included in   |                             
|reported net loss, net of related tax effects                |                             
|Deduct: Total stock-based employee compensation expense      |                             
|determined under fair value based method for all awards, net |                             
|of related tax effects                                       |                             
|                                                             |                             
|                                                             |                             
|Pro forma net loss including stock-based compensation cost   |                             
|based on fair-value method                                   |                             
|                                                             |                             
|Loss per share:                                              |                             
|Basic and diluted--as reported                               |                             
|                                                             |                             
|Basic and diluted--pro forma                                 |                             
|                                                             |                             

The
weighted average fair value per share of options granted in 2005 amounted to $4.11. 
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for grants: 
expected volatility of 28%, risk-free interest rate of 4.15% and expected lives of seven
and a half years.

# Statement of Cash Flows

For
purposes of reporting cash flows, cash equivalents include amounts due from banks and
federal funds sold. Generally, federal funds are sold for one-day periods.

7

---

# Item 2.   
Managements Discussion and Analysis or Plan of Operation

The following discussion reviews
our results of operations and assesses our financial condition. You should read the
following discussion and analysis in conjunction with the accompanying consolidated
financial statements. The commentary should be read in conjunction with the discussion of
forward-looking statements, the financial statements, and the related notes and the other
statistical information included in this report.

# DISCUSSION OF
FORWARD-LOOKING STATEMENTS

This report contains statements which
constitute forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are
based on many assumptions and estimates and are not guarantees of future performance. Our
actual results may differ materially from those projected in any forward-looking
statements, as they will depend on many factors about which we are unsure, including many
factors which are beyond our control. The words may, would,
could, will, expect, anticipate,
believe, intend, plan, and estimate, as
well as similar expressions, are meant to identify such forward-looking statements. Our
actual results may differ materially from the results discussed in the forward-looking
statements, and our operating performance each quarter is subject to various risks and
uncertainties that are discussed in detail in our filings with the Securities and Exchange
Commission, including, without limitation:

| |  | significant increases in competitive pressure in the banking and financial services
industries;
| | - | -----------------------------------------------------------------------------------------------

| |  | changes in the interest rate environment which could reduce anticipated or
actual margins;
| | - | ------------------------------------------------------------------------------------------

| |  | changes in political conditions or the legislative or regulatory
environment;
| | - | -----------------------------------------------------------------------------

| |  | general economic conditions, either nationally or regionally and especially
in our primary service area, becoming
less favorable than expected resulting in, among other things, a deterioration in credit
quality;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | changes occurring in business conditions and inflation;
| | - | -------------------------------------------------------

| |  | changes in technology;
| | - | ----------------------

| |  | changes in monetary and tax policies;
| | - | -------------------------------------

| |  | the level of allowance for loan loss;
| | - | -------------------------------------

| |  | the rate of delinquencies and amounts of charge-offs;
| | - | -----------------------------------------------------

| |  | the rates of loan growth;
| | - | -------------------------

| |  | adverse changes in asset quality and resulting credit risk-related losses and expenses;
| | - | ---------------------------------------------------------------------------------------

| |  | loss of consumer confidence and economic disruptions resulting from terrorist
activities;
| | - | -----------------------------------------------------------------------------------------

| |  | changes in the securities markets; and
| | - | --------------------------------------

| |  | other risks and uncertainties detailed from time to time in our filings with the Securities and
Exchange Commission.
| | - | --------------------------------------------------------------------------------------------------------------------

Critical Accounting Policies We have adopted various accounting
policies that govern the application of accounting principles generally accepted in the
United States of America and with general practices within the banking industry in the
preparation of our financial statements. Our significant accounting policies are described
in the footnotes to our audited consolidated financial statements as of December 31, 2005,
as filed on our annual report on Form 10-KSB.

Certain accounting policies involve
significant judgments and assumptions by us that have a material impact on the carrying
value of certain assets and liabilities. We consider these accounting policies to be
critical accounting policies. The judgment and assumptions we use are based on historical
experience and other factors, which we believe to be reasonable under the circumstances.
Because of the nature of the judgment and assumptions we make, actual results could differ
from these judgments and estimates that could have a material impact on the carrying
values of our assets and liabilities and our results of operations.

8

---

# Allowance for Loan Losses

We believe the allowance for loan
losses is the critical accounting policy that requires the most significant judgment and
estimates used in preparation of our consolidated financial statements. Some of the more
critical judgments supporting the amount of our allowance for loan losses include
judgments about the credit worthiness of borrowers, the estimated value of the underlying
collateral, the assumptions about cash flow, determination of loss factors for estimating
credit losses, the impact of current events, and conditions, and other factors impacting
the level of probable inherent losses. Under different conditions or using different
assumptions, the actual amount of credit losses incurred by us may be different from
managements estimates provided in our consolidated financial statements. Refer to
the portion of this discussion that addresses our allowance for loan losses for a more
complete discussion of our processes and methodology for determining our allowance for
loan losses.

# Income Taxes

We use assumptions and estimates in
determining income taxes payable or refundable for the current year, deferred income tax
liabilities and assets for events recognized differently in our financial statements and
income tax returns, and income tax expense. Determining these amounts requires analysis of
certain transactions and interpretation of tax laws and regulations. Management exercises
judgment in evaluating the amount and timing of recognition of resulting tax liabilities
and assets. These judgments and estimates are reevaluated on a continual basis as
regulatory and business factors change. No assurance can be given that either the tax
returns submitted by us or the income tax reported on the financial statements will not be
adjusted by either adverse rulings by the United States Tax Court, changes in the tax
code, or assessments made by the Internal Revenue Service. We are subject to potential
adverse adjustments, including, but not limited to, an increase in the statutory federal
or state income tax rates, the permanent nondeductibility of amounts currently considered
deductible either now or in future periods, and the dependency on the generation of future
taxable income, including capital gains, in order to ultimately realize deferred income
tax assets.

# Overview

The following discussion describes
our results of operations for the quarter ended March 31, 2006 and also analyzes our
financial condition as of March 31, 2006. Because our bank opened for business on May 16,
2005, a comparison of the quarter ended March 31, 2006 to quarter ended March 31, 2005 is
not meaningful. Until May 2005, our principal activities related to our organization, the
conducting of our initial public offering, the pursuit of approvals from the Office of the
Comptroller of the Currency for our application to charter the bank, the pursuit of
approvals from the Federal Reserve to become a bank holding company, and the pursuit of
approvals from the FDIC for our application for insurance of the deposits of the bank. We
received approval from the FDIC, Federal Reserve, and the Office of the Comptroller of the
Currency in May 2005 and commenced business on May 16, 2005. We completed our stock
offering in May 2005, upon the issuance of 2,085,010 shares with net proceeds totaling
$20,536,038. We capitalized the bank with $18 million of the proceeds from the stock
offering.

Like most community banks, we derive
most of our income from interest we receive on our loans and investments. Our primary
source of funds for making these loans and investments is our deposits, on which we pay
interest. Consequently, one of the key measures of our success is our amount of net
interest income, or the difference between the income on our interest-earning assets, such
as loans and investments, and the expense on our interest-bearing liabilities, such as
deposits. Another key measure is the spread between the yield we earn on these
interest-earning assets and the rate we pay on our interest-bearing liabilities.

There are risks inherent in all
loans, so we maintain an allowance for loan losses to absorb probable losses on existing
loans that may become uncollectible. We establish and maintain this allowance by charging
a provision for loan losses against our operating earnings. In the following section we
have included a detailed discussion of this process.

In addition to earning interest on
our loans and investments, we earn income through fees and other expenses we charge to our
customers. We describe the various components of this non-interest income, as well as our
non-interest expense, in the following discussion.

9

---

# Results of Operations

We incurred a net loss of $249,647,
or $0.12 per share, for the three months ended March 31, 2006. We recognized $773,037 in
interest income. The provision for loan loss was $130,000 for the quarter ended March 31,
2006. We anticipate the growth in loans in future quarters will drive the growth in assets
and the growth in interest income. The primary source of funding for our loan portfolio is
deposits that are acquired locally. The bank incurred interest expense on deposit accounts
of $281,362 in the first quarter of 2006.

We incurred non-interest expenses of
$685,029 during the three months ended March 31, 2006. Included in this expense is
$448,960 of compensation and benefits. Compensation and benefits expense for the quarter
ended March 31, 2006 includes approximately $77,000 related to the severance agreement for
an officer who ceased to be employed by us on March 13, 2006 but was under an employment
agreement. We incurred $72,739 of occupancy and equipment expenses, $38,703 of data
processing expense, $26,301 of marketing expense, and $44,140 of professional fees.
Included in the $44,140 of professional fees incurred is approximately $20,000 of legal
and consulting fees related to the employment matter discussed above. We also incurred
$12,344 of expenses related to supplies, $13,701 of insurance expense including regulatory
assessments, and $28,141 of other expenses primarily related to credit expenses, postage
and dues and memberships.

# Assets and Liabilities

General

Total assets as of March 31, 2006
were $58.4 million representing an increase of $17.6 million or 43% compared to December
31, 2005 total assets of $40.8 million. The increase in assets is due to deposit growth of
$22.5 million which was used to fund loan growth of $9.9 million, and repay short-term
borrowings of $4.9 million. Our management closely monitors and seeks to maintain
appropriate levels of interest earning assets and interest bearing liabilities so that
maturities of assets are such that adequate funds are provided to meet customer
withdrawals and demand.

At March 31, 2006, our total assets
of $58.4 million consisted principally of $35.4 million in net loans, $11.0 million in
investment securities, $8.2 million in federal funds sold, and $1.7 in property and
equipment. Liabilities at March 31, 2006 totaled $39.6 million, consisting principally of
$39.0 million in deposits. At March 31, 2006, shareholders equity was $18.8 million.

Loans

Since loans typically provide higher
interest yields than other types of interest earning assets, we intend to invest a
substantial percentage of our earning assets in our loan portfolio. At March 31, 2006, our
loan portfolio consisted primarily of $22.9 million of commercial real estate loans, $6.6
of commercial business loans, and $6.4 million of consumer and home equity loans.

We will discontinue accrual of
interest on a loan when we conclude it is doubtful that we will be able to collect
interest from the borrower. We will reach this conclusion by taking into account factors
such as the borrowers financial condition, economic and business conditions, and the
results of our previous collection efforts. Generally, we will place a delinquent loan in
non-accrual status when the loan becomes 90 days or more past due. When we place a loan in
non-accrual status, we will reverse all interest which has been accrued on the loan but
remains unpaid and we will deduct this interest from earnings as a reduction of reported
interest income. We will not accrue any additional interest on the loan balance until we
conclude the collection of both principal and interest is reasonably certain. At March 31,
2006, there were no non-performing loans, and we had no loans that were 90 days or more
past due or non-accruing.

10

---

Provision and Allowance
for Loan Losses

We have established an allowance for
loan losses through a provision for loan losses charged to expense on our consolidated
statement of operations. The allowance for loan losses was $468,000, or 1.30% of gross
loans as of March 31, 2006. For the quarter ended March 31, 2006, $130,000 was charged to
the provision for loan loss and there were no charge-offs. The allowance for loan losses
represents an amount which we believe will be adequate to absorb probable losses on
existing loans that may become uncollectible. Our judgment as to the adequacy of the
allowance for loan losses is based on a number of assumptions about future events, which
we believe to be reasonable, but which may or may not prove to be accurate. Our
determination of the allowance for loan losses is based on evaluations of the
collectibility of loans, including consideration of factors such as the balance of
impaired loans, the quality, mix, and size of our overall loan portfolio, economic
conditions that may affect the borrowers ability to repay, the amount and quality of
collateral securing the loans, our historical loan loss experience, and a review of
specific problem loans. We also consider subjective issues such as changes in the lending
policies and procedures, changes in the local/national economy, changes in volume or type
of credits, changes in volume/severity of problem loans, quality of loan review and board
of director oversight, concentrations of credit, and peer group comparisons. Due to our
limited operating history, to date the provision for loan losses has been made primarily
as a result of our assessment of general loan loss risk compared to banks of similar size
and maturity. Due to our short operating history, the loans in our loan portfolio and our
lending relationships are of very recent origin. In general, loans do not begin to show
signs of credit deterioration or default until they have been outstanding for some period
of time, a process known as seasoning. As a result, a portfolio of older loans will
usually behave more predictably than a newer portfolio. Because our loan portfolio is new,
the current level of delinquencies and defaults may not be representative of the level
that will prevail when the portfolio becomes more seasoned, which may be higher than
current levels. If delinquencies and defaults increase, we may be required to increase our
provision for loan losses, which would adversely affect our results of operations and
financial condition. Periodically, we will adjust the amount of the allowance based on
changing circumstances. We will charge recognized losses to the allowance and add
subsequent recoveries back to the allowance for loan losses. There can be no assurance
that charge-offs of loans in future periods will not exceed the allowance for loan losses
as estimated at any point in time or that provisions for loan losses will not be
significant to a particular accounting period.

Deposits

Our primary source of funds for loans
and investments is our deposits. At March 31, 2006, we had $39.0 million in deposits which
consisted primarily of $5.1 million in demand deposit accounts, $14.8 million in
certificates of deposit, and $19.0 million of money market accounts. During the quarter
ended March 31, 2006, we completed a deposit campaign in our local market to attract new
customer relationships as well as increase our funding availability for expected loan
growth. Total deposits increased $22.5 million during the quarter ended March 31, 2006, of
which $9.9 million was used to fund loans and $4.9 million was used to pay down short-term
borrowings. The remaining $7.7 million is invested in federal funds sold and is available
for funding future loan growth.

Liquidity Liquidity is the ability to meet
current and future obligations through liquidation or maturity of existing assets or the
acquisition of liabilities. We manage both assets and liabilities to achieve appropriate
levels of liquidity. Cash and short-term investments are our primary sources of asset
liquidity. These funds provide a cushion against short-term fluctuations in cash flow from
both deposits and loans. The investment portfolio is our principal source of secondary
asset liquidity. However, the availability of this source of funds is influenced by market
conditions. Individual and commercial deposits and borrowings are our primary source of
funds for credit activities. We maintain a federal funds purchased line of credit with a
correspondent bank totaling $5.0 million. We are also a member of the Federal Home Loan
Bank of Atlanta, from which applications for borrowings can be made for leverage purposes,
if so desired, in an amount up to 10% of the total assets of the bank. We believe our
liquidity sources are adequate to meet our operating needs. The level of liquidity is
measured by the cash and securities available for sale-to-total assets ratio, which was at
34.14% at March 31, 2006.

Impact of Off-Balance
Sheet InstrumentsThrough the operations of our bank,
we have made contractual commitments to extend credit in the ordinary course of our
business activities. These commitments are legally binding agreements to lend money to our
customers at predetermined interest rates for a specified period of time. At March 31,
2006, we had issued commitments to extend credit of $20.8 million through various types of
lending arrangements. We evaluate each customers credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by us upon extension of
credit, is based on our credit evaluation of the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment, commercial and
residential real estate. We manage the credit risk on these commitments by subjecting them
to normal underwriting and risk management processes.

11

---

Capital Resources Total shareholders equity
decreased from $19.0 million at December 31, 2005 to $18.8 million at March 31, 2006. The
decrease is primarily a result of net loss for the quarter ended March 31, 2006 of
$249,647.

The bank is subject to various
regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a material effect on
the banks financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the bank must meet specific capital guidelines
that involve quantitative measures of the banks assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
banks capital amounts and classifications are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.

The Federal Reserve guidelines
contain an exemption from the capital requirements for small bank holding
companies.  On March 31, 2006, the Federal Reserve changed
the definition of a small bank holding company to bank holding companies with less
than $500 million in total assets (an increase from $150 million under the prior
rule).  However, bank holding companies will not qualify under the new
definition if they (i) are engaged in significant nonbanking activities either directly or
indirectly through a subsidiary, (ii) conduct significant off-balance sheet activities,
including securitizations or managing or administering assets for third parties, or (iii)
have a material amount of debt or equity securities (including trust preferred securities)
outstanding that are registered with the SEC.  Although we have less than $500
million in assets, it is unclear at this point whether we otherwise meet the requirements
for qualifying as a small bank holding company.  According to the Federal
Reserve Board, the revision of the criterion to exclude any bank holding company that has
outstanding a material amount of SEC-registered debt or equity securities reflects the
fact that SEC registrants typically exhibit a degree of complexity of operations and
access to multiple funding sources that warrants excluding them from the new policy
statement and subjecting them to the capital guidelines.   In the adopting
release for the new rule, the Federal Reserve Board stated that what constitutes a
material amount of SEC-registered debt or equity for a particular bank holding
company depends on the size, activities and condition of the relevant bank holding
company.  In lieu of using fixed measurable parameters of materiality across all
institutions, the rule provides the Federal Reserve with supervisory flexibility in
determining, on a case-by-case basis, the significance or materiality of activities
or securities outstanding such that a bank holding company should be excluded from the
policy statement and subject to the capital guidelines. Prior to adoption of this new
rule, our holding company was not subject to these capital guidelines, as it had less than
$150 million in assets. Until the Federal Reserve provides further guidance on the new
rules, it will be unclear whether our holding company will be subject to the exemption
from the capital requirements for small bank holding companies. Regardless, our bank falls
under these minimum capital requirements as set per bank regulatory agencies.

Quantitative measures established by
regulation to ensure capital adequacy require the bank to maintain minimum ratios of Tier
1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Tier 1 capital of the bank consists of common
shareholders equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. The banks Tier 2 capital
consists of the allowance for loan losses subject to certain limitations. Total capital
for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2
capital. The regulatory minimum requirements are 4% for Tier 1 capital and 8% for total
risk-based capital.

The bank is also required to maintain
capital at a minimum level based on quarterly average assets, which is known as the
leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum
requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the
minimum. The bank exceeded its minimum regulatory capital ratios as of March 31, 2006, as
well as the ratios to be considered well capitalized.

The following table summarizes the
capital amounts and ratios of the bank and the regulatory minimum requirements at March
31, 2006.

(Dollars in thousands)

|                                       |  |  |   |        | Adequately
|-------------------------------------- |  |  | - | ------ | ----------
|
|
|
|Total capital to risk weighted assets  |  |  | $ | 16,841 |           
|Tier 1 capital to risk weighted assets |  |  | $ | 16,373 |           
|Tier 1 capital to average assets       |  |  | $ | 16,373 |           

12

---

# Item 3.   Controls and
Procedures

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 15d-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of March 31, 2006. There have been no
significant changes in our internal controls over financial reporting during the fiscal
quarter ended March 31, 2006 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

The
design of any system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of
how remote.

13

---

# Part II  Other
Information

# Item 1.   Legal Proceedings

There
are no material pending legal proceedings to which the company is a party or of which any
of its property is the subject.

# Item 2.   Unregistered
Sales of Equity Securities and Use of Proceeds

Not applicable

# Item 3.   Default Upon Senior
Securities

Not applicable

# Item 4.   Submission of
Matters to a Vote of Security Holders

Not applicable

# Item 5.   Other Information

Not applicable

# Item 6.   Exhibits

31.1        Rule 15d-14(a) Certification of the Chief Executive Officer.
31.2        Rule 15d-14(a) Certification of the Chief Financial Officer.
32           Section 1350 Certifications.

14

---

# SIGNATURES

In accordance with the requirements
of the Exchange Act, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

| | Date:   May 4, 2006 |  | By:  /s/ Lawrence R. Miller
Lawrence R. MillerChief Executive Officer
| | ------------------- |  | ---------------------------------------------------------------------

| | Date:   May 4, 2006 |  | By:  /s/ Kimberly D. Barrs
Kimberly D. BarrsChief Financial Officer
| | ------------------- |  | -------------------------------------------------------------------

15

---

# EXHIBIT INDEX

Exhibit Number        
               Description

31.1        Rule 15d-14(a) Certification of the Chief Executive Officer.
31.2        Rule 15d-14(a) Certification of the Chief Financial Officer.
32           Section 1350 Certifications.

16