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

# FORM 10-QSB

| | QUARTERLY REPORT UNDER SECTION 13 OR 15(D)      
                OF THE SECURITIES EXCHANGE ACT OF 1934 
| | --------------------------------------------------------------------------------------------------------
| |                                                                                                         
| | For the Quarterly Period ended March 31, 2007                                                           
| |                                                                                                         
| | 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
000-51907

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.  
Yes      No

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

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 April 30, 2007.

Transitional Small Business Disclosure Format (check one):   
Yes     No

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# Independence
Bancshares, Inc.

# Part I  Financial
Information

# Item 1. Financial
Statements

# Consolidated Balance
Sheets (unaudited)

|                                                    | March 31, 2007 | December 31, 2006
|--------------------------------------------------- | -------------- | -----------------
|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                                      |                |                  
|                                                    |                |                  
|Borrowings                                          |                |                  
|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 |                |                  
|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

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# Independence
Bancshares, Inc.

# Consolidated
Statements of Operations(unaudited)

|                                                               | Three Months Ended
|-------------------------------------------------------------- | ------------------
|
|
|Interest income                                                |                   
|Loans                                                          |                   
|Investment securities                                          |                   
|Federal funds sold & other                                     |                   
|                                                               |                   
|Total interest income                                          |                   
|                                                               |                   
|Interest expense                                               |                   
|Deposits                                                       |                   
|Borrowings                                                     |                   
|                                                               |                   
|Total interest expense                                         |                   
|                                                               |                   
|Net interest income                                            |                   
|                                                               |                   
|Provision for loan losses                                      |                   
|                                                               |                   
|Net interest income after  provision                           |                   
|for loan losses                                                |                   
|                                                               |                   
|Non-interest income                                            |                   
|                                                               |                   
|Non-interest expenses                                          |                   
|Compensation and benefits                                      |                   
|Professional fees                                              |                   
|Marketing                                                      |                   
|Insurance                                                      |                   
|Occupancy and equipment                                        |                   
|Data processing and related costs                              |                   
|Telephone and supplies                                         |                   
|Other                                                          |                   
|                                                               |                   
|Total non-interest 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

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# Independence
Bancshares, Inc.

# Consolidated Statements
of ChangesIn Shareholders Equity and Comprehensive Loss (unaudited)

|                                |  |  |  | Accumulated |  |  
|------------------------------- |  |  |  | ----------- |  | -
|
|
|
|
|December 31, 2005               |  |  |  | 2,085,010   |  | $
|Compensation expense related to |  |  |  |             |  |  
|stock options granted           |  |  |  | -           |  |  
|Net loss                        |  |  |  | -           |  |  
|Unrealized losses on investment |  |  |  |             |  |  
|securities available for sale,  |  |  |  |             |  |  
|net of tax                      |  |  |  | -           |  |  
|                                |  |  |  |             |  |  
|Total comprehensive loss        |  |  |  | -           |  |  
|                                |  |  |  |             |  |  
|March 31, 2006                  |  |  |  | 2,085,010   |  | $
|                                |  |  |  |             |  |  
|                                |  |  |  |             |  |  
|December 31, 2006               |  |  |  | 2,085,010   |  | $
|Compensation expense related to |  |  |  |             |  |  
|stock options granted           |  |  |  | -           |  |  
|Net loss                        |  |  |  | -           |  |  
|Unrealized loss on investment   |  |  |  |             |  |  
|securities available for sale,  |  |  |  |             |  |  
|net of tax                      |  |  |  | -           |  |  
|                                |  |  |  |             |  |  
|Total comprehensive loss        |  |  |  | -           |  |  
|                                |  |  |  |             |  |  
|March 31, 2007                  |  |  |  | 2,085,010   |  | $
|                                |  |  |  |             |  |  

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

4

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# Independence
Bancshares, Inc.

# Consolidated
Statements of Cash Flows (unaudited)

|                                                                       | Three Months Ended
|---------------------------------------------------------------------- | ------------------
|
|
|Operating activities                                                   |                   
|Net loss                                                               |                   
|Adjustments to reconcile net loss to cash used in operating activities |                   
|Provision for loan losses                                              |                   
|Depreciation                                                           |                   
|Accretion of investment securities discounts, net                      |                   
|Benefit for deferred income taxes                                      |                   
|Compensation expense related to stock options granted                  |                   
|Increase in other assets, net                                          |                   
|(Decrease) increase in other liabilities, net                          |                   
|                                                                       |                   
|Net cash provided by (used in) operating activities                    |                   
|                                                                       |                   
|Investing activities                                                   |                   
|Origination of loans, net                                              |                   
|Maturity of investment securities available for sale                   |                   
|Repayments of investment securities available for sale                 |                   
|Purchase of non-marketable equity securities, net                      |                   
|Purchase of property and equipment                                     |                   
|                                                                       |                   
|Net cash used in investing activities                                  |                   
|                                                                       |                   
|Financing activities                                                   |                   
|Increase in deposits, net                                              |                   
|Decrease in short-term borrowings                                      |                   
|                                                                       |                   
|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                                      |                   
|Decrease (increase) in unrealized loss on securities, net of tax       |                   
|                                                                       |                   
|Loans transferred to other real estate owned                           |                   
|                                                                       |                   

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

5

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# 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.

# 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, 2007 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2007. For further information, refer to the
financial statements and footnotes thereto included in our Annual Report on Form 10-KSB
for 2006 as filed with the Securities and Exchange Commission.

# 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, 2006.  For further
information, refer to the consolidated financial statements and footnotes thereto included
in our Annual Report on Form 10-KSB for 2006 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.

# Cash and Cash Equivalents

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

# 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 three
month periods ended March 31, 2007 and 2006, as a result of the Companys net loss,
all of the potential common shares were considered anti-dilutive.

# NOTE 3  INVESTMENT
SECURITIES

Investment
securities classified as Available for Sale are carried at fair value with
unrealized gains and losses excluded from earnings and reported as a separate component of
shareholders equity (net of estimated tax effects). Realized gains or losses on the
sale of investments are based on the specific identification method.

At
March 31, 2007, the investment portfolio included an unrealized loss of approximately
$85,000. The Company believes, based on industry analyst reports and credit ratings that
the deterioration in fair values of investment securities available for sale is attributed
to changes in market interest rates and not in the credit quality of the issuer and
therefore, these losses are not considered other-than-temporary. The Company has the
ability and intent to hold these securities until such time as the value recovers or the
securities mature.

6

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# 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 anticipated 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, 2006,
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.

7

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# 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 benefit or 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. Valuation allowances are
established to reduce deferred tax assets if it is determined to be more likely than
not that all or some portion of the potential deferred tax asset will not be
realized. 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 non-deductibility 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 quarters ended March 31, 2007 and 2006 and also analyzes
our financial condition as of March 31, 2007.

Like most community banks, we derive
the majority 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 and borrowings. 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 expenses, in the following discussion.

# Results of Operations

Three months ended March
31, 2007 and 2006

We incurred a net loss of $40,461, or
$0.02 per share, for the quarter ended March 31, 2007 compared to a net loss of $249,647,
or $0.12 per share, for the quarter ended March 31, 2006, a decrease in loss of $209,186,
or 84%. For the three months ended March 31, 2007, we recognized $1.5 million in interest
income and $713,493 in interest expense, resulting in net interest income of $792,719, an
increase of $322,480, or 69%, over the same period in 2006. This increase in net interest
income is a result of our current year growth in average earning assets, which increased
to $78.5 million for the three months ended March 31, 2007 from $47.1 million for the
three months ended March 31, 2006, an increase of $31.4 million, or 67%.

8

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Provision for loan losses was
$192,000 for the quarter ended March 31, 2007, an increase of $62,000, or 48%, compared to
the expense of $130,000 for the quarter ended March 31, 2006. This increase in provision
expense is due to an increase in net loan originations in the current quarter compared to
the comparable quarter in 2006.

For the three months ended March 31,
2007, non-interest income was $12,788 compared to $12,143 for the three months ended March
31, 2006. Non-interest income for the three months ended March 31, 2007 and 2006 was
derived from service charges on deposits, customer service fees, rental income, and
mortgage origination income.

During the current quarter, we
incurred non-interest expenses of $667,468, compared to non-interest expenses of $685,029
for the quarter ended March 31, 2006, a decrease of $17,562, or 3%. This decrease within
non-interest expenses for the three month periods ended March 31, 2007 and 2006 primarily
resulted from a decrease of $75,442 in compensation and benefits expense compared to the
quarter ended March 31, 2006, due to severance payments incurred in the first quarter of
2006 to a former employee under an employment agreement. This decrease was offset by an
increase of $33,088 in marketing expenses, due to an emphasis on branding and advertising,
and an increase of $17,820 in data processing and related costs, due to the increase in
our customer base in the current year.

# Assets and Liabilities

General

Total assets as of March 31, 2007
were $91.1 million, representing an increase of $15.3 million, or 20%, compared to
December 31, 2006. The increase in assets is due to net loan growth of $14.3 million,
which was funded by deposit growth of $15.5 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, 2007, our total assets
consisted principally of $8.5 million in investment securities, $75.8 million in net
loans, and $1.6 million in property and equipment. Liabilities at March 31, 2007 totaled
$72.6 million, consisting principally of $72.4 million in deposits. At March 31, 2007,
shareholders equity was $18.5 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, 2007, our
loan portfolio consisted primarily of $49.2 million of commercial real estate loans, $12.2
million of commercial business loans, and $15.9 million of consumer and home equity loans.

We 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 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 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 reverse all interest which has been accrued on the loan but remains unpaid and
deduct this interest from earnings as a reduction of reported interest income. We do not
accrue any additional interest on the loan balance until we conclude the collection of
both principal and interest is reasonably certain. We had approximately $478,000 and
$589,000 in non-accrual loans at March 31, 2007 and December 31, 2006, respectively. This
balance represents 0.62% of gross loans at quarter-end. At March 31, 2007, we were not
aware of any potential problem loans that were not already categorized as nonaccrual.

On September 6, 2006, we determined
it necessary to record an additional provision for loan losses of $398,900 as an
impairment charge, or specific reserve, related to one borrowing relationship with an
aggregate principal balance of approximately $895,000, of which $477,885 is considered
impaired. Our loss estimate was based on an assessment of the underlying collateral
securing this relationship. As of March 31, 2007, there were no charge-offs related to
this relationship; however in April 2007, the underlying collateral was fully liquidated,
the funds were applied to the loans, and the remaining balances were charged off. No
material additional loss was incurred by the Bank.

In March 2007, we foreclosed on a 1-4
family residence which was collateral for a loan in the amount of $105,376. The property
appraised for approximately $132,000. As of March 31, 2007, we have other real estate
owned of $105,376 which is included in other assets in the consolidated balance sheets.

9

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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. As of March 31, 2007, the allowance for loan losses was $1.4
million, or 1.80% of gross loans, compared to $1.2 million, or 1.90% of gross loans as of
December 31, 2006. For the quarter ended March 31, 2007, provision for loan losses was
$192,000, an increase of $62,000, or 48%, over the three months ended March 31, 2006.

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, 2007, we had $72.4 million in deposits which
consisted primarily of $5.3 million in demand deposit accounts, $12.0 million in money
market accounts and $55.1 million in time deposits. During the fourth quarter of 2006, we
began obtaining deposits outside of our local market area in the form of brokered time
deposits. Due to the interest rate environment in our market, as well as strong
competition from other banking and financial services companies in gathering deposits,
brokered time deposits allow us to obtain funding at a lower interest rate than local
market deposits and other funding sources in order to support loan growth. At March 31,
2007, we had $27.9 million in brokered time deposits. We plan to continue the use of
brokered time deposits, while maintaining an effort to gather core deposits in our local
market.

# 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 and pledging agreements. 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, cash equivalents, and investment securities
available for sale-to-total assets ratio, which was at 13.02% at March 31, 2007.

10

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# Impact of Off-Balance
Sheet Instruments

Through 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,
2007, we had issued commitments to extend credit of $21.1 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, and commercial and
residential real estate. We manage the credit risk on these commitments by subjecting them
to normal underwriting and risk management processes.

# Capital Resources

Total shareholders equity
remained relatively unchanged at $18.5 million at March 31, 2007 and December 31, 2006.
Our net loss for the quarter of $40,461 was offset by the decrease of $23,979 in
unrealized loss on securities available for sale and the capital impact of $16,500 in
compensation expense related to stock option grants.

Our Bank and Company are subject to
various regulatory capital requirements administered by
the federal banking agencies. However, the Federal Reserve guidelines contain an exemption
from the capital requirements for small bank holding companies, which in 2006 were
amended to cover most bank holding companies with less than $500 million in total assets
that do not have a material amount of debt or equity securities outstanding registered
with the SEC. Although our class of common stock is registered under Section 12 of the
Securities Exchange Act, we believe that because our stock is not listed on any exchange
or otherwise actively traded, the Federal Reserve Board will interpret its new guidelines
to mean that we qualify as a small bank holding company. Nevertheless, our Bank remains
subject to these capital requirements. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the 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.

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, less 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, 2007, 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, 2007.



|(Dollars in thousands)                
|--------------------------------------
|
|
|
|Total capital to risk weighted assets 
|Tier 1 capital to risk weighted assets
|Tier 1 capital to average assets      

11

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# 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 13a-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, 2007. There have been no
significant changes in our internal controls over financial reporting during the fiscal
quarter ended March 31, 2007 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.

12

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# Part II  Other
Information

# Item 1.   Legal Proceedings

There are no material pending legal
proceedings to which we are a party or of which any of our properties are 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

13

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# Item 6.   Exhibits

31.1        Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2        Rule 13a-14(a) Certification of the Principal Financial Officer.

32          Section 1350
Certifications.

14

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# 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 1, 2007 |  | By:  /s/ Lawrence R. Miller
Lawrence R. MillerChief Executive Officer (Principal Executive Officer)
| | ------------------- |  | ---------------------------------------------------------------------------------------------------

| | Date:   May 1, 2007 |  | By:  /s/ Kimberly D. Barrs
Kimberly D. BarrsChief Financial Officer (Principal Financial Officer)
| | ------------------- |  | -------------------------------------------------------------------------------------------------

15

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# EXHIBIT INDEX

ExhibitNumber        
        Description

31.1        Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2        Rule 13a-14(a) Certification of the Principal Financial Officer.

32           Section 1350
Certifications.

16