**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.  20549**




**Form
      10-K**


**(Mark
      One)**


**o**
            **Annual
                Report under Section 13 or 15(d) of the Securities Exchange Act of
                1934**


**For
      the fiscal year ended December 31, 2006**


**Or**


**o**
            **Transition
                Report under Section 13 or 15(d) of the Securities Exchange Act of
                1934**





**For
      the transition period from
            to**




**Commission
      file number: 000-28344**




**First
      Community Corporation**


(Exact
      name of registrant as specified in its charter)




**South
                Carolina**
            
            **57-1010751**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)**5455
                Sunset Blvd.,**
              **Lexington,
                South Carolina**
            
            **29072**(Address
                of principal executive offices)
            
            (Zip
                Code)




**803-951-2265**


Registrant’s
      telephone number, including area code





Securities
      registered pursuant to Section 12(b) of the Act:





Title
                of each class
            Name
                of each exchange on which registeredCommon
                stock, $1.00 par value per share
            The
                NASDAQ Capital Market





Securities
      registered pursuant to Section 12(g) of the Act: None





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


Yes o No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act. Yes o No x





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      past 90 days. Yes x No o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.


Yes o No x





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


Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer x





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


Yes o No x





As
      of
      June 30, 2006, the aggregate market value of the registrant’s common stock held
      by non-affiliates of the registrant was $52,493,000 based on the closing sale
      price of $18.18 on June 30, 2006, as reported on The NASDAQ Capital Market.





3,220,908
      shares of the issuer’s common stock were issued and outstanding as of March 15,
      2007.





**Documents
      Incorporated by Reference**





Proxy
                Statement for the Annual Meeting of Shareholders to be held on May
                16,
                2007.
            
            Part
                III (Portions of Items 10-14)







1





**TABLE
      OF CONTENTS**




Page
                  No.PART
                  IItem
                  1. Business
              3Item
                  1A. Risk Factors
              13Item
                  1B. Unresolved SEC Staff Comments
              16Item
                  2. Properties
              16Item
                  3. Legal Proceedings
              18Item
                  4. Submission of Matters to a Vote of Security
                  Holders
              18PART
                  IIItem
                  5. Market for Registrant’s Common Equity, Related
                  Stockholder Matters, and Issuers Purchases of Equity
                  Securities
              19Item
                  6. Selected Financial Data
              21Item
                  7. Management’s Discussion and Analysis of Financial
                  Condition and Results of Operations
              22Item
                  7A. Quantitative and Qualitative Disclosures About
                  Market Risk
              40Item
                  8. Financial Statements and Supplementary
                  Data
              43Consolidated
                  Balance Sheets
              44Consolidated
                  Statements of Income
              45Consolidated
                  Statement of Changes in Shareholders’ Equity
                  and Comprehensive Income (Loss)
              47Consolidated
                  Statements of Cash Flows
              47Notes
                  to Consolidated Financial
                  Statements
              47Item
                  9. Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure
              71Item
                  9A. Controls and Procedures
              71Item
                  9B. Other Information
              71Part
                  IIIItem
                  10. Directors and Executive Officers of the
                  Registrant
              71Item
                  11. Executive Compensation
              71Item
                  12. Security Ownership of Certain Beneficial Owners
                  and Management and Related Stockholder Matters
              71Item
                  13. Certain Relationships and Related
                  Transactions
              71Item
                  14. Principal Accounting Fees and
                  Services
              71Item
                  15. Exhibits, Financial Statement
                  Schedules
              71SIGNATURES
              74





2
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            of Contents*





**CAUTIONARY
      STATEMENT REGARDING**


**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. Potential risks and uncertainties include, but are not limited
      to
      those described below under Item 1A- Risk Factors and the
      following:





·
            the
                businesses of First Community and DeKalb Bankshares may not be integrated
                successfully or such integration may take longer to accomplish than
                expected;


·
            the
                expected cost savings and any revenue synergies from the merger may
                not be
                fully realized within the expected
                timeframes;


·
            success
                and timing of other business
                strategies;


·
            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.





We
      undertake no obligation to publicly update or otherwise revise any
      forward-looking statements, whether as a result of new information, future
      events, or otherwise.





**PART
      I**


**Item
      1.**  **Business**





**General**





First
      Community Corporation, a bank holding company registered under the Bank Holding
      Company Act of 1956, was incorporated under the laws of South Carolina in 1994
      primarily to own and control all of the capital stock of First Community Bank,
      N.A., which commenced operations in August 1995.  On October 1, 2004, we
      consummated our acquisition of DutchFork Bancshares, Inc. and its wholly-owned
      subsidiary, Newberry Federal Savings Bank. During
      the second quarter of 2006, we completed our acquisition of DeKalb Bankshares,
      Inc., the holding company for The Bank of Camden. We
      engage
      in a commercial banking business from our main office in Lexington, South
      Carolina and our 12 full-service offices are located in Lexington (two), Forest
      Acres, Irmo, Cayce-West Columbia, Gilbert, Chapin, Northeast Columbia,
      Prosperity, Newberry (two) and Camden. We offer a wide-range of traditional
      banking products and services for professionals and small- to medium-sized
      businesses, including consumer and commercial, mortgage, brokerage and
      investment, and insurance services.  We also offer online banking to our
      customers.  Our stock trades on The NASDAQ Capital Market under the symbol
      FCCO.




As
      of
      December 31, 2004, the company no longer met the requirements to qualify as
      a
      small business issuer as defined in Rule 12b-2 of the Securities Exchange Act
      of
      1934 (the “Exchange Act”). All reports of the company, beginning with the Form
      10-Q for the quarter ended March 31, 2005, are presented in accordance with
      Regulation S-K.  The company, however, is not an accelerated filer as
      defined in Rule 12b-2 of the Exchange Act.  As a result,




3
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            of Contents*





the company
      qualifies for the extended compliance period with respect the accountants report
      on management’s assessment of internal control over financial reporting and
      management’s annual report on internal control over financial reporting required
      by PCAOB Auditing Standards No. 2.




**Location
      and Service Area**





The
      bank
      is engaged in a general commercial and retail banking business, emphasizing
      the
      needs of small-to-medium sized businesses, professional concerns and
      individuals, primarily in Richland, Lexington, Kershaw and Newberry counties
      of
      South Carolina and the surrounding areas.





Richland
      County, Lexington County, Kershaw County and Newberry County are located in
      the
      geographic center of the state of South Carolina. Columbia, the capital of
      South
      Carolina, is located within and divided between Richland and Lexington
      counties.  Columbia can be reached via three interstate highways: I-20,
      I-26, and I-77. Columbia is served by several airlines as well as by passenger
      and freight rail service.  According to the U. S. Census Bureau, Richland,
      Lexington, Kershaw and Newberry Counties ,
      which
      include the primary service areas for the existing twelve sites of the bank,
      had
      estimated populations in 2005 of 340,078, 235,272, 56,486 and 37,250,
      respectively.





The
      principal components of the economy within our market area are service
      industries, government, and wholesale and retail trade.  The largest
      employers in the area, each of which employs in excess of 3,000 people, include
      Fort Jackson Army Base, the University of South Carolina, Palmetto Health
      Alliance, Blue Cross Blue Shield and SCANA Corporation.  The area has
      experienced steady growth over the past 10 years and we expect that the area,
      as
      well as the service industry needed to support it, will to continue to
      grow.  For 2003, Richland, Lexington, Kershaw and Newberry Counties had
      estimated median household incomes of $39,737, $45,677, $40,288 and $33,137,
      respectively, compared to $38,003 for South Carolina as a whole.




**Banking
      Services**




We
      offer
      a full range of deposit services that are typically available in most banks
      and
      thrift institutions, including checking accounts, NOW accounts, savings accounts
      and other time deposits of various types, ranging from daily money market
      accounts to longer-term certificates of deposit.  The transaction accounts
      and time certificates are tailored to our principal market area at rates
      competitive to those offered in the area.  In addition, we offer certain
      retirement account services, such as Individual Retirement Accounts
      (IRAs).  All deposit accounts are insured by the FDIC up to the maximum
      amount allowed by law (generally, $100,000 or $250,000 in the case of IRA
      accounts per depositor subject to aggregation rules).  We solicit these
      accounts from individuals, businesses, associations and organizations, and
      governmental authorities.




We
      also
      offer a full range of commercial and personal loans.  Commercial loans
      include both secured and unsecured loans for working capital (including
      inventory and receivables), business expansion (including acquisition of real
      estate and improvements), and purchase of equipment and machinery. 
Consumer loans include secured and unsecured loans for financing automobiles,
      home improvements, education, and personal investments.  We also make real
      estate construction and acquisition loans.  We originate fixed and variable
      rate mortgage loans substantially all of which are closed in the name of a
      third
      party which, are sold into the secondary market.  Our lending activities
      are subject to a variety of lending limits imposed by federal law.  While
      differing limits apply in certain circumstances based on the type of loan or
      the
      nature of the borrower (including the borrower’s relationship to the bank), in
      general we are subject to a loans-to-one-borrower limit of an amount equal
      to
      15% of the bank’s unimpaired capital and surplus, or 25% of the unimpaired
      capital and surplus if the excess over 15% is approved by the board of directors
      of the bank and is fully secured by readily marketable collateral.  We may
      not make any loans to any director, officer, employee, or 10% shareholder of
      the
      company or the bank unless the loan is approved by our board of directors and
      is
      made on terms not more favorable to such person than would be available to
      a
      person not affiliated with the bank.




Other
      bank services include internet banking, cash management services, safe deposit
      boxes, travelers checks, direct deposit of payroll and social security checks,
      and automatic drafts for various accounts.  We offer non-deposit investment
      products and other investment brokerage services through a registered
      representative with an affiliation through GAA Securities, Inc.  We are
      associated with Jeannie, Star, and Plus networks of automated teller machines
      and Mastermoney debit cards that may be used by our customers throughout South
      Carolina and other regions.  We also offer VISA and MasterCard credit card
      services through a correspondent bank as our agent.




We
      currently do not exercise trust powers, but can begin to do so with the prior
      approval of the OCC.





4
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            of Contents*





**Competition**




The
      banking business is highly competitive.  We compete as a financial
      intermediary with other commercial banks, savings and loan associations, credit
      unions and money market mutual funds operating in Richland, Lexington, Kershaw
      and Newberry Counties and elsewhere.  As of June 30, 2006, there were 24
      financial institutions operating approximately 198 offices in Lexington,
      Richland, Kershaw and Newberry Counties.  The competition among the various
      financial institutions is based upon a variety of factors, including interest
      rates offered on deposit accounts, interest rates charged on loans, credit
      and
      service charges, the quality of services rendered, the convenience of banking
      facilities and, in the case of loans to large commercial borrowers, relative
      lending limits.  Size gives larger banks certain advantages in competing
      for business from large corporations.  These advantages include higher
      lending limits and the ability to offers services in other areas of South
      Carolina.  As a result, we do not generally attempt to compete for the
      banking relationships of large corporations, but concentrate our efforts on
      small-to-medium sized businesses and individuals.  We believe we have
      competed effectively in this market by offering quality and personal
      service.




**Employees**




As
      of
      December 31, 2006, we had 137 full-time employees. We believe that our relations
      with our employees are good.




**SUPERVISION
      AND REGULATION**








Both
      the
      company and the bank are subject to extensive state and federal banking laws
      and
      regulations that impose specific requirements or restrictions on and provide
      for
      general regulatory oversight of virtually all aspects of our operations. These
      laws and regulations are generally intended to protect depositors, not
      shareholders. The following summary is qualified by reference to the statutory
      and regulatory provisions discussed. Changes in applicable laws or regulations
      may have a material effect on our business and prospects. Our operations may
      be
      affected by legislative changes and the policies of various regulatory
      authorities. We cannot predict the effect that fiscal or monetary policies,
      economic control, or new federal or state legislation may have on our business
      and earnings in the future.





The
      following discussion is not intended to be a complete list of all the activities
      regulated by the banking laws or of the impact of such laws and regulations
      on
      our operations. It is intended only to briefly summarize some material
      provisions.





**First
      Community Corporation**





We
      own
      100% of the outstanding capital stock of the bank, and therefore we are
      considered to be a bank holding company under the federal Bank Holding Company
      Act of 1956, as amended (the “Bank Holding Company Act”). As a result, we are
      primarily subject to the supervision, examination and reporting requirements
      of
      the Board of Governors of the Federal Reserve (the "Federal Reserve") under
      the
      Bank Holding Company Act and its regulations promulgated thereunder. Moreover,
      as a bank holding company of a bank located in South Carolina, we also are
      subject to the South Carolina Banking and Branching Efficiency Act.





***Permitted
      Activities*** . **** Under
      the
      Bank Holding Company Act, a bank holding company is generally permitted to
      engage in, or acquire direct or indirect control of more than 5% of the voting
      shares of any company engaged in, the following activities:





•
            banking
                or managing or controlling banks;




•
            furnishing
                services to or performing services for our subsidiaries;
                and




•
            any
                activity that the Federal Reserve determines to be so closely related
                to
                banking as to be a proper incident to the business of
                banking.





Activities
      that the Federal Reserve has found to be so closely related to banking as to
      be
      a proper incident to the business of banking include:





5
 *Table
            of Contents*





•
            factoring
                accounts receivable;




•
            making,
                acquiring, brokering or servicing loans and usual related
                activities;




•
            leasing
                personal or real property;




•
            operating
                a non-bank depository institution, such as a savings
                association;




•
            trust
                company functions;




•
            financial
                and investment advisory activities;




•
            conducting
                discount securities brokerage
                activities;




•
            underwriting
                and dealing in government obligations and money market
                instruments;




•
            providing
                specified management consulting and counseling
                activities;




•
            performing
                selected data processing services and support
                services;




•
            acting
                as agent or broker in selling credit life insurance and other types
                of
                insurance in connection with credit transactions;
                and




•
            performing
                selected insurance underwriting
                activities.





As
      a bank
      holding company we also can elect to be treated as a “financial holding
      company,” which would allow us engage in a broader array of activities. In sum,
      a financial holding company can engage in activities that are financial in
      nature or incidental or complimentary to financial activities, including
      insurance underwriting, sales and brokerage activities, providing financial
      and
      investment advisory services, underwriting services and limited merchant banking
      activities. We have not sought financial holding company status, but may elect
      such status in the future as our business matures. If we were to elect in
      writing for financial holding company status, each insured depository
      institution we control would have to be well capitalized, well managed and
      have
      at least a satisfactory rating under the CRA (discussed below).





The
      Federal Reserve has the authority to order a bank holding company or its
      subsidiaries to terminate any of these activities or to terminate its ownership
      or control of any subsidiary when it has reasonable cause to believe that the
      bank holding company’s continued ownership, activity or control constitutes a
      serious risk to the financial safety, soundness or stability of it or any of
      its
      bank subsidiaries.





***Change
      in Control.*** In
      addition, and subject to certain exceptions, the Bank Holding Company Act and
      the Change in Bank Control Act, together with regulations promulgated there
      under, require Federal Reserve approval prior to any person or company acquiring
      “control” of a bank holding company. Control is conclusively presumed to exist
      if an individual or company acquires 25% or more of any class of voting
      securities of a bank holding company. Control is rebuttably presumed to exist
      if
      a person acquires 10% or more, but less than 25%, of any class of voting
      securities and either the company has registered securities under Section 12
      of
      the Securities Exchange Act of 1934 or no other person owns a greater percentage
      of that class of voting securities immediately after the transaction. Our common
      stock is registered under Section 12 of the Securities Exchange Act. The
      regulations provide a procedure for rebutting control when ownership of any
      class of voting securities is below 25%.





***Source
      of Strength.*** In
      accordance with Federal Reserve Board policy, we are expected to act as a source
      of financial strength to the bank and to commit resources to support the bank
      in
      circumstances in which we might not otherwise do so. Under the Bank Holding
      Company Act, the Federal Reserve Board may require a bank holding company to
      terminate any activity or relinquish control of a non-bank subsidiary, other
      than a non-bank subsidiary of a bank, upon the Federal Reserve's determination
      that such activity or control constitutes a serious risk to the financial
      soundness or stability of any depository institution subsidiary of a bank
      holding company. Further, federal bank regulatory authorities have additional
      discretion to require a bank holding company to divest itself of any bank or
      non-bank subsidiaries if the agency determines that divestiture may aid the
      depository institution’s financial condition.





6
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***Capital
      Requirements.*** The
      Federal Reserve Board imposes certain capital requirements on the bank holding
      company under the Bank Holding Company Act, including a minimum leverage ratio
      and a minimum ratio of “qualifying” capital to risk-weighted assets. These
      requirements are described below under “First Community Bank, N.A. - Capital
      Regulations.” Subject to our capital requirements and certain other
      restrictions, we are able to borrow money to make a capital contribution to
      the
      bank, and these loans may be repaid from dividends paid from the bank to the
      company. Our ability to pay dividends is subject to regulatory restrictions
      as
      described below in “First Community Bank, N.A. - Dividends.” We are also able to
      raise capital for contribution to the bank by issuing securities without having
      to receive regulatory approval, subject to compliance with federal and state
      securities laws.





***South
      Carolina State Regulation.*** As a
      South Carolina bank holding company under the South Carolina Banking and
      Branching Efficiency Act, we are subject to limitations on sale or merger and
      to
      regulation by the South Carolina Board of Financial Institutions (the "S.C.
      Board"). We are not required to obtain the approval of the S.C. Board prior
      to
      acquiring the capital stock of a national bank, but we must notify them at
      least
      15 days prior to doing so. We must receive the Board’s approval prior to
      engaging in the acquisition of a South Carolina state chartered bank or another
      South Carolina bank holding company.





**First
      Community Bank, N.A.**





The
      bank
      operates as a national banking association incorporated under the laws of the
      United States and subject to examination by the Office of the Comptroller of
      the
      Currency (the "Comptroller") . Deposits in the bank are insured by the Federal
      Deposit Insurance Corporation (“FDIC”) up to a maximum amount, which is
      currently $100,000 for each non-retirement depositor and $250,000 for certain
      retirement-account depositors. The Comptroller and the FDIC regulate or monitor
      virtually all areas of the bank’s operations, including





•
            security
                devices and procedures;




•
            adequacy
                of capitalization and loss reserves;




•
            loans;




•
            investments;




•
            borrowings;




•
            deposits;




•
            mergers;




•
            issuances
                of securities;




•
            payment
                of dividends;




•
            interest
                rates payable on deposits;




•
            interest
                rates or fees chargeable on loans;




•
            establishment
                of branches;




•
            corporate
                reorganizations;




•
            maintenance
                of books and records; and




•
            adequacy
                of staff training to carry on safe lending and deposit gathering
                practices.





The
      Comptroller requires the bank to maintain specified capital ratios and imposes
      limitations on the bank’s aggregate investment in real estate, bank premises,
      and furniture and fixtures. The Comptroller of the Currency also requires the
      bank to prepare annual reports on the bank’s financial condition and to conduct
      an annual audit of its financial affairs in compliance with its minimum
      standards and procedures.





7
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            of Contents*





All
      insured institutions must undergo regular on-site examinations by their
      appropriate banking agency. The cost of examinations of insured depository
      institutions and any affiliates may be assessed by the appropriate federal
      banking agency against each institution or affiliate as it deems necessary
      or
      appropriate. Insured institutions are required to submit annual reports to
      the
      FDIC, their federal regulatory agency, and state supervisor when applicable.
      The
      FDIC has developed a method for insured depository institutions to provide
      supplemental disclosure of the estimated fair market value of assets and
      liabilities, to the extent feasible and practicable, in any balance sheet,
      financial statement, report of condition or any other report of any insured
      depository institution. The federal banking regulatory agencies to prescribe,
      by
      regulation, standards for all insured depository institutions and depository
      institution holding companies relating, among other things, to the
      following:





•
            internal
                controls;




•
            information
                systems and audit systems;




•
            loan
                documentation;




•
            credit
                underwriting;




•
            interest
                rate risk exposure; and




•
            asset
                quality.





***Prompt
      Corrective Action.*** As an
      insured depository institution, the bank is required to comply with the capital
      requirements promulgated under the Federal Deposit Insurance Act and the
      Comptroller’s prompt corrective action regulations thereunder, which set
      forth **** five
      capital categories, each with specific regulatory consequences. Under these
      regulations, the categories are:





Ÿ
            Well
                Capitalized — The institution exceeds the required minimum level for each
                relevant capital measure. A well capitalized institution is one
                (i) having a total capital ratio of 10% or greater, (ii) having
                a tier 1 capital ratio of 6% or greater, (iii) having a leverage
                capital ratio of 5% or greater and (iv) that is not subject to any
                order or written directive to meet and maintain a specific capital
                level
                for any capital measure.





Ÿ
            Adequately
                Capitalized — The institution meets the required minimum level for each
                relevant capital measure. No capital distribution may be made that
                would
                result in the institution becoming undercapitalized. An adequately
                capitalized institution is one (i) having a total capital ratio of 8%
                or greater, (ii) having a tier 1 capital ratio of 4% or greater and
                (iii) having a leverage capital ratio of 4% or greater or a leverage
                capital ratio of 3% or greater if the institution is rated composite
                1
                under the CAMELS (Capital, Assets, Management, Earnings, Liquidity
                and
                Sensitivity to market risk) rating
                system.





Ÿ
            Undercapitalized
                — The institution fails to meet the required minimum level for any
                relevant capital measure. An undercapitalized institution is one
                (i) having a total capital ratio of less than 8% or (ii) having
                a tier 1 capital ratio of less than 4% or (iii) having a leverage
                capital
                ratio of less than 4%, or if the institution is rated a composite
                1 under
                the CAMEL rating system, a leverage capital ratio of less than
                3%.





Ÿ
            Significantly
                Undercapitalized — The institution is significantly below the required
                minimum level for any relevant capital measure. A significantly
                undercapitalized institution is one (i) having a total capital ratio
                of less than 6% or (ii) having a tier 1 capital ratio of less than 3%
                or (iii) having a leverage capital ratio of less than
                3%.





Ÿ
            Critically
                Undercapitalized — The institution fails to meet a critical capital level
                set by the appropriate federal banking agency. A critically
                undercapitalized institution is one having a ratio of tangible equity
                to
                total assets that is equal to or less than 2%.





If
      the
      Comptroller determines, after notice and an opportunity for hearing, that the
      bank is in an unsafe or unsound condition, the regulator is authorized to
      reclassify the bank to the next lower capital category (other than critically
      undercapitalized) and require the submission of a plan to correct the unsafe
      or
      unsound condition.





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If
      the
      bank is not well capitalized, it cannot accept brokered deposits without prior
      FDIC approval and, if approval is granted, cannot offer an effective yield
      in
      excess of 75 basis points on interests paid on deposits of comparable size
      and
      maturity in such institution’s normal market area for deposits accepted from
      within its normal market area, or national rate paid on deposits of comparable
      size and maturity for deposits accepted outside the bank’s normal market area.
      Moreover, if the bank becomes less than adequately capitalized, it must adopt
      a
      capital restoration plan acceptable to the Comptroller that is subject to a
      limited performance guarantee by the corporation. The bank also would become
      subject to increased regulatory oversight, and is increasingly restricted in
      the
      scope of its permissible activities. Each company having control over an
      undercapitalized institution also must provide a limited guarantee that the
      institution will comply with its capital restoration plan. Except under limited
      circumstances consistent with an accepted capital restoration plan, an
      undercapitalized institution may not grow. An undercapitalized institution
      may
      not acquire another institution, establish additional branch offices or engage
      in any new line of business unless determined by the appropriate Federal banking
      agency to be consistent with an accepted capital restoration plan, or unless
      the
      FDIC determines that the proposed action will further the purpose of prompt
      corrective action. The appropriate federal banking agency may take any action
      authorized for a significantly undercapitalized institution if an
      undercapitalized institution fails to submit an acceptable capital restoration
      plan or fails in any material respect to implement a plan accepted by the
      agency. A critically undercapitalized institution is subject to having a
      receiver or conservator appointed to manage its affairs and for loss of its
      charter to conduct banking activities.





An
      insured depository institution may not pay a management fee to a bank holding
      company controlling that institution or any other person having control of
      the
      institution if, after making the payment, the institution, would be
      undercapitalized. In addition, an institution cannot make a capital
      distribution, such as a dividend or other distribution that is in substance
      a
      distribution of capital to the owners of the institution if following such
      a
      distribution the institution would be undercapitalized. Thus, if payment of
      such
      a management fee or the making of such would cause the bank to become
      undercapitalized, it could not pay a management fee or dividend to us. As of
      December 31, 2006, the bank was deemed to be “well capitalized.”





***Deposit
      Insurance and Assessments*** .
      Deposits at the bank are insured by the Deposit Insurance Fund (the "DIF")
      as
      administered by the FDIC, up to the applicable limits established by law -
      generally $100,000 per accountholder and $250,000 for certain retirement
      accountholders. In accordance with regulations adopted to implement the Federal
      Deposit Insurance Reform Act of 2005 (“FDIRA”), deposit insurance premium
      assessments are based upon perceived risks to the DIF, by evaluating an
      institution's supervisory ratios and other financial ratios and then determining
      insurance premiums based upon the likelihood an institution could be downgraded
      to a CAMELS 3 or worse in the succeeding year. As a result, institutions deemed
      to pose less risk, pay lower premiums than those institutions deemed to pose
      more risk, which pay more.





FDIRA
      caps the amount of the DIF at 1.50% of domestic deposits. The FDIC must issue
      cash dividends, awarded on a historical basis, for the amount of the DIF over
      the 1.50% ratio. Additionally, if the DIF exceeds 1.35% of domestic deposits
      at
      year-end, the FDIC is required issue cash dividends, awarded on a historical
      basis, for half of the amount of the excess. Pursuant to the FDIRA, the FDIC
      will begin to indexing deposit insurance coverage levels for inflation beginning
      in 2012. Moreover, if we become undercapitalized we cannot accept employee
      benefit plan deposits.





***Transactions
      with Affiliates and Insiders.*** The bank
      is subject to the provisions of Section 23A of the Federal Reserve Act, which
      places limits on the amount of loans or extensions of credit to, or investments
      in, or certain other transactions with, affiliates and on the amount of advances
      to third parties collateralized by the securities or obligations of affiliates.
      The aggregate of all covered transactions is limited in amount, as to any one
      affiliate, to 10% of the bank’s capital and surplus and, as to all affiliates
      combined, to 20% of the bank’s capital and surplus. Furthermore, within the
      foregoing limitations as to amount, each covered transaction must meet specified
      collateral requirements. Compliance is also required with certain provisions
      designed to avoid the taking of low quality assets.





The
      bank
      also is subject to the provisions of Section 23B of the Federal Reserve Act
      which, among other things, prohibits an institution from engaging in certain
      transactions with certain affiliates unless the transactions are on terms
      substantially the same, or at least as favorable to such institution or its
      subsidiaries, as those prevailing at the time for comparable transactions with
      nonaffiliated companies. The bank is subject to certain restrictions on
      extensions of credit to executive officers, directors, certain principal
      shareholders, and their related interests. Such extensions of credit (i) must
      be
      made on substantially the same terms, including interest rates and collateral,
      as those prevailing at the time for comparable transactions with third parties
      and (ii) must not involve more than the normal risk of repayment or present
      other unfavorable features.





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The
      Federal Reserve Board has issued Regulation W, which codifies prior regulations
      under Sections 23A and 23B of the Federal Reserve Act and interpretative
      guidance with respect to affiliate transactions. Regulation W incorporates
      the
      exemption from the affiliate transaction rules but expands the exemption to
      cover the purchase of any type of loan or extension of credit from an affiliate.
      In addition, under Regulation W:





•
            a
                bank and its subsidiaries may not purchase a low-quality asset from
                an
                affiliate;





•
            covered
                transactions and other specified transactions between a bank or its
                subsidiaries and an affiliate must be on terms and conditions that
                are
                consistent with safe and sound banking practices; and





•
            with
                some exceptions, each loan or extension of credit by a bank to an
                affiliate must be secured by collateral with a market value ranging
                from
                100% to 130%, depending on the type of collateral, of the amount
                of the
                loan or extension of credit.





Regulation
      W generally excludes all non-bank and non-savings association subsidiaries
      of
      banks from treatment as affiliates, except to the extent that the Federal
      Reserve Board decides to treat these subsidiaries as affiliates. The regulation
      also limits the amount of loans that can be purchased by a bank from an
      affiliate to not more than 100% of the bank's capital and surplus.





***Dividends.*** A
      national bank may not pay dividends from its permanent capital. All dividends
      must be paid out of undivided profits then on hand, after deducting expenses,
      including reserves for losses and bad debts. In addition, a national bank is
      prohibited from declaring a dividend on its shares of common stock until its
      surplus equals its stated capital, unless there has been transferred to surplus
      no less than one-tenth of the bank’s net profits of the preceding two
      consecutive half-year periods (in the case of an annual dividend). The approval
      of the Comptroller is required if the total of all dividends declared by a
      national bank in any calendar year exceeds the total of its net profits for
      that
      year combined with its retained net profits for the preceding two years, less
      any required transfers to surplus.





***Branching.*** National
      banks are required by the National Bank Act to adhere to branch office banking
      laws applicable to state banks in the states in which they are located. Under
      current South Carolina law, the bank may open branch offices throughout South
      Carolina with the prior approval of the Comptroller. In addition, with prior
      regulatory approval, the bank is able to acquire existing banking operations
      in
      South Carolina. Furthermore, federal legislation permits interstate branching,
      including out-of-state acquisitions by bank holding companies, interstate
      branching by banks if allowed by state law, and interstate merging by banks.
      South Carolina law, with limited exceptions, currently permits branching across
      state lines through interstate mergers.





***Community
      Reinvestment Act.*** The
      Community Reinvestment Act requires that the Comptroller evaluate the record
      of
      the bank in meeting the credit needs of its local community, including low
      and
      moderate income neighborhoods. These factors are also considered in evaluating
      mergers, acquisitions, and applications to open a branch or facility. Failure
      to
      adequately meet these criteria could impose additional requirements and
      limitations on our bank.





***Finance
      Subsidiaries.*** Under
      the Gramm-Leach-Bliley Act (the "GLBA"), subject to certain conditions imposed
      by their respective banking regulators, national and state-chartered banks
      are
      permitted to form “financial subsidiaries” that may conduct financial or
      incidental activities, thereby permitting bank subsidiaries to engage in certain
      activities that previously were impermissible. The GLBA imposes several
      safeguards and restrictions on financial subsidiaries, including that the parent
      bank’s equity investment in the financial subsidiary be deducted from the bank’s
      assets and tangible equity for purposes of calculating the bank’s capital
      adequacy. In addition, the GLBA imposes new restrictions on transactions between
      a bank and its financial subsidiaries similar to restrictions applicable to
      transactions between banks and non-bank affiliates.





***Other
      Regulations.*** Interest
      and other charges collected or contracted for by the bank are subject to state
      usury laws and federal laws concerning interest rates. The bank’s loan
      operations are also subject to federal laws applicable to credit transactions,
      such as:





•
            the
                federal Truth-In-Lending Act, governing disclosures of credit terms
                to
                consumer borrowers;





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•
            the
                Home Mortgage Disclosure Act of 1975, requiring financial institutions
                to
                provide information to enable the public and public officials to
                determine
                whether a financial institution is fulfilling its obligation to help
                meet
                the housing needs of the community it serves;





•
            the
                Equal Credit Opportunity Act, prohibiting discrimination on the basis
                of
                race, creed or other prohibited factors in extending credit;





•
            the
                Fair Credit Reporting Act of 1978, governing the use and provision
                of
                information to credit reporting agencies;





•
            the
                Fair Debt Collection Act, governing the manner in which consumer
                debts may
                be collected by collection agencies; and





•
            the
                rules and regulations of the various federal agencies charged with
                the
                responsibility of implementing such federal laws.





The
      deposit operations of the bank also are subject to:





•
            the
                Right to Financial Privacy Act, which imposes a duty to maintain
                confidentiality of consumer financial records and prescribes procedures
                for complying with administrative subpoenas of financial records;
                and





•
            the
                Electronic Funds Transfer Act and Regulation E issued by the Federal
                Reserve Board to implement that Act, which governs automatic deposits
                to
                and withdrawals from deposit accounts and customers’ rights and
                liabilities arising from the use of automated teller machines and
                other
                electronic banking services.





***Enforcement
      Powers.*** The bank
      and its “institution-affiliated parties,” including its management, employees
      agents independent contractors and consultants such as attorneys and accountants
      and others who participate in the conduct of the financial institution’s
      affairs, are subject to potential civil and criminal penalties for violations
      of
      law, regulations or written orders of a government agency. These practices
      can
      include the failure of an institution to timely file required reports or the
      filing of false or misleading information or the submission of inaccurate
      reports. Civil penalties may be as high as $1,000,000 a day for such violations.
      Criminal penalties for some financial institution crimes have been increased
      to
      twenty years. In addition, regulators are provided with greater flexibility
      to
      commence enforcement actions against institutions and institution-affiliated
      parties. Possible enforcement actions include the termination of deposit
      insurance. Furthermore, banking agencies’ power to issue cease-and-desist orders
      were expanded. Such orders may, among other things, require affirmative action
      to correct any harm resulting from a violation or practice, including
      restitution, reimbursement, indemnifications or guarantees against loss. A
      financial institution may also be ordered to restrict its growth, dispose of
      certain assets, rescind agreements or contracts, or take other actions as
      determined by the ordering agency to be appropriate.





***USA
      PATRIOT Act.*** ** **** The
      USA
      PATRIOT Act became effective on October 26, 2001, amended, in part, the
      Bank Secrecy Act and provides, in part, for the facilitation of information
      sharing among governmental entities and financial institutions for the purpose
      of combating terrorism and money laundering by enhancing anti-money laundering
      and financial transparency laws, as well as enhanced information collection
      tools and enforcement mechanics for the U.S. government, including:
      (i) requiring standards for verifying customer identification at account
      opening; (ii) rules to promote cooperation among financial institutions,
      regulators, and law enforcement entities in identifying parties that may be
      involved in terrorism or money laundering; (iii) reports by nonfinancial
      trades and businesses filed with the Treasury Department’s Financial Crimes
      Enforcement Network for transactions exceeding $10,000; and (iv) filing
      suspicious activities reports by brokers and dealers if they believe a customer
      may be violating U.S. laws and regulations and requires enhanced due diligence
      requirements for financial institutions that administer, maintain, or manage
      private bank accounts or correspondent accounts for non-U.S.
      persons.




Under
      the
      USA PATRIOT Act, the Federal Bureau of Investigation (“FBI”) can send our
      banking regulatory agencies lists of the names of persons suspected of
      involvement in terrorist activities. The bank can be requested, to search its
      records for any relationships or transactions with persons on those lists.
      If
      the bank finds any relationships or transactions, it must file a suspicious
      activity report and contact the FBI.





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The
      Office of Foreign Assets Control (“OFAC”), which is a division of the U.S.
      Department of the Treasury, is responsible for helping to insure that United
      States entities do not engage in transactions with “enemies” of the United
      States, as defined by various Executive Orders and Acts of Congress. OFAC has
      sent, and will send, our banking regulatory agencies lists of names of persons
      and organizations suspected of aiding, harboring or engaging in terrorist acts.
      If the bank finds a name on any transaction, account or wire transfer that
      is on
      an OFAC list, it must freeze such account, file a suspicious activity report
      and
      notify the FBI. The bank has appointed an OFAC compliance officer to oversee
      the
      inspection of its accounts and the filing of any notifications. The bank
      actively checks high-risk OFAC areas such as new accounts, wire transfers and
      customer files. The bank performs these checks utilizing software, which is
      updated each time a modification is made to the lists provided by OFAC and
      other
      agencies of Specially Designated Nationals and Blocked Persons.





***Privacy
      and Credit Reporting.*** ** Financial
      institutions are required to disclose their policies for collecting and
      protecting confidential information. Customers generally may prevent financial
      institutions from sharing nonpublic personal financial information with
      nonaffiliated third parties except under narrow circumstances, such as the
      processing of transactions requested by the consumer. Additionally, financial
      institutions generally may not disclose consumer account numbers to any
      nonaffiliated third party for use in telemarketing, direct mail marketing or
      other marketing to consumers. It is the bank’s policy not to disclose any
      personal information unless required by law.





Like
      other lending institutions, the bank utilizes credit bureau data in its
      underwriting activities. Use of such data is regulated under the Federal Credit
      Reporting Act on a uniform, nationwide basis, including credit reporting,
      prescreening, sharing of information between affiliates, and the use of credit
      data. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”)
      authorizes states to enact identity theft laws that are not inconsistent with
      the conduct required by the provisions of the FACT Act.





***Check
      21.*** The
      Check Clearing for the 21st Century Act gives “substitute checks,” such as a
      digital image of a check and copies made from that image, the same legal
      standing as the original paper check. Some of the major provisions
      include:





•
            allowing
                check truncation without making it mandatory;





•
            demanding
                that every financial institution communicate to accountholders in
                writing
                a description of its substitute check processing program and their
                rights
                under the law;





•
            legalizing
                substitutions for and replacements of paper checks without agreement
                from
                consumers;





•
            retaining
                in place the previously mandated electronic collection and return
                of
                checks between financial institutions only when individual agreements
                are
                in place;





•
            requiring
                that when accountholders request verification, financial institutions
                produce the original check (or a copy that accurately represents
                the
                original) and demonstrate that the account debit was accurate and
                valid;
                and





•
            requiring
                the re-crediting of funds to an individual’s account on the next business
                day after a consumer proves that the financial institution has erred.





***Effect
      of Governmental Monetary Policies*** **.** Our
      earnings are affected by domestic economic conditions and the monetary and
      fiscal policies of the United States government and its agencies. The Federal
      Reserve Bank’s monetary policies have had, and are likely to continue to have,
      an important impact on the operating results of commercial banks through its
      power to implement national monetary policy in order, among other things, to
      curb inflation or combat a recession. The monetary policies of the Federal
      Reserve Board have major effects upon the levels of bank loans, investments
      and
      deposits through its open market operations in United States government
      securities and through its regulation of the discount rate on borrowings of
      member banks and the reserve requirements against member bank deposits. It
      is
      not possible to predict the nature or impact of future changes in monetary
      and
      fiscal policies.





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





12
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**Item
      1A. Risk Factors**





***Our
      recent operating results may not be indicative of our future operating
      results.***




We
      may
      not be able to sustain our historical rate of growth.  Because of our
      relatively short operating history, it will be difficult for us to generate
      similar earnings growth as we continue to expand, and consequently our
      historical results of operations will not necessarily be indicative of our
      future operations.  Various factors, such as economic conditions,
      regulatory and legislative considerations, and competition, may also impede
      our
      ability to expand our market presence.  If we experience a significant
      decrease in our historical rate of growth, our results of operations and
      financial condition may be adversely affected because a high percentage of
      our
      operating costs are fixed expenses.





***Our
      decisions regarding credit risk and reserves for loan losses may materially
      and
      adversely affect our business.***




Making
      loans and other extensions of credit is an essential element of our
      business.  Although we seek to mitigate risks inherent in lending by
      adhering to specific underwriting practices, our loans and other extensions
      of
      credit may not be repaid.  The risk of nonpayment is affected by a number
      of factors, including:





•
            the
                duration of the credit;


•
            credit
                risks of a particular customer;


•
            changes
                in economic and industry conditions;
                and


•
            in
                the case of a collateralized loan, risks resulting from uncertainties
                about the future value of the
                collateral.





We
      attempt to maintain an appropriate allowance for loan losses to provide for
      potential losses in our loan portfolio.  We periodically determine the
      amount of the allowance based on consideration of several factors,
      including:




•
            an
                ongoing review of the quality, mix, and size of our overall loan
                portfolio;


•
            our
                historical loan loss experience;


•
            evaluation
                of economic conditions;


•
            regular
                reviews of loan delinquencies and loan portfolio quality;
                and


•
            the
                amount and quality of collateral, including guarantees, securing
                the
                loans.




There
      is
      no precise method of predicting credit losses; therefore, we face the risk
      that
      charge-offs in future periods will exceed our allowance for loan losses and
      that
      additional increases in the allowance for loan losses will be required. 
Additions to the allowance for loan losses would result in a decrease of our
      net
      income, and possibly our capital.





***Lack
      of seasoning of our loan portfolio may increase the risk of credit defaults
      in
      the future.***





Due
      to
      the rapid growth of our bank over the past several years, a material portion
      of
      the loans in our loan portfolio and of our lending relationships are of
      relatively 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 we refer to as “seasoning.” As a result, a portfolio of older
      loans will usually behave more predictably than a newer portfolio.  In
      addition, we acquired a substantial portion of the loans in our loan portfolio
      and of our lending relationships through our acquisitions of DutchFork
      Bancshares, Inc. and DeKalb Bankshares, Inc. Because these loans and lending
      relationships are new to us, we may have more difficulty in assessing the risk
      of credit defaults from these relationships.  Because of both our internal
      loan growth and our acquisitions, 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.





***An
      economic downturn, especially one affecting the Lexington, Richland, Newberry,
      and Kershaw Counties and the surrounding areas, could reduce our customer base,
      our level of deposits, and demand for financial products such as
      loans.***





Our
      success significantly depends upon the growth in population, income levels,
      deposits, and housing starts in our market of Lexington, Richland, Newberry,
      and
      Kershaw Counties and the surrounding area.  If the communities in which we
      operate do not grow or if prevailing economic conditions locally or nationally
      are





13
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unfavorable,
      our business may not succeed.  An economic downturn would likely contribute
      to the deterioration of the quality of our loan portfolio and reduce our level
      of deposits, which in turn would hurt our business.  If an economic
      downturn occurs in the economy as a whole, or in Lexington, Richland, Newberry,
      and Kershaw Counties and the surrounding area, borrowers may be less likely
      to
      repay their loans as scheduled.  Moreover, the value of real estate or
      other collateral that may secure our loans could be adversely affected. 
Unlike many larger institutions, we are not able to spread the risks of
      unfavorable local economic conditions across a large number of diversified
      economies.  An economic downturn could, therefore, result in losses that
      materially and adversely affect our business.




***Changes
      in prevailing interest rates may reduce our
      profitability.***





Our
      results of operations depend in large part upon the level of our net interest
      income, which is the difference between interest income from interest-earning
      assets, such as loans and mortgage-backed securities, and interest expense
      on
      interest-bearing liabilities, such as deposits and other borrowings. 
Depending on the terms and maturities of our assets and liabilities, a
      significant change in interest rates could have a material adverse effect on
      our
      profitability.  Many factors cause changes in interest rates, including
      governmental monetary policies and domestic and international economic and
      political conditions.  While we intend to manage the effects of changes in
      interest rates by adjusting the terms, maturities, and pricing of our assets
      and
      liabilities, our efforts may not be effective and our financial condition and
      results of operations could suffer.  After operating in a historically low
      interest rate environment, the Federal Reserve began raising short-term interest
      rates in the second quarter of 2004.  At December 31, 2006, we anticipate
      that our balance sheet is currently structured so that net income is not
      materially impacted in a rising interest rate environment. However, no assurance
      can be given that the Federal Reserve will actually continue to raise interest
      rates or that the results we anticipate will actually occur.





***We
      are dependent on key individuals, and the loss of one or more of these key
      individuals could curtail our growth and adversely affect our
      prospects.***




Michael
      C. Crapps, our president and chief executive officer, has extensive and
      long-standing ties within our primary market area and substantial experience
      with our operations, and he has contributed significantly to our growth. 
If we lose the services of Mr. Crapps, he would be difficult to replace and
      our
      business and development could be materially and adversely
      affected.





Our
      success also depends, in part, on our continued ability to attract and retain
      experienced loan originators, as well as other management personnel. Competition
      for personnel is intense, and we may not be successful in attracting or
      retaining qualified personnel. Our failure to compete for these personnel,
      or
      the loss of the services of several of such key personnel, could adversely
      affect our growth strategy and seriously harm our business, results of
      operations, and financial condition.





***We
      are subject to extensive regulation that could limit or restrict our
      activities.***




We
      operate in a highly regulated industry and are subject to examination,
      supervision, and comprehensive regulation by various regulatory agencies. 
Our compliance with these regulations is costly and restricts certain of our
      activities, including payment of dividends, mergers and acquisitions,
      investments, loans and interest rates charged, interest rates paid on deposits,
      and locations of offices.  We are also subject to capitalization guidelines
      established by our regulators, which require us to maintain adequate capital
      to
      support our growth.




The
      laws
      and regulations applicable to the banking industry could change at any time,
      and
      we cannot predict the effects of these changes on our business and
      profitability.  Because government regulation greatly affects the business
      and financial results of all commercial banks and bank holding companies, our
      cost of compliance could adversely affect our ability to operate
      profitably.




The
      Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated
      by
      the Securities and Exchange Commission that are now applicable to us, have
      increased the scope, complexity, and cost of corporate governance, reporting,
      and disclosure practices.  To comply with the Sarbanes-Oxley Act, we have
      previously hired outside consultant to assist with our internal audit and
      internal control functions. We have experienced, and we expect to continue
      to
      experience, greater compliance costs, including costs related to internal
      controls, as a result of the Sarbanes-Oxley Act.





We
      are in
      the process of evaluating our internal controls to allow management to report
      on
      our internal control for our fiscal year 2007, and for our independent
      registered public accounting firm to attest to our internal controls for fiscal
      year 2008.  We are performing the system and process evaluation and testing
      (and any necessary





14
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remediation)
      required to comply with the management certification and auditor attestation
      requirements of Section 404 of the Sarbanes-Oxley Act. While we currently
      anticipate that we will be able to fully implement the requirements relating
      to
      internal controls and all other aspects of Section 404 in a timely manner,
      as
      required by Section 404 and the SEC's related regulations, we
      could identify deficiencies that we may not be able to remediate in time to
      meet this deadline. If we are not able to implement or maintain the requirements
      of Section 404 in a timely manner or with adequate compliance, we could be
      subject to scrutiny by regulatory authorities and the trading price of our
      stock
      could decline.  Moreover, effective internal controls are
      necessary for us to produce reliable financial reports and are important to
      helping prevent financial fraud. If we cannot provide reliable financial reports
      or prevent fraud, our business and operating results could be harmed, investors
      and regulators could lose confidence in our reported financial information,
      and
      the trading price of our stock could drop significantly.   We
      currently anticipate that we will fully implement the requirements relating
      to internal controls and all other aspects of Section 404 within the required
      time frames.




***Our
      continued pace of growth may require us to raise additional capital in the
      future, but that capital may not be available when it is
      needed.***




We
      are
      required by regulatory authorities to maintain adequate levels of capital to
      support our operations.  To support our continued growth, we may need to
      raise additional capital.  Our ability to raise additional capital, if
      needed, will depend in part on conditions in the capital markets at that time,
      which are outside our control.  Accordingly, we cannot assure you of our
      ability to raise additional capital, if needed, on terms acceptable to us. 
If we cannot raise additional capital when needed, our ability to further expand
      our operations through internal growth and acquisitions could be materially
      impaired.  In addition, if we decide to raise additional equity capital,
      your interest could be diluted.





***We
      face strong competition for customers, which could prevent us from obtaining
      customers and may cause us to pay higher interest rates to attract
      customers.***




The
      banking business is highly competitive, and we experience competition in our
      market from many other financial institutions.  We compete with commercial
      banks, credit unions, savings and loan associations, mortgage banking firms,
      consumer finance companies, securities brokerage firms, insurance companies,
      money market funds, and other mutual funds, as well as other super-regional,
      national, and international financial institutions that operate offices in
      our
      primary market areas and elsewhere.  We compete with these institutions
      both in attracting deposits and in making loans.  In addition, we have to
      attract our customer base from other existing financial institutions and from
      new residents.  Many of our competitors are well-established, larger
      financial institutions.  These institutions offer some services, such as
      extensive and established branch networks, that we do not provide.  There
      is a risk that we will not be able to compete successfully with other financial
      institutions in our market, and that we may have to pay higher interest rates
      to
      attract deposits, resulting in reduced profitability.  In addition,
      competitors that are not depository institutions are generally not subject
      to
      the extensive regulations that apply to us.





***We
      will face risks with respect to expansion through acquisitions or
      mergers.***





We
      completed our acquisition of DeKalb Bankshares and The Bank of Camden in June
      2006. We face a risk that the expected cost savings and any revenue synergies
      from this merger may not be fully realized within the expected timeframes,
      or
      that disruption from the merger may make it more difficult to maintain
      relationships with our or DeKalb’s customers, employees, or suppliers.





In
      addition, from time to time we may seek to acquire other financial institutions
      or parts of those institutions.  We may also expand into new markets or
      lines of business or offer new products or services.  These activities
      would involve a number of risks, including:





•
            the
                potential inaccuracy of the estimates and judgments used to evaluate
                credit, operations, management, and market risks with respect to
                a target
                institution;


•
            the
                time and costs of evaluating new markets, hiring or retaining experienced
                local management, and opening new offices and the time lags between
                these
                activities and the generation of sufficient assets and deposits to
                support
                the costs of the expansion;


•
            the
                incurrence and possible impairment of goodwill associated with an
                acquisition and possible adverse effects on our results of operations;
                and


•
            the
                risk of loss of key employees and
                customers.





15
 *Table
            of Contents*





**Our
      decisions regarding credit risk and reserves for loan losses may materially
      and
      adversely affect our business.**





While
      we
      generally underwrite the loans in our portfolio in accordance with our own
      internal underwriting guidelines and regulatory supervisory guidelines, in
      certain circumstances we have made loans which exceed either our internal
      underwriting guidelines, supervisory guidelines, or both. As of December 31,
      2006, approximately $10.3 million of our loans, or 22.4% of our bank’s capital,
      had loan-to-value ratios that exceeded regulatory supervisory guidelines, of
      which 10 loans totaling approximately $3.3 million had loan-to-value ratios
      of
      100% or more. In addition, supervisory limits on commercial loan to value
      exceptions are set at 30% of our bank’s capital. At December 31, 2006, $9.3
      million of our commercial loans, or 20.5% of our bank’s capital, exceeded the
      supervisory loan to value ratio. The number of loans in our portfolio with
      loan-to-value ratios in excess of supervisory guidelines, our internal
      guidelines, or both could increase the risk of delinquencies and defaults in
      our
      portfolio.





**A
      significant portion of our loan portfolio is secured by real estate, and events
      that negatively impact the real estate market could hurt our business.**





A
      significant portion of our loan portfolio is secured by real estate. As of
      December 31, 2006, approximately 88.1% of our loans had real estate as a primary
      or secondary component of collateral. The real estate collateral in each case
      provides an alternate source of repayment in the event of default by the
      borrower and may deteriorate in value during the time the credit is extended.
      A
      weakening of the real estate market in our primary market area could result
      in
      an increase in the number of borrowers who default on their loans and a
      reduction in the value of the collateral securing their loans, which in turn
      could have an adverse effect on our profitability and asset quality. If we
      are
      required to liquidate the collateral securing a loan to satisfy the debt during
      a period of reduced real estate values, our earnings and capital could be
      adversely affected. Acts of nature, including hurricanes, tornados, earthquakes,
      fires and floods, which may cause uninsured damage and other loss of value
      to
      real estate that secures these loans, may also negatively impact our financial
      condition.




Item
      1B.Unresolved Staff Comments




We
      have
      no unresolved staff comments with the SEC regarding our periodic or currect
      reports under the Exchange Act.




**Item
      2. Description of Property.**  ****




*Lexington
      Property* .
      The
      principal place of business of both the company and our main office is located
      at 5455 Sunset Boulevard, Lexington, South Carolina 29072.  The site of the
      bank’s main office branch is a 2.29 acre plot of land.  This site was
      purchased for $576,000 and the building cost were approximately $1.0
      million.  The branch operates in an 8,500 square foot facility located on
      this site.





In
      October 2000, the bank acquired an additional 2.0 acres adjacent to the existing
      facility for approximately $300,000.  This site was designed to allow for
      24,000 to 48,000 square foot facility at some future date. The bank completed
      construction and occupied the 28,000 square foot administrative center in July
      2006. The total construction cost for the building is approximately $3.4
      million. The Lexington property is owned by the bank.




*Forest
      Acres Property* .
      We
      operate a branch office facility at 4404 Forest Drive, Columbia, South Carolina
      29206.  The Forest Acres site is .71 acres.  The banking facility is
      approximately 4,000 square feet with a total cost of land and facility
      approximately $920,000. This property is owned by the bank.




*Irmo
      Property* .
      We
      operate a branch office facility at 1030 Lake Murray Boulevard, Irmo, South
      Carolina 29063.  The Irmo site is approximately 1.00 acre.  The
      banking facility is approximately 3,200 square feet with a total cost of land
      and facility of approximately $1.1 million. This property is owned by the
      bank.




*Cayce/West
      Columbia Property* .
      We
      operate a branch office facility at 506 Meeting Street, West Columbia, South
      Carolina, 29169.  The Cayce/West Columbia site is approximately 1.25
      acres.  The banking facility is approximately 3,800 square feet with a
      total cost of land and facility of approximately $935,000. This property is
      owned by the bank.




*Gilbert
      Property.* We
      operate a branch office at 4325 Augusta Highway Gilbert, South Carolina
      29054.  The facility is an approximate 3000 square foot facility located on
      an approximate one acre lot.  The total cost of the land and facility was
      approximately $768,000. This property is owned by the bank.





*Chapin
      Office.* We
      operate a branch office facility at 137 Amicks Ferry Rd., Chapin, South Carolina
      29036. The facility is approximately 3,000 square feet and is located on a
      three
      acre lot.  The total cost of the facility and land was approximately $1.3
      million. This property is owned by the bank.





16
 *Table
            of Contents*





*Northeast
      Columbia.* We
      operate a branch office facility ** at
      9822
      Two Notch Rd, Columbia, South Carolina 29223. ** The
      facility is approximately 3,000 square feet and is located on a 1.0 acre
      lot.  The total cost of the facility and land was approximately $1.2
      million. This property is owned by the bank.





*College
      Street.* We
      operate a branch office at 1323 College Street, Newberry, South Carolina
      29108.  This banking office was acquired in connection with the DutchFork
      merger.  The banking facility is approximately 3,500 square feet and is
      located on a .65 acre lot.  The total cost of the facility and land was
      approximately $365,000. This property is owned by the bank.





*Prosperity
      Property* . 
      We operate a branch office at 101 N. Wheeler Avenue, Prosperity, South Carolina
      29127.  This office was acquired in connection with the DutchFork
      merger.  The banking facility is approximately 1,300 square feet and is
      located on a .31 acre lot.  The total cost of the facility and land was
      approximately $175,000. This property is owned by the bank.




*Wilson
      Road.* We
      operate a branch office at 1735 Wilson Road, Newberry, South Carolina
      29108.  The banking office was acquired in connection with the DutchFork
      merger.  This banking facility is approximately 12,000 square feet and is
      located on a 1.56 acre lot.  Adjacent to the branch facility is a 13,000
      square foot facility which was formerly utilized as the DutchFork operations
      center.  The total cost of the facility and land was approximately $3.3
      million. This property is owned by the bank.





*Redbank
      Property.* We
      operate a branch office facility at 1449 Two Notch Road, Lexington, South
      Carolina 29073.  This branch opened for operation on February 3,
      2005.  The facility is approximately 3,000 square feet and is located on a
      1.0 acre lot.  The total cost of the facility and land was approximately
      $1.3 million. This property is owned by the bank.





*Camden
      Property.* We
      operate a branch office facility at 631 DeKalb Street, Camden, South Carolina
      29020.  This office was acquired in connection with the DeKalb
      merger.  The facility is approximately 11,247 square feet and is located on
      a 2.2 acre lot.  The total cost of the facility and land was approximately
      $2.4 million. This property is owned by the bank.





*Highway
      219 Property.* A
      .61
      acre lot located on highway 219 in Newberry County was acquired in connection
      with the DutchFork merger.  This lot may be used for a future branch
      location but no definitive plans have been made.  The cost of the lot was
      $430,000. This property is owned by the bank.





17
 *Table
            of Contents*





**Item
      3. Legal Proceedings.**




Neither
      the company nor the bank is a party to, nor is any of their property the subject
      of, any material pending legal proceedings related to the business of the
      company or the bank.




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




No
      matter
      was submitted to a vote of security holders during the fourth quarter of the
      fiscal year covered by this report.





18
 *Table
            of Contents*





**PART
      II**


**Item
      5. Market for Registrant’s Common Equity, Related
      Stockholder Matters, and Issuer Purchases of Equity
      Securities.**




As
      of
      March 1, 2007, there were approximately 1,545 shareholders of record of our
      common stock. On January 15, 2003, our stock began trading on The NASDAQ Capital
      Market under the trading symbol of “FCCO.”  Prior to January 15, 2003, our
      stock was quoted on the OTC Bulletin Board under the trading symbol
“FCCO.OB.”  The following table sets forth the high and low sales price
      information as reported by NASDAQ in 2006 and 2005, and the dividends per share
      declared on our common stock in each such quarter.  All information has
      been adjusted for any stock splits and stock dividends effected during the
      periods presented.




**High**
            
            **Low**
            
            **Dividends****2006**Quarter
                ended March 31, 2006
            
            $
            19.63
            
            $
            17.75
            
            $
            0.05Quarter
                ended June 30, 2006
            
            $
            18.79
            
            $
            17.11
            
            $
            0.06Quarter
                ended September 30, 2006
            
            $
            18.32
            
            $
            16.62
            
            $
            0.06Quarter
                ended December 31, 2006
            
            $
            18.75
            
            $
            16.50
            
            $
            0.06**2005**Quarter
                ended March 31, 2005
            
            $
            22.42
            
            $
            18.80
            
            $
            0.05Quarter
                ended June 30, 2005
            
            $
            20.49
            
            $
            16.73
            
            $
            0.05Quarter
                ended September 30, 2005
            
            $
            20.45
            
            $
            18.50
            
            $
            0.05Quarter
                ended December 31, 2005
            
            $
            20.50
            
            $
            18.35
            
            $
            0.05




We
      expect
      comparable dividends to be paid to the shareholders for the foreseeable
      future.  Notwithstanding the foregoing, the future dividend policy of the
      company is subject to the discretion of the board of directors and will depend
      upon a number of factors, including future earnings, financial condition, cash
      requirements, and general business conditions. Our ability to pay dividends
      is
      generally limited by the ability of our subsidiary
      bank to pay dividends to us. As
      a
      national bank, our bank may only pay dividends out of its net profits then
      on
      hand, after deducting expenses, including losses and bad debts.  In
      addition, the bank is prohibited from declaring a dividend on its shares of
      common stock until its surplus equals its stated capital, unless there has
      been
      transferred to surplus no less than one-tenth of the bank’s net profits of the
      preceding two consecutive half-year periods (in the case of an annual
      dividend).  The approval of the OCC will be required if the total of all
      dividends declared in any calendar year by the bank exceeds the bank’s net
      profits to date, as defined, for that year combined with its retained net
      profits for the preceding two years less any required transfers to
      surplus.  At December 31, 2006, the bank had $8.2 million free of these
      restrictions.  The OCC also has the authority under federal law to enjoin a
      national bank from engaging in what in its opinion constitutes an unsafe or
      unsound practice in conducting its business, including the payment of a dividend
      under certain circumstances.





On
      June
      21, 2006, our board of directors approved a new plan to repurchase up to 150,000
      shares of our common stock on the open market. The following table reflects
      share repurchase activity during the fourth quarter ended December 31,
      2006:





**Period**
            **Total
                Number**
              **of
                Shares**
              **Purchased**
            **Average**
              **Price
                Paid**
              **Per
                Share**
            **Total
                Number of**
              **Shares
                Purchased**
              **as
                Part of****Publicly**
              **Announced
                Plans**
              **or
                Programs**
            **Maximum
                Number**
              **of
                Shares that May**
              **Yet
                Be Purchased**
              **Under
                the Plans or**
              **Programs**October
                1, 2006 to October 31, 2006
            4,800
            $18.10
            4,800
            90,600November
                1, 2006 to November 30, 2006
            7,100
            $18.13
            7,100
            83,500December
                1, 2006 to December 31,2006
            3,600
            $17.74
            3,600
            79,900Total
            15,500
            $18.04
            15,500
            79,900








19
 *Table
            of Contents*





**FIVE
      YEAR CUMULATIVE TOTAL RETURNS**


COMPARISON
      OF FIRST COMMUNITY CORPORATION,


NASDAQ
      STOCK MARKET (U.S.) INDEX,


AND
      NASDAQ BANK INDEX











See
      Tabular Information Below


**12/31/2001**
            
            **12/31/2002**
            
            **12/31/2003**
            
            **12/31/2004**
            
            **12/31/2005**
            
            **12/31/2006**First
                Community Corporation
            
            
            100.00
            
            
            122.45
            
            
            201.28
            
            
            186.86
            
            
            175.27
            
            
            161.13NASDAQ
                Composite Index
            
            
            100.00
            
            
            68.76
            
            
            103.67
            
            
            113.16
            
            
            115.57
            
            
            127.58SNL
                Southeast Bank Index
            
            
            100.00
            
            
            110.46
            
            
            138.72
            
            
            164.50
            
            
            168.39
            
            
            197.45




20
 *Table
            of Contents*





**Item
      6. Selected Financial Data**









**First
      Community Corporation**


**Selected
      Financial Data**





(Amounts
      in thousands, except per share data)




2006
              
              2005
              
              2004
              
              2003
              
              2002**Operations
                  Statement Data:**Net
                  interest income
              
              $
              14,323
              
              $
              12,994
              
              $
              9,596
              
              $
              7,648
              
              $
              7,044Provision
                  for loan losses
              
              
              528
              
              
              329
              
              
              245
              
              
              167
              
              
              677Non-interest
                  income
              
              
              4,401
              
              
              3,298
              
              
              1,774
              
              
              1,440
              
              
              1,232Non-interest
                  expense
              
              
              13,243
              
              
              11,838
              
              
              7,977
              
              
              6,158
              
              
              5,377Income
                  taxes
              
              
              1,452
              
              
              1,032
              
              
              963
              
              
              965
              
              
              758Net
                  income
              
              $
              3,501
              
              $
              3,093
              
              $
              2,185
              
              $
              1,797
              
              $
              1,464**Per
                  Share Data:**Net
                  income diluted (1)
              
              $
              1.10
              
              $
              1.04
              
              $
              1.09
              
              $
              1.08
              
              $
              0.90Cash
                  dividends
              
              
              .23
              
              
              .20
              
              
              0.20
              
              
              0.19
              
              
              0.12Book
                  value at period end (1)
              
              
              19.36
              
              
              17.82
              
              
              18.09
              
              
              12.21
              
              
              11.61Tangible
                  book value at period end (1)
              
              
              10.05
              
              
              8.34
              
              
              8.19
              
              
              11.74
              
              
              11.02**Balance
                  Sheet Data:**Total
                  assets
              
              $
              548,056
              
              $
              467,455
              
              $
              455,706
              
              $
              215,029
              
              $
              195,201Loans
              
              
              275,189
              
              
              221,668
              
              
              186,771
              
              
              121,008
              
              
              99,991Securities
              
              
              176,523
              
              
              176,372
              
              
              196,026
              
              
              58,954
              
              
              69,785Deposits
              
              
              414,941
              
              
              349,604
              
              
              337,064
              
              
              185,259
              
              
              168,062Shareholders'
                  equity
              
              
              63,208
              
              
              50,767
              
              
              50,463
              
              
              19,509
              
              
              18,439Average
                  shares outstanding (1)
              
              
              3,097
              
              
              2,847
              
              
              1,903
              
              
              1,590
              
              
              1,588**Performance
                  Ratios:**Return
                  on average assets
              
              
              0.68
              %
              
              0.67
              %
              
              0.76
              %
              
              0.88
              %
              
              0.82
              %Return
                  on average equity
              
              
              6.12
              %
              
              6.12
              %
              
              8.00
              %
              
              9.49
              %
              
              8.35
              %Return
                  on average tangible equity
              
              
              12.69
              %
              
              13.33
              %
              
              10.39
              %
              
              9.94
              %
              
              8.87
              %Net
                  interest margin
              
              
              3.27
              %
              
              3.30
              %
              
              3.72
              %
              
              4.02
              %
              
              4.26
              %Dividend
                  payout ratio
              
              
              20.35
              %
              
              18.35
              %
              
              17.39
              %
              
              16.81
              %
              
              13.04
              %**Asset
                  Quality Ratios:**Allowance
                  for loan losses to periodEnd
                  total loans
              
              
              1.17
              %
              
              1.22
              %
              
              1.48
              %
              
              1.41
              %
              
              1.53
              %Allowance
                  for loan losses toNon-performing
                  assets
              
              
              716.04
              %
              
              487.48
              %
              
              2,291.34
              %
              
              2,131.25
              %
              
              1,059.03
              %Non-performing
                  assets to total assets
              
              
              .09
              %
              
              .12
              %
              
              .03
              %
              
              .04
              %
              
              .07
              %Net
                  charge-offs (recoveries) to average loans
              
              
              .13
              %
              
              .19
              %
              
              .13
              %
              
              (.01
              %)
              
              .16
              %**Capital
                  and Liquidity Ratios:**Tier
                  1 risk-based capital
              
              
              13.48
              %
              
              13.24
              %
              
              12.91
              %
              
              13.21
              %
              
              14.03
              %Total
                  risk-based capital
              
              
              14.40
              %
              
              14.12
              %
              
              13.86
              %
              
              14.42
              %
              
              15.28
              %Leverage
                  ratio
              
              
              9.29
              %
              
              9.29
              %
              
              8.51
              %
              
              8.87
              %
              
              8.77
              %Equity
                  to assets ratio
              
              
              11.53
              %
              
              10.86
              %
              
              9.60
              %
              
              9.07
              %
              
              9.45
              %Average
                  loans to average deposits
              
              
              64.83
              %
              
              59.81
              %
              
              61.00
              %
              
              63.33
              %
              
              60.71
              %




(1)
      Adjusted for the
      February 28, 2002 5-for-4 stock split.





21
 *Table
            of Contents*





**Item
      7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations.**





**Overview**





First
      Community Corporation is a one bank holding company headquartered in Lexington,
      South Carolina. We operate from our
      main
      office in Lexington, South Carolina and our 12 full-service offices are located
      in Lexington (two), Forest Acres, Irmo, Cayce-West Columbia, Gilbert, Chapin,
      Northeast Columbia, Prosperity, Newberry (two) and Camden.  During
      the second quarter of 2006,
      we
      completed our acquisition of DeKalb Bankshare s,
      Inc.,
      the holding company for The Bank of Camden. The
      merger added one office in Kershaw County located in the Midlands of South
      Carolina. During the fourth quarter of 2004, we completed our first acquisition
      of another financial institution when we merged with DutchFork Bancshares,
      Inc.,
      the holding company for Newberry Federal Savings Bank. The merger added three
      offices in Newberry County. We engage in a general commercial and retail banking
      business characterized by personalized service and local decision making,
      emphasizing the banking needs of small to medium-sized businesses, professional
      concerns and individuals.





During
      2006, we continued to implement our strategy to continue leveraging the
      DutchFork acquisition as well as integrate the operations of DeKalb into our
      systems. We experienced organic loan growth (growth excluding the DeKalb merger)
      of 9.7 %,
      or
      $21.5 million. Organic deposit growth was 6.4% or $22.3 million. We added
      approximately $26.6 million in loans and $27.3 million in deposits through
      our
      acquisition of DeKalb. This continued growth in our loan portfolio is consistent
      with our strategy to leverage the deposit base in Newberry County that we
      acquired in the DutchFork acquisition. Our loan to deposit ratio at December
      31,
      2006 was 66.3% as compared to 63.4% at December 31, 2005. The continued growth
      in core deposits as well as cash flow provided from our investment portfolio
      provided the needed cash flow to fund loan growth. Total assets grew to $548.1
      million, loans to $275.2 million and deposits to $414.9 million at December
      31,
      2006. Our net
      income increased $409,000 in 2006, or 13.2%, over the year ended December 31,
      2005. The increase was primarily attributable to the continued growth in the
      level of earning assets. Net income was $3.5 million, or $1.10 diluted earnings
      per share in 2006, compared to $3.1 million, or $1.04 diluted earnings per
      share
      in 2005.




The
      following discussion describes our
      results of operations for 2006 as compared to 2005 (and 2005 compared to 2004
      and also analyzes our financial condition as of December 31, 2006 as compared
      to
      December 31, 2005. Like most community banks, we derive most of our income
      from
      interest we receive on our loans and investments. A 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.





We
      have
      included a number of tables to assist in our description of these measures.
      For
      example, the “Average Balances” table shows the average balance during 2006,
      2005 and 2004
      of
      each category of our assets and liabilities, as well as the yield we earned
      or
      the rate we paid with respect to each category. A review of this table shows
      that our loans typically provide higher interest yields than do other types
      of
      interest earning assets, which is why we intend to channel a substantial
      percentage of our earning assets into our loan portfolio. Similarly, the
“Rate/Volume Analysis” table helps demonstrate the impact of changing interest
      rates and changing volume of assets and liabilities during the years shown.
      We
      also track the sensitivity of our various categories of assets and liabilities
      to changes in interest rates, and we have included a “Sensitivity Analysis
      Table” to help explain this. Finally, we have included a number of tables that
      provide detail about our investment securities, our loans, and our deposits
      and
      other borrowings.





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, as well as several tables describing our
      allowance for loan losses and the allocation of this allowance among our various
      categories of loans.





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 noninterest income, as well as our noninterest
      expense, in the following discussion. The
      discussion and analysis also identifies significant factors that have affected
      our financial position and operating results during the periods included in
      the
      accompanying financial statements. We encourage you to read this discussion
      and
      analysis in conjunction with the financial statements and the related notes
      and
      the other statistical information also included in this report.





22
 *Table
            of Contents*





**Mergers**





On
      June
      9, 2006 we consummated our merger with DeKalb Bankshares, Inc. Pursuant to
      the
      merger, we issued 364,034 shares of common stock valued at $7.6 million and
      paid
      $2.4 million in cash to shareholders of DeKalb. Other costs related to the
      merger included stock options valued at $585,000 and direct acquisition costs
      of
      $277,000. The
      fair
      value of assets acquired at the date of acquisition was $46.4 million, including
      $4.9 million in goodwill and $522,000 in core deposit intangible. The fair
      value
      of liabilities assumed amounted to $36.2 million. Periods
      prior to June 9, 2006 do not include the effect of the merger with
      DeKalb.





On October
      1, 2004, we completed our merger with DutchFork Bancshares, Inc .
      Pursuant to the merger,
      we issued 1,169,898 shares of common stock valued at $27.3 million and paid
      $18.3 million to
      shareholders of DutchFork. Other costs
      related to the merger included stock options valued at $2.6 million and direct
      acquisition costs of $1.1 million. The fair value of assets acquired at the
      date
      of acquisition was $224.2 million, including $24.2 million in goodwill and
      $2.9
      million in core deposit intangible. The fair value of liabilities assumed
      amounted to $174.9 million. The results of operations for the years ended
      December 31, 2006 and 2005 include a full year of the results of the merger
      with
      DutchFork as compared to three months for the year ended December 31, 2004.
      Due
      to the relative asset size of DutchFork as compared to First Community
      Corporation, the comparison of the results of operations between the various
      periods is significantly affected by the merger.





**Results
      of Operations**





Our
      net
      income was $3.5 million, or $1.10 diluted earnings per share, for the year
      ended
      December 31, 2006, as compared to net income of $3.1 million, or $1.04 diluted
      earnings per share, for the year ended December 31, 2005, and $2.2 million,
      or
      $1.09 diluted earnings per share, for the year ended December 31, 2004. The
      increase in net income for 2006 as compared to 2005 resulted primarily from
      an
      increase in the level of average earning assets of $44.0 million. The effect
      of
      the increase in earning assets was offset by a 3 basis point decrease in the
      net
      interest margin from 3.30% during 2005 to 3.27% during 2006. On a tax equivalent
      basis, the net interest margin was 3.36% and 3.44% for the years ended December
      31, 2006 and 2005, respectively. Net interest spread, the difference between
      the
      yield on earning assets and the rate paid on interest-bearing liabilities,
      was
      2.88% in 2006 as compared to 3.05% in 2005 and 3.72% in 2004. See below under
      "Net Interest Income" and “Market Risk and Interest Rate Sensitivity” for a
      further discussion about the effect of this decrease in the net interest spread
      and in our net interest margin. Net interest income increased to $14.3 million
      for the year ended December 31, 2006 from $13.0 million in 2005. The provision
      for loan losses was $528,000 in 2006 as compared to $329,000 in 2005.
      Non-interest income increased to $4.4 million in 2006 from $3.3 million in
      2005
      due primarily to increased deposit service charges resulting from higher average
      deposit account balances as well as the introduction of an overdraft protection
      program in the fourth quarter of 2005. Non-interest expense increased to $13.2
      million in 2006 as compared to $11.8 million in 2005. This increase is
      attributable to increases in all expense categories required to support the
      continued growth of the bank.




The
      increase in net income from 2004 to 2005 resulted primarily from an increase
      in
      the level of average earning assets of $136.0 million, which was partially
      offset by a decrease in the net interest margin from 3.72% in 2004 compared
      to
      3.30% in 2005. Earning assets averaged $393.9 million in 2005 as compared to
      $257.9 million in 2004. Non-interest income increased from $1.8 million in
      2004
      to $3.3 million in 2005 due to increased deposit service charges and increases
      in ATM/debit card fees and ATM surcharge fees. In addition, in 2005 we had
      gains
      on the sale of securities of $188,000 and gains on the early extinguishment
      of
      debt of $124,000. This compares to gains on sale of securities of $11,000 in
      2004. Non-interest expense increased to $11.8 million in 2005 as compared to
      $8.0 million in 2004. This increase is attributable to increases in all expense
      categories required to support the continued growth of the bank. In addition,
      expenses related to the operations of the branches acquired in the DutchFork
      acquisition on October 1, 2004 are included in the 2005 results for the entire
      year whereas in 2004 they were only included for the three months subsequent
      to
      the consummation of the merger.





23
 *Table
            of Contents*





**Net
      Interest Income**




Net
      interest income is our primary source of revenue. Net interest income is the
      difference between income earned on assets and interest paid on deposits and
      borrowings used to support such assets. Net interest income is determined by
      the
      rates earned on our interest-earning assets and the rates paid on our
      interest-bearing liabilities, the relative amounts of interest-earning assets
      and interest-bearing liabilities, and the degree of mismatch and the maturity
      and repricing characteristics of its interest-earning assets and
      interest-bearing liabilities.





Net
      interest income totaled $14.3 million in 2006, $13.0 million in 2005 and $9.6
      million in 2004. The yield on earning assets, which was 5.06% in 2004, increased
      to 5.42% and 6.22% in 2005 and 2006, respectively. The rate paid on
      interest-bearing liabilities was 1.60% in 2004, 2.37% in 2005 and 3.34% in
      200 6.
      The
      net interest margin was 3.72% in 2004, 3.44% in 2005 and 3.27% in 2006. The
      continued decrease in net interest margin in 2006 as compared to 2005 was a
      result of a smaller rise in average yields on interest earning assets relative
      to the rise in the average cost of interest-bearing liabilities. Our loan to
      deposit ratio on average during 2006 was 64.8%, as compared to 59.8% in 2005
      and
      61.0% during 2004. Loans typically provide a higher yield than other types
      of
      earning assets and thus one of our goals continues to be to grow the loan
      portfolio as a percentage of earning assets which should improve the overall
      yield on earning assets and the net interest margin. At December 31, 2006,
      the
      loan to deposit ratio had increased to 66.3%.





The
      inverted yield curve throughout much of 2006 as well as a very competitive
      deposit and lending environment were significant contributors to the decline
      in
      the net interest margin. The
      yield
      on earning assets increased by 80 basis points in 2006 as compared to 2005,
      whereas the cost of interest-bearing funds increased by 97 basis points during
      the same period. The higher increase in the cost of funds as compared to yield
      on interest earning assets was primarily due to a significant increase in our
      funding cost on time deposits. Approximately, 84.2% of our time deposits reprice
      within 12 months and as a result of increases in short term interest rates
      during 2006 the cost of these deposits increased 127 basis points in 2006.
      The
      average cost of time deposits was 4.18% in 2006 as compared to 2.89% and 2.13%
      in 2005 and 2004, respectively. The average borrowed funds to total interest
      bearing-liabilities in 2006 was 17.0%, as compared to 19.2% and 11.4% in 2005
      and 2004, respectively. During 2004, we borrowed $15.0 million in long-term
      debt
      to facilitate the merger with DutchFork and acquired $35.0 million in Federal
      Home Loan Bank advances as a result of the merger. Longer term borrowed funds
      typically have a higher interest rate than our mix of deposit products. Our
      average cost of borrowed funds for 2006 was 3.70% as compared to 3.84% and
      2.92%
      in 2005 and 2004, respectively.





A *verage
      Balances, Income Expenses and Rates* .
      The
      following tables depict, for the periods indicated, certain information related
      to our average balance sheet and our average yields on assets and average costs
      of liabilities. Such yields are derived by dividing income or expense by the
      average balance of the corresponding assets or liabilities. Average balances
      have been derived from daily averages.





24
 *Table
            of Contents*




(In
                thousands)
            
            Year
                ended December 31,2006
            
            2005
            
            2004Average
              Balance
            
            Income/
              Expense
            
            Yield/
              Rate
            
            Average
              Balance
            
            Income/
              Expense
            
            Yield/
              Rate
            
            Average
              Balance
            
            Income/
              Expense
            
            Yield/
              Rate**Assets**Earning
                assetsLoans
            
            $
            249,209
            
            $
            18,613
            
            
            7.47
            %
            $
            202,143
            
            $
            13,608
            
            
            6.73
            %
            $
            141,793
            
            $
            9,063
            
            
            6.39
            %Securities
            
            
            175,145
            
            
            7,891
            
            
            4.51
            %
            
            184,057
            
            
            7,465
            
            
            4.06
            %
            
            92,933
            
            
            3,647
            
            
            3.92
            %Other
                short-term investments (2)
            
            
            13,543
            
            
            741
            
            
            5.47
            %
            
            7,670
            
            
            271
            
            
            3.53
            %
            
            23,167
            
            
            334
            
            
            1
                .44
            %Total
                earning assets
            
            
            437,897
            
            
            27,245
            
            
            6.22
            %
            
            393,870
            
            
            21,344
            
            
            5.42
            %
            
            257,893
            
            
            13,044
            
            
            5.06
            %Cash
                and due from banks
            
            
            10,170
            
            
            
            
            
            
            
            
            10,456
            
            
            
            
            
            
            
            
            8,425Premises
                and equipment
            
            
            19,211
            
            
            
            
            
            
            
            
            14,710
            
            
            
            
            
            
            
            
            9,740Intangible
                assets
            
            
            29,603
            
            
            
            
            
            
            
            
            27,320
            
            
            
            
            
            
            
            
            6,434Other
                assets
            
            
            17,945
            
            
            
            
            
            
            
            
            15,404
            
            
            
            
            
            
            
            
            5,739Allowance
                for loan losses
            
            
            (3,002
            )
            
            
            
            
            
            
            
            (2,774
            )
            
            
            
            
            
            
            
            (2,063
            )Total
                assets
            
            $
            511,824
            
            
            
            
            
            
            
            $
            458,986
            
            
            
            
            
            
            
            $
            286,168**Liabilities**Interest-bearing
                liabilitiesInterest-bearing
                transaction accounts
            
            $
            58,099
            
            
            305
            
            
            0.52
            %
            $
            55,289
            
            
            187
            
            
            0.34
            %
            $
            36,906
            
            
            110
            
            
            0.30
            %Money
                market accounts
            
            
            48,399
            
            
            1,547
            
            
            3.20
            %
            
            41,615
            
            
            829
            
            
            1.99
            %
            
            29,568
            
            
            284
            
            
            0.96
            %Savings
                deposits
            
            
            29,108
            
            
            209
            
            
            0.72
            %
            
            31,988
            
            
            214
            
            
            0.67
            %
            
            22,070
            
            
            155
            
            
            0.70
            %Time
                deposits
            
            
            185,653
            
            
            7,768
            
            
            4.18
            %
            
            156,131
            
            
            4,513
            
            
            2.89
            %
            
            102,322
            
            
            2,180
            
            
            2.13
            %Other
                borrowings
            
            
            65,815
            
            
            3,093
            
            
            4.70
            %
            
            67,941
            
            
            2,606
            
            
            3.84
            %
            
            24,596
            
            
            719
            
            
            2.92
            %Total
                interest-bearing liabilities
            
            
            387,074
            
            
            12,922
            
            
            3.34
            %
            
            352,964
            
            
            8,349
            
            
            2.37
            %
            
            215,462
            
            
            3,448
            
            
            1.60
            %Demand
                deposits
            
            
            63,167
            
            
            
            
            
            
            
            
            52,964
            
            
            
            
            
            
            
            
            41,663Other
                liabilities
            
            
            .4,378
            
            
            
            
            
            
            
            
            2,536
            
            
            
            
            
            
            
            
            1,573Shareholders'
                equity
            
            
            57,205
            
            
            
            
            
            
            
            
            50,522
            
            
            
            
            
            
            
            
            27,470Total
                liabilities and shareholders' equity
            
            $
            511,824
            
            
            
            
            
            
            
            $
            458,986
            
            
            
            
            
            
            
            $
            286,168Net
                interest spread
            
            
            
            
            
            
            
            
            2.88
            %
            
            
            
            
            
            
            
            3.05
            %
            
            
            
            
            
            
            
            3.46
            %Net
                interest income/margin
            
            
            
            
            $
            14,323
            
            
            3.27
            %
            
            
            
            $
            12,995
            
            
            3.30
            %
            
            
            
            $
            9,596
            
            
            3.72
            %Net
                interest margin (tax equivalent)
            
            
            
            
            
            
            
            
            3.36
            %
            
            
            
            
            
            
            
            3.44
            %
            
            
            
            
            
            
            
            3.82
            %




(1)
      All
      loans and deposits are domestic. Average loan balances include non-accrual
      loans


(2)
      The
      computation includes federal funds sold, securities purchased under agreement
      to
      resell and interest bearing deposits.





25
 *Table
            of Contents*





The
      following table presents the dollar amount of changes in interest income and
      interest expense attributable to changes in volume and the amount attributable
      to changes in rate. The combined effect in both volume and rate, which cannot
      be
      separately identified, has been allocated proportionately to the change due
      to
      volume and due to rate.





(In
      thousands)


2006
                versus 2005
            
            2005
                versus 2004Increase
                (decrease ) due to
            
            Increase
                (decrease ) duetoVolume
            
            Rate
            
            Net
            
            Volume
            
            Rate
            
            Net**Assets**Earning
                assetsLoans
            
            $
            3,404
            
            $
            1,600
            
            $
            5,004
            
            $
            4,092
            
            $
            453
            
            $
            4,545Investment
                securities
            
            
            (330
            )
            
            757
            
            
            427
            
            
            3,700
            
            
            118
            
            
            3,818Other
                short-term investments
            
            
            274
            
            
            196
            
            
            470
            
            
            (
                326
            )
            
            262
            
            
            (
                64
            )Total
                earning assets
            
            
            2,538
            
            
            3.363
            
            
            5,901
            
            
            7,445
            
            
            854
            
            
            8,299Interest-bearing
                liabilitiesInterest-bearing
                transaction accounts
            
            
            10
            
            
            108
            
            
            118
            
            
            65
            
            
            12
            
            
            77Money
                market accounts
            
            
            152
            
            
            566
            
            
            718
            
            
            150
            
            
            394
            
            
            544Savings
                deposits
            
            
            (26
            )
            
            21
            
            
            (5
            )
            
            67
            
            
            (7
            )
            
            59Time
                deposits
            
            
            967
            
            
            2,288
            
            
            3,255
            
            
            2,418
            
            
            (85
            )
            
            2,333Other
                short-term Borrowings
            
            
            (79
            )
            
            565
            
            
            487
            
            
            1,603
            
            
            284
            
            
            1,887Total
                interest-bearing liabilities
            
            
            870
            
            
            3,702
            
            
            4,573
            
            
            6,394
            
            
            (1,493
            )
            
            4,901Net
                interest income
            
            
            
            
            
            
            
            $
            1,328
            
            
            
            
            
            
            
            $
            3,398





**Market
      Risk and Interest Rate Sensitivity**





Market
      risk reflects the risk of economic loss resulting from adverse changes in market
      prices and interest rates. The risk of loss can be measured in either diminished
      current market values or reduced current and potential net income. Our primary
      market risk is interest rate risk. We have established an Asset/Liability
      Management Committee (“ALCO”) to monitor and manage interest rate risk. The ALCO
      monitors and manages the pricing and maturity of its assets and liabilities
      in
      order to diminish the potential adverse impact that changes in interest rates
      could have on its net interest income. The ALCO has established policies
      guidelines and strategies with respect to interest rate risk exposure and
      liquidity.





A
      monitoring technique employed by us is the measurement of our interest
      sensitivity “gap,” which is the positive or negative dollar difference between
      assets and liabilities that are subject to interest rate repricing within a
      given period of time. Also, asset/liability modeling is performed to assess
      the
      impact varying interest rates and balance sheet mix assumptions will have on
      net
      interest income. Interest rate sensitivity can be managed by repricing assets
      or
      liabilities, selling securities available-for-sale, replacing an asset or
      liability at maturity or by adjusting the interest rate during the life of
      an
      asset or liability. Managing the amount of assets and liabilities repricing
      in
      the same time interval helps to hedge the risk and minimize the impact on net
      interest income of rising or falling interest rates. Neither the “gap” analysis
      or asset/liability modeling are precise indicators of our interest sensitivity
      position due to the many factors that affect net interest income including,
      the
      timing, magnitude and frequency of interest rate changes as well as changes
      in
      the volume and mix of earning assets and interest-bearing
      liabilities.





26
 *Table
            of Contents*





The
      following table illustrates our interest rate sensitivity at December 31,
      2006.




*Interest
      Sensitivity Analysis*


*(In
      thousands)*


Within
              One
                Year
            
            One
                to
              Three
                Years
            
            Three
                to
              Five
                Years
            
            Over
              Five
                Years
            
            TotalAssetsEarning
                assetsLoans
                (1)
            
            $
            140,072
            
            $
            67,537
            
            $
            58,162
            
            $
            8,971
            
            $
            274,742Securities
                (2)
            
            
            48,891
            
            
            73,267
            
            
            17,396
            
            
            39,703
            
            
            179,257Federal
                funds sold, securities purchased under agreements to resell and other
                earning assets
            
            
            17,793
            
            
            -
            
            
            -
            
            
            -
            
            
            17,793Total
                earning assets
            
            
            206,756
            
            
            140,804
            
            
            75,558
            
            
            48,674
            
            
            471,792LiabilitiesInterest
                bearing liabilitiesInterest
                bearing depositsNOW
                accounts
            
            
            16,011
            
            
            28,820
            
            
            9,606
            
            
            9,606
            
            
            64,043Money
                market accounts
            
            
            40,393
            
            
            10,406
            
            
            -
            
            
            -
            
            
            50,799Savings
                deposits
            
            
            7,997
            
            
            10,976
            
            
            3,658
            
            
            3,504
            
            
            26,135Time
                deposits
            
            
            168,874
            
            
            19,566
            
            
            11,847
            
            
            1
            
            
            200,288Total
                interest-bearing deposits
            
            
            233,275
            
            
            69,768
            
            
            25,111
            
            
            13,111
            
            
            341,265Other
                borrowings
            
            
            35,617
            
            
            2,020
            
            
            26,919
            
            
            288
            
            
            64,844Total
                interest-bearing liabilities
            
            
            268,892
            
            
            71,788
            
            
            52,030
            
            
            13,399
            
            
            406,109Period
                gap
            
            $
            (62,136
            )
            $
            69,016
            
            $
            23,528
            
            $
            35,275
            
            $
            65,683Cumulative
                gap
            
            $
            (62,136
            )
            $
            6,880
            
            $
            30,408
            
            $
            65,683
            
            $
            65,683Ratio
                of cumulative gap to total earning assets
            
            
            (13.17
            %)
            
            1.46
            %
            
            6.45
            %
            
            13.92
            %
            
            13.92
            %


_________________________


(1)
            Loans
                classified as non-accrual as of December 31, 2006 are not included
                in the
                balances.


(2)
            Securities
                based on amortized cost.





At
      December 31, 2006, we had entered into interest rate cap and floor agreements
      with a notional amount of $10,000,000 each. The cap rate of interest is 4.50%
      three month LIBOR and the floor rate of interest is 5.00% three month LIBOR.
      The
      fair value of the agreements at December 31, 2006 were $373,000. These
      agreements were entered into to protect assets and liabilities from the negative
      effects of volatility in interest rates. The agreements provide for a payment
      to
      the bank of the difference between the cap/floor rate of interest and the market
      rate of interest. The bank’s exposure to credit risk is limited to the ability
      of the counterparty to make potential future payments required pursuant to
      the
      agreement. The bank’s exposure to market risk of loss is limited to the market
      value of the cap and floor. The market rate of the cap was $180,000 and the
      floor market value was $191,000 at December 31, 2006. Any gain or loss on the
      value of this contract is recognized in earnings on a current basis. The bank
      received payments under the terms of the cap contract in the amount $49,000
      during the year ended December 31, 2006. No payments were received under the
      terms of the cap contract in 2005 and no payments have been received under
      the
      terms of the floor contract in 2006. The bank recognized $18,409 and $37,897
      in
      other income to reflect the increase in the value of the contracts for the
      years
      ended December 31, 2006 and 2005, respectively. The cap agreement and floor
      agreement expire on August 1, 2009 and August 31, 2011,
      respectively.





27
 *Table
            of Contents*





Through
      simulation modeling, we monitor the effect that an immediate and sustained
      change in interest rates of 100 basis points and 200 basis points up and down
      will have on net-interest income over the next 12 months. Based on the many
      factors and assumptions used in simulating the effect of changes in interest
      rates, the following table estimates the hypothetical percentage change in
      net
      interest income at December 31, 2006 and 2005 over the subsequent 12 months.
      Even though we are liability sensitive the model at December 31, 2006 reflects
      a
      decrease in net interest income in a declining rate environment. This primarily
      results from the current level of interest rates being paid on our interest
      bearing transaction accounts as well as money market accounts. The interest
      rates on these accounts are at a level where they can not be repriced in
      proportion to the change in interest rates. The increase and decrease of 100
      and
      200 basis points assume a simultaneous and parallel change in interest rates
      along the entire yield curve..





*Net
      Interest Income Sensitivity*


Change
                in
              short-term
              interest
            
            Hypothetical
              percentage
                change in
              net
                interest income
              December
                31,rates
            
            2006
            
            2005+200bp
            
            -
                2.73%
            
            +
                0.74%+100bp
            
            -
                1.19%
            
            +
                0.75%Flat
            
            -
            
            --100bp
            
            -
                0.79%
            
            -
                2.79%-200bp
            
            -
                4.16%
            
            -
                8.30%





We
      also
      perform a valuation analysis projecting future cash flows from assets and
      liabilities to determine the Present Value of Equity (PVE) over a range of
      changes in market interest rates. The sensitivity of PVE to changes in interest
      rates is a measure of the sensitivity of earnings over a longer time horizon.
      At
      December 31, 2006 and 2005 the PVE, exposure in a plus 200 basis point increase
      in market interest rates was estimated to be 9.92% and 8.03%,
      respectively.





**Provision
      and Allowance for Loan Losses**





At
      December 31, 2006, the allowance for loan losses amounted to $3.2 million,
      or
      1.17% of total loans, as compared to $2.7 million, or 1.22% of total loans,
      at
      December 31, 2005. Our provision for loan loss was $528,000 for the year ended
      December 31, 2006 as compared to $329,000 and $245,000 for the years ended
      December 31, 2005 and 2004, respectively. The provision is made based on our
      assessment of general loan loss risk and asset quality. 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 and concentrations of credit. While net charge-offs
      declined during 2006 the charge-offs for installment and other credit card
      loans
      increased 186.1% from $72,000 in 2005 to $206,000 in 2006. This primarily
      results from the introduction of the overdraft protection program in the fourth
      quarter of 2005. Overdrafts are included in loans on the balance sheet and
      charge-off of the overdraft amount, excluding fees, is charged to the allowance
      for loan losses. In evaluating this overdraft protection program it was
      anticipated that these consumer charge-offs would increase. Periodically, we
      adjust the amount of the allowance based on changing circumstances. We charge
      recognized losses to the allowance and add subsequent recoveries back to the
      allowance for loan losses.





We
      perform an analysis quarterly to assess the risk within the loan portfolio.
      The
      portfolio is segregated into similar risk components for which historical loss
      ratios are calculated and adjusted for identified changes in current portfolio
      characteristics. Historical loss ratios are calculated by product type and
      by
      regulatory credit risk classification. The allowance consist of an allocated
      and
      unallocated allowance. The allocated portion is determined by types and ratings
      of





28
 *Table
            of Contents*





loans
      within the portfolio. The unallocated portion of the allowance is established
      for losses that exist in the remainder of the portfolio and compensates for
      uncertainty in estimating the 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.
      The
      allowance is also subject to examination and testing for adequacy by regulatory
      agencies, which may consider such factors as the methodology used to determine
      adequacy and the size of the allowance relative to that of peer institutions.
      Such regulatory agencies could require us to adjust our allowance based on
      information available to them at the time of their examination.





At
      December 31, 2006, 2005, and 2004, we had non-accrual loans in the amount of
      $449,000, $101,000 and $0, respectively. There were $1.6 million, $387,000
      and
      $411,000 in loans delinquent greater than 30 days at December 31, 2006, 2005
      and
      2004, respectively. There were $22,000, $34,000 and $80,000 in loans greater
      than 90 days delinquent and still accruing interest at December 31, 2006, 2005
      and 2004, respectively. As a result of the merger with DeKalb, we acquired
      an
      allowance for loan losses in the amount of $320,000. This allowance for loan
      losses had been recorded through the provision for loan losses for DeKalb prior
      to the merger, which was consummated on June 9, 2006.





Our
      management continuously monitors non-performing, classified and past due loans
      to identify deterioration regarding the condition of these loans. We identified
      six loans in the amount of $769,000 which are current as to principal and
      interest and not included in non-performing assets but that could be potential
      problem loans.




*Allowance
      for Loan Losses*


(Dollars
                in thousands)
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Average
                loans outstanding
            
            $
            249,209
            
            $
            202,143
            
            $
            141,793
            
            $
            111,928
            
            $
            93,992Loans
                outstanding at period end
            
            $
            275,189
            
            $
            221,668
            
            $
            186,771
            
            $
            121,009
            
            $
            99,991Total
                nonaccrual loans
            
            $
            449
            
            $
            101
            
            
            -
            
            $
            80
            
            $
            144Loanspast due 90 days and still accruing
            
            $
            22
            
            $
            34
            
            $
            80
            
            $
            109
            
            $
            24Beginning
                balance of allowance
            
            $
            2,701
            
            $
            2,764
            
            $
            1,705
            
            $
            1,525
            
            $
            1,000Loans
                charged-off:1-4
                family residential mortgage
            
            
            97
            
            
            119
            
            
            5
            
            
            27
            
            
            -Home
                equity
            
            
            -
            
            
            274
            
            
            -
            
            
            -
            
            
            -Commercial
            
            
            142
            
            
            56
            
            
            196
            
            
            157
            
            
            156Installment
                & credit card
            
            
            206
            
            
            72
            
            
            93
            
            
            51
            
            
            16Total
                loans charged-off
            
            
            445
            
            
            521
            
            
            294
            
            
            235
            
            
            172Recoveries:1-4
                family residential mortgage
            
            
            2
            
            
            -
            
            
            -
            
            
            -
            
            
            -Home
                equity
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            19Commercial
            
            
            59
            
            
            99
            
            
            90
            
            
            247
            
            
            1Installment
                & credit card
            
            
            50
            
            
            30
            
            
            23
            
            
            1
            
            
            -Total
                recoveries
            
            
            111
            
            
            129
            
            
            113
            
            
            248
            
            
            20Net
                loans charged off (recovered)
            
            
            334
            
            
            392
            
            
            181
            
            
            (
                13
            )
            
            152Provision
                for loan losses
            
            
            528
            
            
            329
            
            
            245
            
            
            167
            
            
            677Purchased
                in acquisition
            
            
            320
            
            
            -
            
            
            995
            
            
            -
            
            
            -Balance
                at period end
            
            $
            3,215
            
            $
            2,701
            
            $
            2,764
            
            $
            1,705
            
            $
            1,525Net
                charge -offs to average loans
            
            
            0.13
            %
            
            0.19
            %
            
            0.13
            %
            
            (0.01
            %)
            
            0.16
            %Allowance
                as percent of total loans
            
            
            1.17
            %
            
            1.22
            %
            
            1.48
            %
            
            1.41
            %
            
            1.53
            %Non-performing
                loans as % of total loans
            
            
            .16
            %
            
            .05
            %
            
            -
            
            
            0.07
            %
            
            0.14
            %Allowance
                as % of non-performing loans
            
            
            716.04
            %
            
            2674.26
            %
            
            -
            
            
            2131.25
            %
            
            1059.03
            %




29
 *Table
            of Contents*





The
      following table presents an allocation of the allowance for loan losses at
      the
      end of each of the past four years. The allocation is calculated on an
      approximate basis and is not necessarily indicative of future losses or
      allocations. The entire amount is available to absorb losses occurring in any
      category of loans. Prior to December 31, 2003, we did not allocate the allowance
      to loan losses to categories of loans but rather evaluated the allowance on
      an
      overall portfolio basis. The change as of December 31, 2003 to allocating the
      allowance to loan losses to loan categories had no financial statement effect
      on
      the allowance for loan losses.





*Allocation
      of the Allowance for Loan Losses*


*Dollars
                in thousands*
            
            2006
            
            2005
            
            2004
            
            2003Amount
            
            %
                of
              loans
              in
              category
            
            Amount
            
            %
                of
              loans
              in
              category
            
            Amount
            
            %
                of
              loans
              in
              category
            
            Amount
            
            %
                of
              loans
              in
              categoryCommercial,
                Financial and Agricultural
            
            $
            83
            
            
            8.6
            %
            $
            574
            
            
            10.0
            %
            $
            462
            
            
            10.2
            %
            $
            285
            
            
            9.5
            %Real
                Estate Construction
            
            
            884
            
            
            11.4
            %
            
            611
            
            
            9.0
            %
            
            348
            
            
            4.3
            %
            
            214
            
            
            6.4
            %Real
                Estate Mortgage:Commercial
            
            
            1,692
            
            
            50.5
            %
            
            953
            
            
            50.9
            %
            
            1,285
            
            
            51.8
            %
            
            792
            
            
            60.1
            %Residential
            
            
            323
            
            
            17.4
            %
            
            275
            
            
            16.8
            %
            
            478
            
            
            19.0
            %
            
            293
            
            
            9.8
            %Consumer
            
            
            133
            
            
            12.1
            %
            
            213
            
            
            13.3
            %
            
            135
            
            
            14.7
            %
            
            85
            
            
            14.2
            %Unallocated
            
            
            100
            
            
            N/A
            
            
            75
            
            
            N/A
            
            
            56
            
            
            N/A
            
            
            36
            
            
            N/ATotal
            
            $
            3,215
            
            
            100.0
            %
            $
            2,701
            
            
            100.0
            %
            $
            2,764
            
            
            100.0
            %
            $
            1,705
            
            
            100.0
            %





Accrual
      of interest is discontinued on loans when we believe, after considering economic
      and business conditions and collection efforts that a borrower’s financial
      condition is such that the collection of interest is doubtful. A delinquent
      loan
      is generally placed in nonaccrual status when it becomes 90 days or more past
      due. At the time a loan is placed in nonaccrual status, all interest, which
      has
      been accrued on the loan but remains unpaid is reversed and deducted from
      earnings as a reduction of reported interest income. No additional interest
      is
      accrued on the loan balance until the collection of both principal and interest
      becomes reasonably certain.





30
 *Table
            of Contents*





**Noninterest
      Income and Expense**





*Noninterest
      Income.* Our
      primary source of noninterest income is service charges on deposit accounts.
      In
      addition, we originate mortgage loans that are pre-sold and funded by the third
      party acquirer, for which receive a fee. Other sources of noninterest
      income are
      derived from commissions on sale of non-deposit investment products, bankcard
      fees, ATM/debit card fees, commissions on check sales, safe deposit box rent,
      wire transfer and official check fees. Noninterest
      income for the year ended December 31, 2006 was $4.4 million as compared to
      $3.3
      million for 2005, an increase of $1.1 million, or 33.4%.
      This increase is due
      primarily to increased deposit service charges resulting from higher average
      deposit account balances.   In
      addition, during the fourth quarter of 2005 we introduced a formalized overdraft
      privilege program, which contributed to the increase in deposit service charges
      in 2006 as compared 2005 . Deposit
      service charges amounted to $2.4 million in 2006 as compared to $1.5 million
      in
      2005. Mortgage origination fees increased to $450,000 in 2006 as compared to
      $362,000 in 2005. This increase resulted from continued historically low
      mortgage interest rates as well as the addition of one full time and one
      part-time originator in the last half of 2005 and another full time originator
      was added as a result of the DeKalb acquisition in June 2006. In the first
      quarter of 2006 we sold securities that resulted in a loss of $69,000. The
      proceeds from the sale of the securities were used to pay down $5.0 million
      in
      FHLB advances resulting in a gain on the early extinguishment of debt of
      $159,000. This compares to gains on the sale of securities in the amount of
      $181,000 that were recognized in the first quarter of 2005 as we continued
      to
      restructure the investment portfolio acquired from DutchFork. A gain on the
      early extinguishment of debt in the amount of $124,000 was realized in the
      fourth quarter of 2005. This also resulted from the pay down of approximately
      $5.0 million of the FHLB advances. Commissions on the sale of non-deposit
      investment products increased to $321,000 in 2006 as compared to $230,000 in
      2005. This increase results from emphasis on this source of income through
      branch referrals as well as additional calling efforts. Other noninterest income
      increased to $1.1 million in 2006 as compared to $931,000 in 2005. This is
      a
      result of all categories of other noninterest income increasing, including
      loan
      late charges increasing by $11,000, ATM/debit card fees and surcharges by
      $147,000 and income from increases in value of bank owned life insurance of
      approximately $47,000. The increases in loan late charges and ATM/debit card
      fees and surcharges are a result of the continued growth of the bank. In July
      2006 we purchased an additional $3.5 million in bank owned life insurance which
      resulted in the increase in this source of income in 2006 as compared to 2005.
      In addition, we realized an increase in the cash value of bank owned life
      insurance of approximately $251,000 in 2005 as compared to $19,000 in 2004.
      These policies were acquired in the DutchFork acquisition and were owned for
      the
      entire year of 2005 as compared to only three months in 2004.





Noninterest
      income amounted to $3.3 million in 2005 as compared to $1.8 million in
      2004 ,
      an
      increase of $1.5 million (85.9% ).
      Non-interest income in 2005 included the impact of the DutchFork acquisition
      for
      a full year, whereas it only impacted 2004 during the fourth quarter of that
      year. **** Deposit service
      charges amounted to $1.5 million in 2005 as compared to $880,000 in 2004. During
      the fourth quarter of 2005, we introduced a formalized overdraft privilege
      program. The introduction of the overdraft privilege program as well as
      increased deposit balances contributed to the increase in deposit service
      charges. Mortgage origination fees increased to $362,000 in 2005 as compared
      to
      $268,000 in 2004. This increase resulted from an emphasis in this area and
      the
      addition of one full time and one part-time originator in the last half of
      2005.
      We had gains on the sale of securities in the amount of $188,000 in 2005 as
      compared to $11,000 in 2004. Gains in the amount of $181,000 were recognized
      in
      the first quarter of 2005 as we continued to restructure the investment
      portfolio acquired from DutchFork. A gain on the early extinguishment of debt
      in
      the amount of $124,000 was realized in the fourth quarter of 2005. This resulted
      from the pay down of approximately $5.0 million of the FHLB advances that were
      acquired in the DutchFork merger. Other noninterest income increased to $931,000
      million in 2005 as compared to $402,000 in 2004. This is a result of all
      categories of other noninterest income increasing, including loan late charges,
      ATM/debit card fees and surcharges due to the effect of the DutchFork merger.
      In
      addition, we realized an increase in the cash value of bank owned life insurance
      of approximately $251,000 in 2005 as compared to $19,000 in 2004. These policies
      were acquired in the DutchFork acquisition and were owned for the entire year
      of
      2005 as compared to only three months in 2004.





*Noninterest
      Expense.* In the
      very competitive financial services industry, we recognize the need to place
      a
      great deal of emphasis on expense management and continually evaluate and
      monitor growth in discretionary expense categories in order to control future
      increases. We have expanded our branch network over the last five years and
      acquired our twelfth office located in Camden, South Carolina in June 2006
      through the acquisition of DeKalb. In July 2006, construction was completed
      and
      we occupied our new 29,000 square foot administrative center. We believe that
      the administrative center along with other initiatives continue to improve
      the
      support infrastructure to enable our company to effectively manage the asset
      growth and expanded branch network experienced over the last five years. As
      a
      result of management’s expansion strategy, all categories of non-interest
      expense have continued to increase over the last several years. We anticipate
      that we will continue to seek de novo branch expansion as well as possible
      acquisition opportunities in key markets within the midlands of South
      Carolina.





31
 *Table
            of Contents*





Noninterest
      expense increased to $13.2 million for the year e nded
      December 31, 2006 from $11.8 million for the year ended December 31, 2005.
      Salary and employee benefits increased $594,000 million in 2006 as compared
      to
      2005. We added approximately 8 employees in connection with the merger with
      DeKalb. These employees were included in operations for approximately seven
      months during 2006. The number of full time equivalent employees at December
      31,
      2006 was 137 as compared to 123 at the same time in 2005. The new employees
      were
      hired to support the continued growth of the bank. Occupancy expense increased
      $139,000 from $807,000 in 2005 to $946,000 in 2006. The increase is primarily
      a
      result of the increased expense associated with the administrative center and
      the Camden branch for approximately five months and seven months, respectively.
      Data processing cost are primarily associated with third party processors
      supporting our network of ATM machines as well as processing ATM and Debit
      card
      activity. The expense related to these activities increased $66,000 as a result
      of the increased activity and numbers of outstanding cards. Telephone expense
      increased $90,000 as result of enhancements to our data network and the addition
      of the Camden branch. Professional fees increased from $415,000 in 2005 to
      $833,000 in 2006. This increase results primarily from the expense associated
      with the implementation of the overdraft privilege program. Expenses in 2006
      related to implementing this program were approximately $290,000. Ongoing
      professional expenses related to this program after 2006 are not anticipated
      to
      be significant. Professional fees in 2006 also include approximately $180,000
      for consulting services relative to the investment portfolio. In 2005, the
      expense related to investment portfolio consulting was approximately $45,000.
      In
      addition, the Sarbanes-Oxley Act of 2002, and the rules and regulations
      promulgated by the Securities and Exchange Commission that are now applicable
      to
      us, have increased the scope, complexity, and cost of corporate governance,
      reporting, and disclosure and as a result have increased legal and other
      professional fees. The Securities and Exchange Commission has granted an
      extension to non-accelerated filers to comply with the management reporting
      provisions of Section 404 to December 31, 2007. The requirement for an
      independent attestation report on internal controls has been extended to
      December 31, 2008 for non-accelerated filers. There will be continued cost
      incurred relative to complying with the requirements of Section 404 into 2007
      and beyond. We continue to evaluate the best options for utilizing
      consulting/outside resources for implementation and compliance with the
      requirements of Section 404. Amortization of intangibles increased approximately
      $42,000, which is a result of amortization of the core deposit premium
      associated with the DeKalb merger. The core deposit premium acquired in this
      merger amounted to $522,000 and is being amortized on a straight-line basis
      over
      seven years.





As
      a
      result of the merger with DutchFork in
      October 2004, expenses associated with operating the three new offices were
      included in the results of operations for the last quarter of 2004 as compared
      to the full year in 2005. Noninterest expense increased to $11.8 million for
      the
      year e nded
      December 31, 2005 from $8.0 million for the year ended December 31, 2004. Salary
      and employee benefits increased $2.0 million in 2005 as compared to 2004 .
      We
      added approximately 30 employees in
      connection with the merger with DutchFork. The
      number of full time equivalent employees at December 31, 2005 was 123 as
      compared to 115 at the same time in 2004. The new employees were hired to
      support the continued growth of the bank . Occupancy expense increased $318,000 from $489,000 in 2004 to $807,000 in 2005.
      Equipment expense increased by $ 254,000,
      or 25.6%,
      in 2005 as
      compared to 2004.
      This is primarily a result of the expenses associated with the DutchFork
      acquisition being included for an entire year in 2005. In addition, increased
      depreciation and maintenance contract expense related to equipment purchased
      to
      upgrade and improve existing technology ,
      including an upgrade to our main processor and item processing equipment needed
      to support increased volumes subsequent to the merger with DutchFork. These
      additions and upgrades were made in the second and third quarter of 2004 and
      therefore did not impact the full year of 2004. Noninterest expense in 2005
      and
      2004 included amortization of the deposit premium intangible of $595,000
      and $280,000, respectively ,
      related
      to the merger with DutchFork in October 2004
      and
      the acquisition of the Chapin office in February 2001. The deposit premiums
      of
      $1.2 million relative to the Chapin branch acquisition and the $2.9 million
      related to the DutchFork merger are being amortized on a straight-line
      basis over a period of seven years. Professional
      fees increased by $225,000 in 2005 as compared to 2004 due to increased legal
      fees, audit fees and consulting fees, most of which is attributable to the
      significant growth we experienced between the two periods.





32
 *Table
            of Contents*





The
      following table sets forth for the periods indicated the primary components
      of
      non-interest expense:


(In
                thousands)Year
                ended December 31,2006
            
            2005
            
            2004Salary
                and employee benefits
            
            $
            6,887
            
            $
            6,292
            
            $
            4,263Occupancy
            
            
            946
            
            
            807
            
            
            489Equipment
            
            
            1,241
            
            
            1,246
            
            
            992Marketing
                and public relations
            
            
            329
            
            
            337
            
            
            325Data
                processing
            
            
            265
            
            
            199
            
            
            127Supplies
            
            
            271
            
            
            262
            
            
            191Telephone
            
            
            381
            
            
            291
            
            
            206Correspondent
                services
            
            
            169
            
            
            167
            
            
            140Insurance
            
            
            255
            
            
            246
            
            
            149Professional
                fees
            
            
            833
            
            
            415
            
            
            190Postage
            
            
            168
            
            
            164
            
            
            111Amortization
                of intangibles
            
            
            637
            
            
            595
            
            
            280Other
            
            
            861
            
            
            817
            
            
            514$
            13,243
            
            $
            11,838
            
            $
            7,977




**Income
      Tax Expense**




Income
      tax expenses for the year ended December 31, 2006 were $1.5 million, or 29.3%
      of
      income before taxes, as compared to $ 1.0
      million, or 25.0% of income before taxes, for the year ended December 31, 2005.
      Income taxes for 2004 were $963,000, or 30.6% of income before taxes. We
      recognize deferred tax assets for future deductible amounts resulting from
      differences in the financial statement and tax bases of assets and liabilities
      and operating loss carry forwards. A valuation allowance is then established
      to
      reduce the deferred tax asset to the level that it is more likely than not
      that
      the tax benefit will be realized. There are no valuation allowances established
      for deferred taxes as of December 31, 2006 and 2005. The increase in the
      effective tax rate in 2006 over the prior year is primarily a result of the
      decrease in the amount of dividends received (eligible for a 70% dividend
      received deduction) in 2006 versus 2005 on preferred stock held in the
      available-for-sale portfolio ($614,000 in 2006 and $920,000 in 2005). These
      investments were owned by DutchFork at the date of the merger. Subsequent to
      the
      merger and as a result of restructuring certain holdings within the
      portfolio ,
      a
      significant portion of the preferred stock holdings were sold in the fourth
      quarter of 2004 and first quarter of 2005. As of December 31, 2006, we hold
      preferred stock with a fair value of $14.0 million in the available for sale
      portfolio and bank owned life insurance with a book value of $9.6 million.
      These
      holdings will continue to reduce the company’s effective tax rate in future
      periods. The decrease in the effective tax rate in 2005 as compared to 2004
      was
      also a primarily a result of these assets being held only during the fourth
      quarter of 2004.





**Financial
      Position**




Total
      assets at December 31, 2006 were $548.1 million as compared to $467.5 million
      at
      December 31, 2005. Average earning assets increased to $437.9 million during
      2006 from $393.9 million during 2005. Asset growth included organic
      growth in loans of $26.9
      million during 2006. Loans
      at
      December 31, 2006 were $2 75.2
      as
      compared to $221.7 million at December 31, 2005. The increase includes $26.6
      million in loans acquired in the merger with DeKalb. Investment securities
      were
      $176.5 at December 31, 2006 as compared to $176.4 million at December 31, 2005. The
      organic $34.6 million growth in assets was funded by an organic increase in
      deposit account balances of $38.0 million. Deposits and borrowings acquired
      in
      the merger with DeKalb amounted to $27.3 million and $7.9 million respectively.
      Securities sold under agreements to repurchase increased by $5.7 million at
      December 31, 2006 as compared to December 31, 2005. Federal Home Loan Bank
      Advances decreased by $4.7 million as of December 31, 2006 compared to December
      31, 2005. Shareholders’
      equity totaled $63.2 million
      at December 31, 2006 as compared to $50.8 million at December 31, 2005. The
      increase was a result of retained earnings of $2.8 million, proceeds from
      issuance of stock under stock option plans and the dividend reinvestment plan
      of $1.1
      million and stock issued in the DeKalb merger valued at $7.6 million. There
      was
      also a partial recovery of the net of tax unrealized loss on available-for-sale
      securities of $1.9 million during 2006.





33
 *Table
            of Contents*





**Earning
      Assets**




*Loans.* Loans
      typically provide higher yields than the other types of earning assets, and
      thus one of
      our goals is to have loans be the largest category of our earning assets. During
      2006, loans accounted for 56.9% of average earning assets as compared to 51.3%
      of average earning assets in 2005. The 5.6%
      increase in the ratio during 2006 demonstrates progress towards our asset mix
      goals. The growth of the loan portfolio both in total dollars and as a
      percentage of total earning assets will continue to be a major focus throughout
      2007 and thereafter. Associated with the higher loan yields are the inherent
      credit and liquidity risks, which we attempt to control and counterbalance.
      We
      are committed to achieving our asset mix goals without sacrificing asset
      quality. Loans averaged $249.2 million during 2006, as compared to $202.1
      million in 2005.




The
      following table shows the composition of the loan portfolio by
      category:





December
                31,(In
                thousands)
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Commercial,
                financial & agricultural
            
            $
            23,595
            
            $
            22,091
            
            $
            19,001
            
            $
            11,518
            
            $
            10,688Real
                estate:Construction
            
            
            31,474
            
            
            19,955
            
            
            8,066
            
            
            7,782
            
            
            7,533Mortgage
                - residential
            
            
            47,950
            
            
            37,251
            
            
            35,438
            
            
            11,804
            
            
            11,055Mortgage
                - commercial
            
            
            138,886
            
            
            112,915
            
            
            96,811
            
            
            72,668
            
            
            55,290Consumer
            
            
            33,284
            
            
            29,456
            
            
            27,455
            
            
            17,237
            
            
            15,425Total
                gross loans
            
            
            275,189
            
            
            221,668
            
            
            186,771
            
            
            121,009
            
            
            99,991Allowance
                for loan losses
            
            
            (3,215
            )
            
            (2,701
            )
            
            (2,764
            )
            
            (1,705
            )
            
            (1,525
            )Total
                net loans
            
            $
            271,974
            
            $
            218,967
            
            $
            184,007
            
            $
            119,304
            
            $
            98,466




In
      the
      context of this discussion, a real estate mortgage loan is defined as any loan,
      other than loans for construction purposes, secured by real estate, regardless
      of the purpose of the loan. We follow the common practice of financial
      institutions in the company’s market area of obtaining a security interest in
      real estate whenever possible, in addition to any other available collateral.
      This collateral is taken to reinforce the likelihood of the ultimate repayment
      of the loan and tends to increase the magnitude of the real estate loan
      components. Generally we limit the loan-to-value ratio to 80%. The principal
      components of our loan portfolio, at year-end 2006 and 2005, were commercial
      mortgage loans in the amount of $138.9 million and $112.9 million, representing
      50.5% and 50.9% of the portfolio, respectively. Significant portions of these
      commercial mortgage loans are made to finance owner-occupied real estate. We
      continue to maintain a conservative philosophy regarding our underwriting
      guidelines, and believe it will reduce the risk elements of the loan portfolio
      through strategies that diversify the lending mix.




The
      repayment of loans in the loan portfolio as they mature is a source of
      liquidity. The following table sets forth the loans maturing within specified
      intervals at December 31,
      2006.




**Loan
      Maturity Schedule and Sensitivity to Changes in Interest
      Rates**




(In
                thousands)
            
            December
                31, 2006One
                Year
              or
                Less
            
            Over
                One
              Year
                Through
              Five
                Years
            
            Over
              Five
                Years
            
            TotalCommercial,
                financial & agricultural
            
            $
            8,383
            
            $
            14,449
            
            $
            763
            
            $
            23,595Real
                estate - construction
            
            
            27,919
            
            
            3,500
            
            
            55
            
            
            31,474All
                other loan
            
            
            37,988
            
            
            121,643
            
            
            60,489
            
            
            220,120$
            74,290
            
            $
            139,592
            
            $
            61,307
            
            $
            275,189Loans
                maturing after one year with:Fixed
                interest rates
            
            
            
            
            
            
            
            
            
            
            $
            143,700Floating
                interest rates
            
            
            
            
            
            
            
            
            
            
            
            57,199$
            200,899




The
      information presented in the above table is based on the contractual maturities
      of the individual loans ,
      including loans ,
      which
      may be subject to renewal at their contractual maturity. Renewal of such loans
      is subject to review and credit approval, as well as modification of terms
      upon
      their maturity.





34
 *Table
            of Contents*





**Investment
      Securities**





The
      investment securities portfolio is a significant component of our total earning
      assets. Total securities averaged $175.1 million in 2006, as compared to $184.1
      million in 2005. This represents 40.0% and 46.7% of the average earning assets
      for the year ended December 31, 2006 and 2005, respectively.  At
      December 31, 2006, the portfolio was 37.6% of earning assets.





At
      December 31, 2006 we had mortgage backed securities including collateralized
      mortgage obligations with a fair value of $79.4 million. Of these $45.5 million
      were issued by government sponsored enterprises and $33.9 million are by other
      issuers. We believe that none of the CMOs held at December 31, 2006 are deemed
      to be invested in “high risk” tranches. Prior to acquiring a CMO, we perform a
      detailed analysis of the changes in value and the impact on cash flows in a
      changing interest rate environment to ensure that it meets our investment
      objectives as outlined in our investment policies. At December 31, 2006, we
      also
      had investments in variable rate preferred stock issued by the Federal Home
      Loan
      Mortgage Corporation (FHLMC) with a fair value of $14.0 million, which were
      acquired in the DutchFork transaction. In addition, we acquired other fixed
      and
      variable rate preferred stocks issued by FHLMC and FNMA in the DutchFork
      transaction. During the fourth quarter of 2004, we sold approximately $33.0
      million primarily fixed rate, preferred stock securities. As a result of marking
      the securities to market at the date of acquisition, substantially no gain
      or
      loss on those transactions was recognized in 2004. In the first quarter of
      2005,
      we sold preferred stock securities with an approximate carrying value of $12.0
      million. A gain of approximately $136,000 was realized in the first quarter
      of
      2005 on these sales. During 2006 we sold approximately preferred stock with
      a
      carrying value of approximately $17.1 million for a net gain of approximately
      $9,000. At December 31, 2006, the remaining preferred stock securities owned
      have an average book value of 85% of their par value. The remaining FHLMC
      preferred stock securities have adjustable rates. There have been no significant
      downgrades in the credit rating of the issuer. Given the adjustable rate nature
      of these securities, the dividend rate will adjust to a level more in line
      with
      current or future interest rates at a preset time in the future. Our objective
      in the management of the investment portfolio is to maintain a portfolio of
      high
      quality, liquid investments. This policy is particularly important as we
      continue to emphasize increasing the percentage of the loan portfolio to total
      earning assets. At December 31, 2006, the estimated weighted average life of
      the
      portfolio was 7.1
      years, duration of approximately 3.3 and a weighted average tax equivalent
      yield
      of approximately 4.88%. Based on our evaluation of securities that currently
      have unrealized losses, and our ability and intent to hold these investments
      until a recovery of fair value, we do not consider any of it investments to
      be
      other-than-temporarily impaired at December 31, 2006.





35
 *Table
            of Contents*





The
      following table shows the investment portfolio composition.


(In
      thousands)





December
                31,2006
            
            2005
            
            2004Securities
                available-for-sale at fair value:U.S.
                Treasury
            
            $
            1,004
            
            $
            992
            
            $
            997U.S.
                Government sponsored enterprises
            
            
            56,660
            
            
            57,479
            
            
            63,755Mortgage-backed
                securities
            
            
            79,426
            
            
            69,794
            
            
            71,056State
                and local government
            
            
            4,481
            
            
            253
            
            
            -FHLMC
                preferred stock
            
            
            14,005
            
            
            28,214
            
            
            42,128Corporate
                bonds
            
            
            8,792
            
            
            8,607
            
            
            7,754Other
            
            
            5,666
            
            
            5,319
            
            
            4,320170,034
            
            
            170,658
            
            
            190,010Securities
                held-to-maturity (amortized cost):State
                and local government
            
            
            6,429
            
            
            5,654
            
            
            6,006Other
            
            
            60
            
            
            60
            
            
            106,489
            
            
            5,714
            
            
            6,016Total
            
            $
            176,523
            
            $
            176,372
            
            $
            196,026




**Investment
      Securities Maturity Distribution and Yields**




The
      following table shows, at carrying value, the scheduled maturities and average
      yields of securities held at December 31, 2006.




(In
              thousands)Within
                One Year
            
            After
                One But
              Within
                Five Years
            
            After
                Five But
              Within
                Ten Years
            
            After
                Ten YearsHeld-to-maturity:
            
            Amount
            
            Yield
            
            Amount
            
            Yield
            
            Amount
            
            Yield
            
            Amount
            
            YieldState
                and local government
            
            $
            430
            
            
            4.60
            %
            $
            4,236
            
            
            3.91
            %
            $
            1,763
            
            
            3.83
            %
            $
            -Other
            
            
            -
            
            
            
            
            
            10
            
            
            5.85
            %
            
            50
            
            
            4.05
            %Total
                investment securities held-to-Maturity
            
            
            430
            
            
            4.60
            %
            
            4,246
            
            
            3.92
            %
            
            1,813
            
            
            3.84
            %
            
            -Available-for-sale:U.S.
                treasury
            
            
            1,004
            
            
            5.11
            %
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            -Government
                sponsored enterprises
            
            
            25,889
            
            
            4.30
            %
            
            25,343
            
            
            4.20
            %
            
            5,354
            
            
            4.85
            %
            
            74
            
            
            3.64
            %Mortgage-backed
                securities
            
            
            2,087
            
            
            3.50
            %
            
            45,698
            
            
            4.85
            %
            
            16,443
            
            
            5.78
            %
            
            15,199
            
            
            5.92
            %State
                and local government
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            1,969
            
            
            4.04
            %
            
            2,513
            
            
            4.20
            %FHLMC
                preferred stock
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            14,005
            
            
            4.41
            %Corporate
            
            
            551
            
            
            5.09
            %
            
            1,718
            
            
            0.30
            %
            
            4,062
            
            
            3.93
            %
            
            2,460
            
            
            4.59
            %Other
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            5,665
            
            
            4.49
            %Total
                investment securities available-for-sale
            
            
            29,531
            
            
            4.29
            %
            
            72,759
            
            
            4.51
            %
            
            27,828
            
            
            5.30
            %
            
            39,916
            
            
            4.99
            %Total
                investment securities
            
            $
            29,961
            
            
            4.29
            %
            $
            77,005
            
            
            4.48
            %
            $
            29,641
            
            
            5.21
            %
            $
            39,916
            
            
            4.99
            %





**Short-Term
      Investments**





Short-term
      investments, which consist of federal funds sold, securities purchased under
      agreements to resell and interest bearing deposits, averaged $13.5 million
      in 2006, as compared to $7.7 million in 2005. At December 31, 2006, short-
      term investments totaled $17.8 million. These funds are a primary source of
      liquidity and are generally invested in an earning capacity on an overnight
      basis .




**Deposits
      and Other Interest-Bearing Liabilities**





36
 *Table
            of Contents*





*Deposits.* Average
      deposits were $384.4 million during 2006, compared to $338.0 million during
      2005. Average interest-bearing deposits were $321.3 million in 2006, as compared
      to $285.0 million in 2005.




The
      following table sets forth the deposits by category:


(In
                thousands)
            
            December
                31,2006
            
            2005
            
            2004Amount
            
            %
                of
              Deposits
            
            Amount
            
            %
                of
              Deposits
            
            Amount
            
            %
                of
              DepositsDemand
                deposit accounts
            
            $
            73,676
            
            
            17.8
            %
            $
            57,327
            
            
            16.4
            %
            $
            49,520
            
            
            14.7
            %NOW
                accounts
            
            
            64,043
            
            
            15.4
            %
            
            60,756
            
            
            17.4
            %
            
            59,723
            
            
            17.7
            %Money
                market accounts
            
            
            50,799
            
            
            12.2
            %
            
            45,582
            
            
            13.0
            %
            
            39,124
            
            
            11.6
            %Savings
                accounts
            
            
            26,135
            
            
            6.3
            %
            
            29,819
            
            
            8.5
            %
            
            35,370
            
            
            10.5
            %Time
                deposits less than $100,000
            
            
            119,083
            
            
            28.7
            %
            
            100,612
            
            
            28.8
            %
            
            100,629
            
            
            29.9
            %Time
                deposits more than $100,000
            
            
            81,205
            
            
            19.6
            %
            
            55,508
            
            
            15.9
            %
            
            52,698
            
            
            15.6
            %$
            414,941
            
            
            100.0
            %
            $
            349,604
            
            
            100.0
            %
            $
            337,064
            
            
            100.0
            %




Core
      deposits, which exclude certificates of deposit of $100,000 or more, provide
      a
      relatively stable funding source for the loan portfolio and other earning
      assets. Core deposits were $334.7 million and $294.1 million at December 31,
      2006 and 2005, respectively. A
      stable
      base of deposits is
      expected to continue be the primary source of funding to meet both our
      short-term and long-term liquidity needs in the future. The
      maturity distribution of time deposits is shown in the following
      table.




**Maturities
      of Certificates of Deposit and Other Time Deposit of $100,000 or more**




(In
                thousands)
            
            December
                31, 2006Within
                Three
              Months
            
            After
                Three
              Through
              Six
                Months
            
            After
                Six
              Through
              Twelve
                Months
            
            After
              Twelve
              Months
            
            TotalCertificates
                of deposit of $100,000 or more
            
            $
            23,599
            
            $
            20,932
            
            $
            24,864
            
            $
            11,810
            
            $
            81,205




There
      were no other
      time deposits of $100,000 or more at December 31, 2006.




Large
      certificate of deposit customers tend to be extremely sensitive to interest
      rate
      levels, making these deposits less reliable sources of funding for liquidity
      planning purposes than core deposits. Some financial institutions partially
      fund
      their balance sheets using large certificates of deposits
      obtained through brokers. These brokered deposits can be unreliable as long-term
      funding sources. Accordingly, we do not currently accept brokered
      deposits.





*Borrowed
      funds.* Borrowed
      funds consist of securities sold under agreements to repurchase, Federal Home
      Loan Bank advances and long-term debt as a result of issuing $15.0 million
      in
      trust preferred securities.  Short-term borrowings in the form of securities sold under agreements to
      repurchase averaged $19.1 million, $11.0 and $5.9 million during 2006, 2005
      and
      2004, respectively. The maximum month-end balance during 2005, 2004 and 2003
      was
      $27.7 million, $14.9 million and $7.6 million, respectively. The average rate
      paid during these periods was 3.90%, 3.38% and 0.71%, respectively. The balance
      of securities sold under agreements to repurchase were $19.5 million and $13.8
      million at December 31, 2006 and 2005, respectively. The repurchase agreements
      all mature within one to four days and are generally originated with customers
      that have other relationships with the company and tend to provide a stable
      and
      predictable source of funding. As a member of the Federal Home Loan Bank of
      Atlanta (FHLB Atlanta) , the bank
      has access to advances from the FHLB Atlanta for various terms and amounts.
      During 2006 and 2005,
      the average outstanding advances amounted to $31.1 million and $41.3
      million, respectively.





37
 *Table
            of Contents*





The
      following is a schedule of the maturities for Federal Home Loan Bank Advances
      as
      of December 31, 2006 and 2005:





December
                31,(In
                thousands)
            
            2006
            
            2005Maturing
            
            Amount
            
            Rate
            
            Amount
            
            Rate2006
            
            $
            -
            
            
            -
            
            $
            1,500
            
            
            2.83
            %2008
            
            
            1,954
            
            
            3.79
            %
            
            5,251
            
            
            3.42
            %2010
            
            
            26,853
            
            
            3.64
            %
            
            27,306
            
            
            3.64
            %2011
            
            
            500
            
            
            5.35
            %
            
            467
            
            
            1.00
            %After
                five years
            
            
            450
            
            
            1.00
            %29,758
            
            
            3.64
            %
            
            34,524
            
            
            3.54
            %




Purchase
      premiums included in advances acquired in the merger with DutchFork reflected
      in
      the advances maturing in 2010 amount to $1.9 million and $2.3 million at
      December 31, 2006 and 2005, respectively. The coupon rate on these advances
      is
      5.76%. In addition to the above borrowings ,
      we
      issued $15.0 million in trust preferred securities on September 16,
      2004. The securities accrue and pay distributions quarterly at a rate of LIBOR
      plus 257 basis points. The debt may be redeemed in full anytime after September
      16, 2009 with notice and matures on September 16, 2034.





**Capital**




Total
      shareholders’ equity as of December 31, 2006 was $63.2
      million as compared to $50.8 million as of December 31, 2005. This increase
      was
      attributable to retained net income for the year ended December 31, 2006 of
      $2.8
      million, a recovery in the net unrealized loss of $1.9 million net of tax effect
      in the market value of investment securities available-for sale ,
      the
      issuance of shares in the dividend reinvestment plan and upon the exercise
      of
      stock options valued at $1.1 million, and the issuance of 364,034 shares of
      common stock valued at $7.6 million in conjunction with the acquisition of
      DeKalb. Offsetting these increases was the repurchase of 70,100 shares at a
      total price of $1.3 million pursuant to a stock repurchase program we instituted
      during the third quarter of 2006 authorizing the repurchase of up to 150,000
      shares of our common stock. During the
      first quarter of 2006 we paid a quarterly dividend of $0.05 per share. For
      the
      last three quarters of 2006 our dividend was $0.06 per share. In 2005 and 2004,
      we paid quarterly cash dividends of $.05 per share. A
      dividend reinvestment plan was implemented in the third quarter of 2003. The
      plan allows existing shareholders the option of reinvesting cash dividends
      as
      well as making optional purchases of up to $5,000 in the purchase of common
      stock per quarter.




Under
      the
      capital guidelines of the Federal Reserve and the OCC, the company and the
      bank
      are currently required to maintain a minimum risk-based total capital ratio
      of
      8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of common
      shareholders’ equity, qualifying perpetual preferred stock, and minority
      interests in equity accounts of consolidated subsidiaries, less goodwill. In
      addition, the bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital
      to total assets) of at least 4%, but this minimum ratio is increased by 100
      to
      200 basis points for other than the highest-rated institutions. The trust
      preferred securities in the amount of $15.0 million that were issued on
      September 16, 2004 qualify as tier 1 capital under the regulatory guidelines
      and are
      included in the amounts reflected below.





38
 *Table
            of Contents*





The
      company and the bank exceeded their regulatory capital ratios at
      December 31, 2006 and 2005, as set forth in the following table.





Analysis
                of Capital(In
                thousands)
            
            Required
              Amount
            
            %
            
            Actual
              Amount
            
            %
            
            Excess
              Amount
            
            %The
                Bank:December
                31, 2006Risk
                Based CapitalTier
                1
            
            $
            14,009
            
            
            4.0
            %
            $
            43,039
            
            
            12.3
            %
            
            29,031
            
            
            8.3
            %Total
                Capital
            
            
            28,018
            
            
            8.0
            %
            
            46,254
            
            
            13.2
            %
            
            18,236
            
            
            5.2
            %Tier
                1 Leverage
            
            
            20,266
            
            
            4.0
            %
            
            43,039
            
            
            8.5
            %
            
            22,773
            
            
            4.5
            %December
                31, 2005Risk
                Based CapitalTier
                1
            
            $
            12,320
            
            
            4.0
            %
            $
            36,179
            
            
            11.8
            %
            $
            23,859
            
            
            7.8
            %Total
                Capital
            
            
            24,640
            
            
            8.0
            %
            
            38,880
            
            
            12.6
            %
            
            14,240
            
            
            4.6
            %Tier
                1 Leverage
            
            
            17,740
            
            
            4.0
            %
            
            36,179
            
            
            8.2
            %
            
            18,439
            
            
            4.2
            %The
                Company:December
                31, 2006Risk
                Based CapitalTier
                1
            
            $
            14,030
            
            
            4.0
            %
            $
            47,238
            
            
            13.5
            %
            $
            33,208
            
            
            9.5
            %Total
                Capital
            
            
            28,060
            
            
            8.0
            %
            
            50,453
            
            
            14.4
            %
            
            22,393
            
            
            6.4
            %Tier
                1 Leverage
            
            
            20,343
            
            
            4.0
            %
            
            47,238
            
            
            9.3
            %
            
            26,895
            
            
            5.3
            %December
                31, 2005Risk
                Based CapitalTier
                1
            
            $
            12,354
            
            
            4.0
            %
            $
            40,898
            
            
            13.2
            %
            $
            28,544
            
            
            8.2
            %Total
                Capital
            
            
            24,709
            
            
            8.0
            %
            
            43,599
            
            
            14.1
            %
            
            18,890
            
            
            6.1
            %Tier
                1 Leverage
            
            
            17,616
            
            
            4.0
            %
            
            40,898
            
            
            9.3
            %
            
            23,282
            
            
            5.3
            %




**Liquidity
      Management**




Liquidity
      management involves monitoring sources and uses of funds in order to meet its
      day-to-day cash flow requirements while maximizing profits. Liquidity represents
      our ability to convert assets into cash or cash equivalents without significant
      loss and to raise additional funds by increasing liabilities. Liquidity
      management is made more complicated because different balance sheet components
      are subject to varying degrees of management control. For example, the timing
      of
      maturities of the investment portfolio is very predictable and subject to a
      high
      degree of control at the time investment decisions are made. However, net
      deposit inflows and outflows are far less predictable and are not subject to
      nearly the same degree of control. Asset liquidity is provided by cash and
      assets which are readily marketable, or which can be pledged, or which will
      mature in the near future. Liability liquidity is provided by access to core
      funding sources, principally the ability to generate customer deposits in our
      market area. In addition, liability liquidity is provided through the ability
      to
      borrow against approved lines of credit (federal funds purchased) from
      correspondent banks and to borrow on a secured basis through securities sold
      under agreements to repurchase. The bank is a member of the FHLB Atlanta and
      has
      the ability to obtain advances for various periods of time. These advances
      are
      secured by securities pledged by the bank or assignment of loans within the
      bank’s portfolio.




With
      the
      successful completion of the common stock offering in 1995, the secondary
      offering completed in 1998, the trust preferred offering completed in September
      2004, the acquisition of DutchFork in October 2004 and the acquisition of DeKalb
      in June 2006, the company has maintained a high level of liquidity and adequate
      capital, along with continued retained earnings, sufficient to fund the
      operations of the bank for at least the next 12 months. The company’s management
      anticipates that the bank will remain a well capitalized institution for at
      least the next 12 months. Shareholders’ equity was 11.5% of total assets at
      December 31, 2006 and 10.9% at December 31, 2005 . Funds
      sold and short-term interest bearing deposits are our primary source of
      liquidity and averaged $13.5 million and $7.7 million during the year ended
      December 31, 2006 and 2005, respectively. The bank maintains federal funds
      purchased lines, in the amount of $10.0 million with several financial
      institutions, although these were not utilized in 2006. The FHLB Atlanta has
      approved a line of credit of up to 15% of the bank assets, which would be
      collateralized





39
 *Table
            of Contents*





by
      a
      pledge against specific investment securities and or eligible loans. We
      regularly review the liquidity position of the company and have implemented
      internal policies establishing guidelines for sources of asset based liquidity
      and limit the total amount of purchased funds used to support the balance sheet
      and funding from non core sources. We believe that our existing stable base
      of
      core deposits along with continued growth in this deposit base will enable
      us to
      meet our long term liquidity needs successfully.





**CONTRACTUAL
      OBLIGATIONS**





The
      following table provides payments due by period for various contractual
      obligations as of December 31, 2006





Payments
                Due by Period(in
                thousands)
            
            Within
              One
                Year
            
            Over
                One
              to
                Two
              Years
            
            Over
                Two
              to
                Three
              Years
            
            Over
                Three
              to
                Five
              Years
            
            After
              Five
              Years
            
            TotalCertificate
                accounts
            
            $
            168,714
            
            $
            5,521
            
            $
            14,048
            
            $
            12,005
            
            $
            -
            
            $
            200,288Short-term
                borrowings
            
            
            19,621
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            19,621Long-term
                debt
            
            
            -
            
            
            1,954
            
            
            -
            
            
            27,353
            
            
            15,915
            
            
            45,222Purchases
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                contractual obligations
            
            $
            188,335
            
            $
            7,475
            
            $
            14,048
            
            $
            39,358
            
            
            15,915
            
            $
            265,131





**Off-Balance
      Sheet Arrangements**





In
      the
      normal course of operations, we engage in a variety of financial transactions
      that, in accordance with generally accepted accounting principles, are not
      recorded in the financial statements, or are recorded in amounts that differ
      from the notional amounts. These transactions involve, to varying degrees,
      elements of credit, interest rate, and liquidity risk. Such transactions are
      used by the company for general corporate purposes or for customer needs.
      Corporate purpose transactions are used to help manage credit, interest rate,
      and liquidity risk or to optimize capital. Customer transactions are used to
      manage customers' requests for funding. Please
      refer to Note 13 of the company’s financial statements for a discussion of our
      off-balance sheet arrangements.




**Impact
      of Inflation**




Unlike
      most industrial companies, the assets and liabilities of financial institutions
      such as the company and the bank are primarily monetary in nature. Therefore,
      interest rates have a more significant effect on our performance than do the
      effects of changes in the general rate of inflation and change in prices. In
      addition, interest rates do not necessarily move in the same direction or in
      the
      same magnitude as the prices of goods and services. As discussed previously,
      we
      continually seek to manage the relationships between interest sensitive assets
      and liabilities in order to protect against wide interest rate fluctuations,
      including those resulting from inflation.





**Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risk.**





Please
      refer to “Market Risk and Interest Rate Sensitivity,” “Loan Maturity Schedule
      and Sensitivity to Changes n Interest Rates,” “Investment Securities Majority
      Distribution and Yields” in Item 6 for quantitative and qualitative disclosures
      about market risk, which information is incorporated herein by reference.





**Item
      8. Financial Stateme** **nts
      and Supplementary Data.**





Additional
      information required under this Item 8 may be found under the Notes to Financial
      Statements under Note 21.





40
 *Table
            of Contents*





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**










The
      Board
      of Directors


First
      Community Corporation


Lexington,
      South Carolina








We
      have
      audited the accompanying consolidated balance sheet of First Community
      Corporation (the Company) as of December 31, 2006 and the related consolidated
      statement of income, shareholders' equity and comprehensive income, and cash
      flows for the year then ended. These consolidated financial statements are
      the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these consolidated financial statements based on our
      audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of First Community Corporation
      at December 31, 2006, and the results of their operations and their cash flows
      for the year then ended, in conformity with accounting principles generally
      accepted in the United States of America.








/s/
      Elliott Davis, LLC





Elliott
      Davis, LLC


Columbia,
      South Carolina


March
      19,
      2007





41
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            of Contents*





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








The
      Board
      of Directors


First
      Community Corporation


Lexington,
      South Carolina








I
      have
      audited the accompanying consolidated balance sheet of First Community
      Corporation (the Company) as of December 31, 2005 and 2004 and the related
      consolidated statement of income, shareholders' equity and comprehensive income,
      and cash flows for the years ended December 31, 2005 and 2004. These
      consolidated financial statements are the responsibility of the Company's
      management. My responsibility is to express an opinion on these consolidated
      financial statements based on my audits.





I
      conducted the audits in accordance with the standards of the Public Company
      Accounting oversight Board (United States). Those standards require that I
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. I believe that my audits provide a reasonable
      basis for my opinion.





In
      my
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of First Community Corporation
      at December 31, 2005, and the results of their operations and their cash flows
      for the years ended December 31, 2005 and 2004, in conformity with accounting
      principles generally accepted in the United States of America.








/s/
      Clifton D. Bodiford





Clifton
      D. Bodiford


Certified
      Public Accountant


Columbia,
      South Carolina


January
      13, 2006





42
 *Table
            of Contents*





**FIRST
      COMMUNITY CORPORATION**


**Consolidated
      Balance Sheets**





December
                31,2006
            
            2005ASSETSCash
                and due from banks
            
            $
            10,021,781
            
            $
            11,701,764Interest-bearing
                bank balances
            
            
            47,786
            
            
            83,178Federal
                funds sold and securities purchased under agreements to
                resell
            
            
            17,745,404
            
            
            1,079,204Investment
                securities - available for sale
            
            
            170,034,478
            
            
            170,657,770Investment
                securities - held to maturity (market value of $6,509,148 and $5,746,448
                at December 31, 2006 and 2005, respectively)
            
            
            6,488,796
            
            
            5,713,830Loans
            
            
            275,188,567
            
            
            221,667,632Less,
                allowance for loan losses
            
            
            3,214,624
            
            
            2,700,647Net
                loans
            
            
            271,973,943
            
            
            218,966,985Property,
                furniture and equipment - net
            
            
            20,960,332
            
            
            15,982,029Bank
                owned life insurance
            
            
            9,606,657
            
            
            5,811,302Goodwill
            
            
            27,761,219
            
            
            24,256,020Core
                deposit intangible
            
            
            2,652,917
            
            
            2,767,074Other
                assets
            
            
            10,762,430
            
            
            10,435,937Total
                assets
            
            $
            548,055,743
            
            $
            467,455,093LIABILITIESDeposits:Non-interest
                bearing demand
            
            $
            73,676,415
            
            $
            57,326,637NOW
                and money market accounts
            
            
            114,842,382
            
            
            106,337,887Savings
            
            
            26,134,834
            
            
            29,818,705Time
                deposits less than $100,000
            
            
            119,082,462
            
            
            100,612,256Time
                deposits $100,000 and over
            
            
            81,205,314
            
            
            55,508,666Total
                deposits
            
            
            414,941,407
            
            
            349,604,151Securities
                sold under agreements to repurchase
            
            
            19,472,580
            
            
            13,806,400Federal
                Home Loan Bank Advances
            
            
            29,757,545
            
            
            34,524,409Junior
                subordinated debt
            
            
            15,464,000
            
            
            15,464,000Other
                borrowed money
            
            
            148,886
            
            
            169,233Other
                liabilities
            
            
            5,063,674
            
            
            3,120,115Total
                liabilities
            
            
            484,848,092
            
            
            416,688,308Commitments
                and contingencies (Note 14)SHAREHOLDERS'
                EQUITYPreferred
                stock, par value $1.00 per share; 10,000,000 shares authorized; none
                issued and outstandingCommon
                stock, par value $1.00 per share; 10,000,000 shares authorized; issued
                and
                outstanding 3,264,608 in 2006 and 2,848,627 in 2005
            
            
            3,264,608
            
            
            2,848,627Additional
                paid in capital
            
            
            49,695,346
            
            
            42,352,205Retained
                earnings
            
            
            12,033,065
            
            
            9,240,088Accumulated
                other comprehensive income (loss)
            
            
            (1,785,368
            )
            
            (3,674,135
            )Total
                shareholders' equity
            
            
            63,207,651
            
            
            50,766,785Total
                liabilities and shareholders' equity
            
            $
            548,055,743
            
            $
            467,455,093





**See
      Notes to Consolidated Financial Statements**





43
 *Table
            of Contents*





**FIRST
      COMMUNITY CORPORATION**


**Consolidated
      Statements of Income**





Year
                Ended December 31,2006
            
            2005
            
            2004Interest
                income:Loans,
                including fees
            
            $
            18,612,615
            
            $
            13,607,962
            
            $
            9,063,092Investment
                securities - available-for-sale
            
            
            7,662,919
            
            
            7,241,453
            
            
            3,440,033Investment
                securities - held-to-maturity
            
            
            228,008
            
            
            223,059
            
            
            206,681Other
                short term investments
            
            
            741,406
            
            
            271,276
            
            
            334,518Total
                interest income
            
            
            27,244,948
            
            
            21,343,750
            
            
            13,044,324Interest
                expense:Deposits
            
            
            9,828,817
            
            
            5,743,340
            
            
            2,729,459Securities
                sold under agreement to repurchase
            
            
            804,532
            
            
            275,738
            
            
            40,934Other
                borrowed money
            
            
            2,288,344
            
            
            2,330,252
            
            
            677,830Total
                interest expense
            
            
            12,921,693
            
            
            8,349,330
            
            
            3,448,223Net
                interest income
            
            
            14,323,255
            
            
            12,994,420
            
            
            9,596,101Provision
                for loan losses
            
            
            528,124
            
            
            328,679
            
            
            245,000Net
                interest income after provision for loan losses
            
            
            13,795,131
            
            
            12,665,741
            
            
            9,351,101Non-interest
                income:Deposit
                service charges
            
            
            2,390,053
            
            
            1,462,111
            
            
            879,585Mortgage
                origination fees
            
            
            450,437
            
            
            361,856
            
            
            267,972Commission
                on sale of non-deposit products
            
            
            321,308
            
            
            229,888
            
            
            212,748Gain
                (loss) on sale of securities
            
            
            (68,962
            )
            
            188,419
            
            
            11,381Gain
                on early extinguishment of debt
            
            
            159,416
            
            
            124,436
            
            
            -Other
            
            
            1,148,655
            
            
            931,207
            
            
            402,035Total
                non-interest income
            
            
            4,400,907
            
            
            3,297,917
            
            
            1,773,721Non-interest
                expense:Salaries
                and employee benefits
            
            
            6,886,509
            
            
            6,292,239
            
            
            4,263,383Occupancy
            
            
            945,561
            
            
            807,258
            
            
            489,261Equipment
            
            
            1,240,943
            
            
            1,245,577
            
            
            991,793Marketing
                and public relations
            
            
            329,173
            
            
            337,481
            
            
            325,395Amortization
                of intangibles
            
            
            636,529
            
            
            594,741
            
            
            279,685Other
            
            
            3,203,899
            
            
            2,561,091
            
            
            1,627,470Total
                non-interest expense
            
            
            13,242,614
            
            
            11,838,387
            
            
            7,976,987Net
                income before tax
            
            
            4,953,424
            
            
            4,125,271
            
            
            3,147,835Income
                taxes
            
            
            1,452,225
            
            
            1,032,600
            
            
            962,850Net
                income
            
            $
            3,501,199
            
            $
            3,092,671
            
            $
            2,184,985Basic
                earnings per common share
            
            $
            1.13
            
            $
            1.09
            
            $
            1.15Diluted
                earnings per common share
            
            $
            1.10
            
            $
            1.04
            
            $
            1.09




**See
      Notes to Consolidated Financial Statements**





44
 *Table
            of Contents*





**FIRST
      COMMUNITY CORPORATION**


**Consolidated
      Statement of Changes in Shareholder's Equity and Comprehensive Income
      (loss)**





Shares
              Issued
            
            Common
              Stock
            
            Additional
              Paid-in
              Capital
            
            Retained
              Earnings
            
            Accumulated
              Other
              Comprehensive
              Income
                (loss)
            
            Total**Balance
                December 31, 2003**
            
            
            1,597,224
            
            $
            1,597,224
            
            $
            12,862,715
            
            $
            4,909,742
            
            $
            139,133
            
            $
            19,508,814Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            2,184,985
            
            
            
            
            
            2,184,985Accumulated
                other comprehensive loss, net of income tax benefit of
                $540,016
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,002,887
            )Less:
                reclassification adjustment for gains included in net income, net
                of tax
                of $3,983
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,398
            )Other
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,010,285
            )
            
            (1,010,285
            )Comprehensive
                income:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,174,700Cash
                dividend ($0.20 per share)
            
            
            
            
            
            
            
            
            
            
            
            (381,878
            )
            
            
            
            
            (381,878
            )Stock
                issued in acquisition
            
            
            1,169,898
            
            
            1,169,898
            
            
            28,675,725
            
            
            
            
            
            
            
            
            29,845,623Exercise
                of stock options
            
            
            15,409
            
            
            15,409
            
            
            205,365
            
            
            
            
            
            
            
            
            220,774Dividend
                reinvestment plan
            
            
            6,371
            
            
            6,371
            
            
            88,285
            
            
            
            
            
            
            
            
            94,656**Balance
                December 31, 2004**
            
            
            2,788,902
            
            
            2,788,902
            
            
            41,832,090
            
            
            6,712,849
            
            
            (871,152
            )
            
            50,462,689Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            3,092,671
            
            
            
            
            
            3,092,671Accumulated
                other comprehensive loss, net of income tax benefit of
                $1,443,352
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (
                2,680,511
            )Less:
                reclassification adjustment for gains included in net income, net
                of tax
                of $65,946
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (122,472
            )Other
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,802,983
            )
            
            (2,802,983
            )Comprehensive
                income:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            289,688Cash
                dividend ($0.20 per share)
            
            
            
            
            
            
            
            
            
            
            
            (565,432
            )
            
            
            
            
            (565,432
            )Exercise
                of stock options
            
            
            52,845
            
            
            52,845
            
            
            399,814
            
            
            
            
            
            
            
            
            452,659Dividend
                reinvestment plan
            
            
            6,880
            
            
            6,880
            
            
            120,301
            
            
            
            
            
            
            
            
            127,181**Balance
                December 31, 2005**
            
            
            2,848,627
            
            
            2,848,627
            
            
            42,352,205
            
            
            9,240,088
            
            
            (3,674,135
            )
            
            50,766,785Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            3,501,199
            
            
            
            
            
            3,501,199Accumulated
                other comprehensive Income, net of income tax of
                $1,006,146
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,843,666Less:
                reclassification adjustment for loss included in net income, net
                of tax of
                $23,864
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            45,101Other
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,888,767
            
            
            1,888,767Comprehensive
                income:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,389,966Cash
                dividend ($0.23 per share)
            
            
            
            
            
            
            
            
            
            
            
            (708,222
            )
            
            
            
            
            (708,222
            )Stock
                issued in acquisition
            
            
            364,034
            
            
            364,034
            
            
            7,212,859
            
            
            
            
            
            
            
            
            7,576,893Repurchase
                of common stock
            
            
            (70,100
            )
            
            (70,100
            )
            
            (1,183,990
            )
            
            
            
            
            
            
            
            (1,254,090
            )Exercise
                of stock options
            
            
            112,932
            
            
            112,932
            
            
            1,164,478
            
            
            
            
            
            
            
            
            1,277,410Dividend
                reinvestment plan
            
            
            9,115
            
            
            9,115
            
            
            149,794
            
            
            
            
            
            
            
            
            158,909**Balance
                December 31, 2006**
            
            
            3,264,608
            
            $
            3,264,608
            
            $
            49,695,346
            
            $
            12,033,065
            
            $
            (1,785,368
            )
            $
            63,207,651





**See
      Notes to Consolidated Financial Statements**





45
 *Table
            of Contents*





**FIRST
      COMMUNITY CORPORATION**


**Consolidated
      Statements of Cash Flows**





Year
                Ended December 31,2006
            
            2005
            
            2004Cash
                flows from operating activities:Net
                income
            
            $
            3,501,199
            
            $
            3,092,671
            
            $
            2,184,985Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
            
            
            1,000,804
            
            
            926,776
            
            
            761,277Premium
                amortization (Discount accretion)
            
            
            (457,553
            )
            
            (345,763
            )
            
            (93,782
            )Provision
                for loan losses
            
            
            528,124
            
            
            328,679
            
            
            245,000Amortization
                of intangibles
            
            
            636,529
            
            
            594,741
            
            
            279,685Gain
                on sale of property and equipment
            
            
            -
            
            
            (29,983
            )
            
            (21,707
            )(Gain)
                loss on sale of securities
            
            
            68,962
            
            
            (188,418
            )
            
            (11,381
            )Gain
                on early extinguishment of debt
            
            
            (159,416
            )
            
            (124,436
            )
            
            -(Increase)
                decrease in other assets
            
            
            270,084
            
            
            (693,657
            )
            
            (425,079
            )Tax
                benefit from exercise of stock options
            
            
            299,715
            
            
            -
            
            
            51,621Increase
                in accounts payable
            
            
            938,634
            
            
            591,691
            
            
            14,681Net
                cash provided in operating activities
            
            
            6,627,082
            
            
            4,152,301
            
            
            2,985,300Cash
                flows form investing activities:Proceeds
                from sale of securities available-for-sale
            
            
            21,241,484
            
            
            39,071,729
            
            
            56,586,668Purchase
                of investment securities available-for-sale
            
            
            (34,671,451
            )
            
            (51,368,761
            )
            
            (108,265,814
            )Maturity/call
                of investment securities available-for-sale
            
            
            27,050,486
            
            
            27,267,768
            
            
            36,424,205Purchase
                of investment securities held-to-maturity
            
            
            (800,000
            )
            
            (50,000
            )
            
            (1,052,057
            )Maturity/call
                of investment securities held-to-maturity
            
            
            -
            
            
            325,000
            
            
            -Increase
                in loans
            
            
            (27,179,342
            )
            
            (35,288,308
            )
            
            (14,813,202
            )Net
                cash disbursed in business combination
            
            
            (1,229,598
            )
            
            -
            
            
            (11,131,142
            )Proceeds
                from sale of property and equipment
            
            
            -
            
            
            401,733
            
            
            23,800Purchase
                of bank owned life insurance
            
            
            (3,500,000
            )
            
            -
            
            
            -Purchase
                of property and equipment
            
            
            (3,366,410
            )
            
            (2,595,715
            )
            
            (2,427,322
            )Net
                cash used in investing activities
            
            
            (22,454,831
            )
            
            (22,236,554
            )
            
            (44,654,864
            )Cash
                flows from financing activities:Increase
                in deposit accounts
            
            
            38,035,208
            
            
            12,539,867
            
            
            16,996,662Proceeds
                from issuance of long term debt
            
            
            -
            
            
            -
            
            
            15,000,000Advances
                from the Federal Home Loan Bank
            
            
            9,000,000
            
            
            19,580,000
            
            
            -Repayment
                of advances from the Federal Home Loan Bank
            
            
            (18,078,829
            )
            
            (26,752,661
            )
            
            (1,000,000
            )Increase
                (decrease) in securities sold under agreements to
                repurchase
            
            
            2,668,250
            
            
            6,256,500
            
            
            3,608,900Increase
                (decrease) in other borrowings
            
            
            (20,347
            )
            
            (15,360
            )
            
            24,517Proceeds
                from exercise of stock options
            
            
            977,695
            
            
            452,659
            
            
            169,153Dividend
                reinvestment plan
            
            
            158,909
            
            
            127,181
            
            
            94,656Purchase
                of common stock
            
            
            (1,254,090
            )
            
            -
            
            
            -Cash
                dividends paid
            
            
            (708,222
            )
            
            (565,432
            )
            
            (381,878
            )Net
                cash provided from financing activities
            
            
            30,778,574
            
            
            11,622,754
            
            
            34,512,010Net
                increase (decrease) in cash and cash equivalents
            
            
            14,950,825
            
            
            (6,461,499
            )
            
            (7,157,554
            )Cash
                and cash equivalents at beginning of period
            
            
            12,864,146
            
            
            19,325,645
            
            
            26,483,199Cash
                and cash equivalents at end of period
            
            $
            27,814,971
            
            $
            12,864,146
            
            $
            19,325,645Supplemental
                disclosure:Cash
                paid during the period for:Interest
            
            $
            11,702,671
            
            $
            7,941,548
            
            $
            3,139,817Taxes
            
            $
            472,647
            
            $
            445,000
            
            $
            907,268Non-cash
                investing and financing activities:Unrealized
                (loss) gain on securities available-for-sale
            
            $
            2,918,777
            
            $
            (4,312,281
            )
            $
            (1,554,287
            )Transfer
                of loans to foreclosed property
            
            $
            50,000
            
            $
            721,052
            
            $
            119,916Common
                stock issued in acquisition
            
            $
            7,576,893
            
            $
            -
            
            $
            29,845,623





**See
      Notes to Consolidated Financial Statements**





46
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            of Contents*





**FIRST
      COMMUNITY CORPORATION**


**Notes
      to Consolidated Financial Statements**




Note
      1 -
      ORGANIZATION AND BASIS OF PRESENTATION




The
      consolidated financial statements include the accounts of First Community
      Corporation (the company) and its wholly owned subsidiary First Community Bank,
      N.A (the bank). The Company owns all of the common stock of FCC Capital Trust
      I.
      All material intercompany transactions are eliminated in consolidation. The
      Company was organized on November 2, 1994, as a South Carolina corporation,
      and was formed to become a bank holding company. The bank opened for business
      on
      August 17, 1995. FCC Capital Trust I is a special purpose subsidiary
      organized for the sole purpose of issuing trust preferred
      securities.




Note
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Use
      of
      Estimates


The
      financial statements are prepared in accordance with accounting principles
      generally accepted in the United States of America. These principles require
      management to make estimates and assumptions that affect the amounts reported
      in
      the financial statements and accompanying notes. Actual results could differ
      from those estimates.




Material
      estimates that are particularly susceptible to significant change relate to
      the
      determination of the reserve for loan losses. The estimation process includes
      management’s judgment as to future losses on existing loans based on an internal
      review of the loan portfolio, including an analysis of the borrower’s current
      financial position, the consideration of current and anticipated economic
      conditions and the effect on specific borrowers. In determining the
      collectibility of loans management also considers the fair value of underlying
      collateral. Various regulatory agencies, as an integral part of their
      examination process, review the Company’s allowance for loan losses. Such
      agencies may require the company to recognize additions to the allowance based
      on their judgments about information available to them at the time of their
      examination. Because of these factors it is possible that the allowance for
      loan
      losses could change materially.




Cash
      and Cash Equivalents


Cash
      and
      cash equivalents consist of cash on hand, due from banks, federal funds sold
      and
      securities purchased under agreements to resell. Generally federal funds are
      sold for a one-day period and securities purchased under agreements to resell
      mature in less than 90 days.





Investment
      Securities


Investment
      securities are classified as either held-to-maturity or available-for-sale.
      In
      determining such classification, securities that the company has the positive
      intent and ability to hold to maturity are classified as held-to maturity and
      are carried at amortized cost. All other securities are classified as
      available-for-sale and carried at estimated fair values with unrealized gains
      and losses included in shareholders’ equity on an after tax basis.




Gains
      and
      losses on the sale of available-for-sale securities are determined using the
      specific identification method. Declines in the fair value of individual
      held-to-maturity and available-for-sale securities below their cost that are
      judged to be other than temporary are written down to fair value and charged
      to
      income in the Consolidated Statement of Income.




Premiums
      and discounts are recognized in interest income using the interest method over
      the period to maturity.




Loans
      and Allowance for Loan Losses


Loans
      receivable that management has the intent and ability to hold for the
      foreseeable future or until maturity or pay-off are reported at their
      outstanding principal balance adjusted for any charge-offs, the allowance for
      loan losses, and any deferred fees or costs on originated loans. Interest is
      recognized over the term of the loan based on the loan balance outstanding.
      Fees
      charged for originating loans, if any, are deferred and offset by the deferral
      of certain direct expenses associated with loans originated. The net deferred
      fees are recognized as yield adjustments by applying the interest
      method.




The
      allowance for loan losses is maintained at a level believed to be adequate
      by
      management to absorb potential losses in the loan portfolio. Management’s
      determination of the adequacy of the allowance is based on an evaluation of
      the
      portfolio, past loss experience, economic conditions and volume, growth and
      composition of the portfolio.





47
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            of Contents*





Note
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - *Continued*





The
      company considers a loan to be impaired when, based upon current information
      and
      events, it is believed that the company will be unable to collect all amounts
      due according to the contractual terms of the loan agreement. Loans that are
      considered impaired are accounted for at fair value. The accrual of interest
      on
      impaired loans is discontinued when, in management’s opinion, the borrower may
      be unable to meet payments as they become due, generally when a loan becomes
      90
      days past due. When interest accrual is discontinued, all unpaid accrued
      interest is reversed. Interest income is subsequently recognized only to the
      extent cash payments are received first to principal and then to interest
      income.





Property
      and Equipment


Property
      and equipment are stated at cost less accumulated depreciation. Depreciation
      is
      computed using the straight-line method over the asset’s estimated useful life.
      Estimated lives range up to 39 years for buildings and up to 10 years for
      furniture, fixtures and equipment.





Goodwill
      and Other Intangible Assets


Goodwill
      represents the cost in excess of fair value of net assets acquired (including
      identifiable intangibles) in purchase transactions. Other intangible assets
      represent premiums paid for acquisitions of core deposits (core deposit
      intangibles). Core deposit intangibles are being amortized on a straight-line
      basis over seven years. Goodwill and identifiable intangible assets are reviewed
      for impairment annually or whenever events or changes in circumstances indicate
      the carrying amount of an asset may not be recoverable. Recoverability of
      identifiable intangible assets is measured by a comparison of the carrying
      amount of the asset to future undiscounted cash flows expected to be generated
      by the asset. If such assets are considered impaired , the amount of impairment
      is measured by the amount by which the carrying value of the asset exceeds
      the
      fair value of the asset based on the discounted expected future cash flows.
      The
      test for goodwill impairment is based on an identified reporting unit and
      the determination of the carrying value of the assets and liabilities, including
      the existing goodwill and intangible assets. The carrying value is compared
      to
      the fair value to determine whether impairment exists. No impairment losses
      have
      been recorded as a result of the company’s analyses during the years ended
      December 31, 2006, 2005 and 2004.





Other
      Real Estate Owned


Other
      real estate owned includes real estate acquired through foreclosure. Other
      real
      estate owned is carried at the lower of cost (principal balance at date of
      foreclosure) or fair value minus estimated cost to sell. Any write-downs at
      the
      date of foreclosure are charged to the allowance for loan losses. Expenses
      to
      maintain such assets, subsequent changes in the valuation allowance, and gains
      or losses on disposal are included in other expenses. Other real estate owned
      is
      included in Other assets on the consolidated balance sheet.





Comprehensive
      Income


The
      Company reports comprehensive income in accordance with SFAS 130, “Reporting
      Comprehensive Income.” SFAS 130 requires that all items that are required to be
      reported under accounting standards as comprehensive income be reported in
      a
      financial statement that is displayed with the same prominence as other
      financial statements. The disclosures requirements have been included in the
      Company’s consolidated statements of shareholders’ equity and comprehensive
      income (loss).





Mortgage
      Origination Fees


Mortgage
      origination fees relate to activities comprised of accepting residential
      mortgage applications, qualifying borrowers to standards established by
      investors and selling the mortgage loans to the investors under pre-existing
      commitments. The loans are funded by the investor at closing and the related
      fees received by the Company for these services are recognized at the time
      the
      loan is closed.




Advertising
      Expense


Advertising
      and public relations costs are generally expensed as incurred. External costs
      incurred in producing media advertising are expensed the first time the
      advertising takes place. External costs relating to direct mailing costs are
      expensed in the period in which the direct mailings are sent.




Income
      Taxes


A
      deferred income tax liability or asset is recognized for the estimated future
      effects attributable to differences in the tax bases of assets or liabilities
      and their reported amounts in the financial statements as well as operating
      loss
      and tax credit carry forwards. The deferred tax asset or liability is measured
      using the enacted tax rate expected to apply to taxable income in the period
      in
      which the deferred tax asset or liability is expected to be
      realized.





48
 *Table
            of Contents*





Note
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - *Continued*





Stock
      Based Compensation Cost


In
      December 2004, the FASB issued SFAS No. 123 (revised), "Share-Based Payment"
      ("SFAS 123(R)"). SFAS 123(R) replaces SFAS No. 123, "Accounting for Stock-Based
      Compensation" ("SFAS 123"), and supersedes APB Opinion No. 25, "Accounting
      for
      Stock Issued to Employees" ("APB 25"). SFAS 123(R) requires compensation costs
      related to share-based payment transactions to be recognized in the financial
      statements over the period that an employee provides service in exchange for
      the
      award. Public companies are required to adopt, and the Company has adopted
      effective January 1, 2006, the new standard using a modified prospective method.
      Under the modified prospective method, companies are allowed to record
      compensation cost for new and modified awards over the related vesting period
      of
      such awards prospectively and record compensation cost prospectively on the
      nonvested portion, at the date of adoption, of previously issued and outstanding
      awards over the remaining vesting period of such awards. No change to prior
      periods presented is permitted under the modified prospective
      method.





At
      December 31, 2006, the Company had a stock-based payment plan for directors,
      officers and other key employees, which is described below. Prior to January
      1,
      2006, the Company, as permitted under SFAS 123, applied the intrinsic value
      method under APB 25, and related interpretations in accounting for its
      stock-based compensation plan.





On
      January 1, 2006, the Company adopted the fair value recognition provisions
      of Financial
      Accounting Standards Board (“FASB”) SFAS No. 123 (R),
      “Accounting for Stock-Based Compensation”, to account for compensation costs
      under its stock option plan. 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 and warrants because the option and warrant exercise price in
      its
      plan equaled 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(R), 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.





The
      following summarizes required pro-forma data in accordance with SFAS 123 prior
      to the company’s adoption of SFAS 123R effective January 1, 2006. The pro-forma
      data includes the effects of the acceleration for the year ended December 31,
      2005:




December
                  31,2005
              
              2004Net
                  income, pro-forma
              
              $
              2,792,578
              
              $
              2,179,236Basic
                  earnings/loss per common share, pro-forma
              
              $
              0.99
              
              $
              1.15Diluted
                  earnings loss per common share, pro-forma
              
              $
              0.94
              
              $
              1.09




The
      fair
      value of each grant is estimated on the date of grant using the Black-Sholes
      option pricing model.  The weighted average fair value of options granted,
      excluding those issued in the Dutch Fork and DeKalb acquisitions, during 2005
      and 2004 was $6.87, and $7.15.  Those granted in conjunction with the
      acquisition in the 2004 acquisition of DutchFork had an average fair value
      of
      $14.32. The options granted in conjunction with the 2006 acquisition of DeKalb
      had an average fair value of $8.21. In calculating the pro-forma disclosures,
      the fair value of options granted is estimated as of the date of grant using
      the
      Black-Sholes option pricing model with the following weighted-average
      assumptions:




2005
            
            2004Dividend
                yield
            
            
            1.0
            %
            
            1.0
            %Expected
                volatility
            
            
            24.3
            %
            
            24.8
            %Risk-free
                interest rate
            
            
            4.3
            %
            
            4.3
            %Expected
                life
            
            
            8
                Years
            
            
            7
                Years





49
 *Table
            of Contents*





Note
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - *Continued*





Effective
      December 31, 2005, upon recommendation of the Human Resource Committee of the
      Board of Directors of First Community Corporation, the Company's Board of
      Directors accelerated the vesting of, and vested, all outstanding options to
      acquire the Company's common stock granted in 2003, 2004 and 2005, totaling
      approximately 67,000 options, that would otherwise vest at various times through
      the end of fiscal 2011 (“Acceleration”). All other terms and conditions of such
      options remained unchanged as a result of the Acceleration. See note 16 for
      additional information relative to stock based compensation.





Earnings
      Per Share


Basic
      earnings per share (“EPS”) excludes dilution and is computed by dividing income
      available to common shareholders by the weighted-average number of common shares
      outstanding for the period. Diluted EPS is computed by dividing net income
      by
      the weighted number of average shares of common stock and common stock
      equivalents. Common stock equivalents consist of stock options and are computed
      using the treasury stock method.





Segment
      Information


Statement
      of Financial Accounting Standards (SFAS) No. 131 “Disclosures about Segments of
      an Enterprise and Related Information” requires selected segment information of
      operating segments based on a management approach. The company operates as
      one
      business segment.




Recently
      Issued Accounting Standards


The
      following is a summary of recent authoritative pronouncements that could impact
      the accounting, reporting, and / or disclosure of financial information by
      the
      Company. In February 2006, the Financial Accounting Standards Board (“FASB”)
      issued Statement of Financial Accounting (“SFAS”) No. 155, “Accounting for
      Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and
      140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments
      and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities.” This
      Statement resolves issues addressed in SFAS No. 133 Implementation Issue No.
      D1,
“Application of Statement 133 to Beneficial Interests in Securitized Financial
      Assets.” FAS
      155
      permits fair value re-measurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation,
      clarifies which interest only-strips and principal-only strips are not subject
      to the requirements of Statement 133, establishes a requirement to evaluate
      interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives, and amends Statement 140 to eliminate the prohibition on a
      qualifying special purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. SFAS
      No.
      155 is effective for all financial instruments acquired or issued after the
      beginning of an entity’s first fiscal year that begins after September 15, 2006.
      The Company does not believe that the adoption of SFAS No. 155 will have a
      material impact on its financial position, results of operations and cash flows.





In
      March
      2006, the FASB issued SFAS No. 156, “ Accounting
      for Servicing of Financial Assets—an amendment of FASB Statement No. 140.” This
      Statement amends FASB No. 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities,” with respect to the
      accounting for separately recognized servicing assets and servicing liabilities.
      SFAS No. 156 r equires
      an entity to recognize a servicing asset or servicing liability each time it
      undertakes an obligation to service a financial asset by entering into a
      servicing contract; requires all separately recognized servicing assets and
      servicing liabilities to be initially measured at fair value, if practicable;
      permits an entity to choose its subsequent measurement methods for each class
      of
      separately recognized servicing assets and servicing liabilities; at its initial
      adoption, permits a one-time reclassification of available-for-sale securities
      to trading securities by entities with recognized servicing rights, without
      calling into question the treatment of other available-for-sale securities
      under
      Statement 115, provided that the available-for-sale securities are identified
      in
      some manner as offsetting the entity’s exposure to changes in fair value of
      servicing assets or servicing liabilities that a servicer elects to subsequently
      measure at fair value; and requires separate presentation of servicing assets
      and servicing liabilities subsequently measured at fair value in the statement
      of financial position and additional disclosures for all separately recognized
      servicing assets and servicing liabilities. An
      entity should adopt SFAS No. 156 as of the beginning of its first fiscal year
      that begins after September 15, 2006. The Company does not believe the adoption
      of SFAS No. 156 will have a material impact on its financial position, results
      of operations and cash flows.





In
      July
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in enterprises’ financial statements in accordance with
      FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a
      recognition threshold and measurement attributable for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosures and
      transitions. FIN 48 is effective for fiscal years beginning after December 15,
      2006. The Company is currently evaluating the effects of FIN 48 and does not
      believe that it will have a material impact on its financial position, results
      of operations and cash flows.





50
 *Table
            of Contents*





Note
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - *Continued*





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
      157 defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. This standard does not require any new fair value
      measurements, but rather eliminates inconsistencies found in various prior
      pronouncements. SFAS 157 is effective for the Company on January 1, 2008 and
      is
      not expected to have a significant impact on the Company’s financial
      statements.





In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans” ** (“SFAS
      158”), which amends SFAS 87 and SFAS 106 to require recognition of the over
      funded or under funded status of pension and other postretirement benefit plans
      on the balance sheet. Under SFAS 158, gains and losses, prior service costs
      and
      credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that
      have not yet been recognized through net periodic benefit cost will be
      recognized in accumulated other comprehensive income, net of tax effects, until
      they are amortized as a component of net periodic cost. The measurement date
—
the date at which the benefit obligation and plan assets are measured — is
      required to be the company’s fiscal year end. SFAS 158 is effective for publicly
      held companies for fiscal years ending after December 15, 2006, except for
      the
      measurement date provisions, which are effective for fiscal years ending after
      December 15, 2008. The Company does not have a defined benefit pension plan.
      Therefore, SFAS 158 will not have an effect on the Company’s financial
      conditions or results of operations.





In
      September, 2006, The FASB ratified the consensuses reached by the FASB’s
      Emerging Issues Task Force (“EITF”) relating to EITF 06-4 “Accounting for the
      Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements” .
      EITF
      06-4 addresses employer
      accounting for endorsement split-dollar life insurance arrangements that provide
      a benefit to an employee that extends to postretirement periods should recognize
      a liability for future benefits in accordance with SFAS No. 106, “ Employers'
      Accounting for Postretirement Benefits Other Than Pensions” *,* or
      Accounting Principles Board (“APB”) Opinion No. 12, “ Omnibus
      Opinion—1967” *.* EITF
      06-4
      is effective for fiscal years beginning after December 15, 2006. Entities should
      recognize the effects of applying this Issue through either (a) a change in
      accounting principle through a cumulative-effect adjustment to retained earnings
      or to other components of equity or net assets in the statement of financial
      position as of the beginning of the year of adoption or (b) a change in
      accounting principle through retrospective application to all prior periods. The
      Company does not believe the adoption of EITF 06-4 will have a material
      impact ** on
      its
      financial position, results of operations and cash flows.





In
      September 2006, the FASB ratified the consensus reached related to EITF
      06-5, ** “Accounting
      for Purchases of Life Insurance—Determining the Amount That Could Be Realized in
      Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases
      of
      Life Insurance.”  EITF 06-5 states that a policyholder should consider any
      additional amounts included in the contractual terms of the insurance policy
      other than the cash surrender value in determining the amount that could be
      realized under the insurance contract.  EITF 06-5 also states that a
      policyholder should determine the amount that could be realized under the life
      insurance contract assuming the surrender of an individual-life by
      individual-life policy (or certificate by certificate in a group policy). EITF
      06-5 is effective for fiscal years beginning after December 15, 2006. The
      Company does not believe the adoption of EITF 06-5 will have a material impact
      on its financial position, results of operations and cash flows. ****





In
      September 2006, the SEC issued Staff Accounting Bulleting No. 108 (“SAB 108”).
      SAB 108 provides interpretive guidance on how the effects of the carryover
      or
      reversal of prior year misstatements should be considered in quantifying a
      potential current year misstatement. Prior to SAB 108, Companies might evaluate
      the materiality of financial statement misstatements using either the income
      statement or balance sheet approach, with the income statement approach focusing
      on new misstatements added in the current year, and the balance sheet approach
      focusing on the cumulative amount of misstatement present in a company’s balance
      sheet. Misstatements that would be material under one approach could be viewed
      as immaterial under another approach, and not be corrected. SAB 108 now requires
      that companies view financial statement misstatements as material if they are
      material according to either the income statement or balance sheet approach.
      The
      Company has analyzed SAB 108 and determined that upon adoption it will have
      no
      impact on the reported results of operations or financial
      conditions.





51
 *Table
            of Contents*





Note
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - *Continued*





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities - Including an amendment of FASB
      Statement No. 115.”  This statement permits, but does not require, entities
      to measure many financial instruments at fair value.  The objective is to
      provide entities with an opportunity to mitigate volatility in reported earnings
      caused by measuring related assets and liabilities differently without having
      to
      apply complex hedge accounting provisions.  Entities electing this option
      will apply it when the entity first recognizes an eligible instrument and will
      report unrealized gains and losses on such instruments in current earnings.
      This
      statement (1) applies to all entities, (2) specifies certain election dates,
      (3)
      can be applied on an instrument-by-instrument basis with some exceptions, (4)
      is
      irrevocable, and (5) applies only to entire instruments.  One exception is
      demand deposit liabilities which are explicitly excluded as qualifying for
      fair
      value.  With respect to SFAS 115, available-for-sale and held-to-maturity
      securities at the effective date are eligible for the fair value option at
      that
      date.  If the fair value option is elected for those securities at the
      effective date, cumulative unrealized gains and losses at that date shall be
      included in the cumulative-effect adjustment and thereafter, such securities
      will be accounted for as trading securities.  SFAS 159 is effective for the
      Company on January 1, 2008.  Earlier adoption is permitted in 2007 if the
      Company also elects to apply the provisions of SFAS 157, “Fair Value
      Measurement.”  The Company is currently analyzing the fair value option
      provided under SFAS 159.





Other
      accounting standards that have been issued or proposed by the FASB or other
      standards-setting bodies are not expected to have a material impact on the
      Company’s financial position, results of operations and cash flows.





Risk
      and Uncertainties


In
      the
      normal course of business, the company encounters two significant types of
      risks: economic and regulatory. There are three main components of economic
      risk: interest rate risk, credit risk and market risk. The Company is subject
      to
      interest rate risk to the degree that its interest-bearing liabilities mature
      or
      reprice at different speeds, or on a different basis, than its interest-earning
      assets. Credit risk is the risk of default on the Company’s loan portfolio that
      results from borrower’s inability or unwillingness to make contractually
      required payments. Market risk reflects changes in the value of collateral
      underlying loans receivable and the valuation of real estate held by the
      Company.





The
      Company is subject to regulations of various governmental agencies. These
      regulations can and do change significantly from period to period. The Company
      also undergoes periodic examinations by the regulatory agencies, which may
      subject it to further changes with respect to asset valuations, amounts of
      required loan loss allowances and operating restrictions from regulators’
judgments based on information available to them at the time of their
      examination.





Reclassifications


Certain
      captions and amounts in the 2005 and 2004 consolidated financial statements
      were
      reclassified to conform with the 2006 presentation.





52
 *Table
            of Contents*





Note
      3 -
      BUSINESS COMBINATION




On
      June
      9, 2006, the Company acquired 100% of the outstanding shares of DeKalb
      Bancshares, Inc (DeKalb), the parent company of The Bank of Camden. In addition,
      The Bank of Camden was merged with and into the Company's wholly owned banking
      subsidiary, First Community Bank, NA, and the Camden office is now operated
      as a
      branch of First Community Bank. The merger enabled First Community to increase
      its market share in the Midlands of South Carolina in a community contiguous
      to
      its existing markets. The aggregate acquisition cost was $10,223,000, including
      $2,369,000 of cash, 364,034 shares of the Company’s common stock valued at
      $7,577,000, stock options valued at $585,000 and direct acquisition costs of
      $277,000. The value of the 364,034 shares of common stock issued at $19.22
      per
      share was determined based on the average closing price of the Company’s common
      shares over the two-day period before and after December 8, 2005, the date
      the
      terms were agreed to and announced.




The
      primary intangible assets acquired in conjunction with the purchase of DeKalb
      are core deposit intangible assets with an estimated useful life of
      approximately seven years and goodwill. The transaction was a tax-free
      reorganization for federal income tax purposes and intangible assets are not
      deductible in determining taxable income.




The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed June 9, 2006. We obtained third party evaluations of certain
      intangible assets.




*(Dollars
                in thousands)*Cash
                and cash equivalents
            
            $
            1,015Federal
                funds sold
            
            
            402Investment
                securities
            
            
            10,152Loans,
                net of allowance
            
            
            26,315Premises
                and equipment
            
            
            2,613Core
                deposit intangible asset
            
            
            522Goodwill
            
            
            4,903Other
                assets
            
            
            524Total
                assets acquired
            
            
            46,446Deposits
            
            
            27,302Advances
                from the Federal Home Loan Bank
            
            
            4,939Other
                borrowed money
            
            
            2,977Other
                liabilities
            
            
            1,005Total
                liabilities assumed
            
            
            36,223Net
                assets acquired
            
            $
            10,223





The
      Company acquired a $320,000 allowance for loan losses as a result of the
      acquisition of DeKalb. Statement
      of Position No. 03-3 (SOP No. 03-3), “Accounting for Certain Loans or
      Debt Securities Acquired in a Transfer addresses accounting for differences
      between contractual cash flows and cash flows expected to be collected from
      an
      investor’s initial investment in loans or debt securities (loans) acquired in a
      transfer or business combination if those differences are attributable, at
      least
      in part, to credit quality. SOP No. 03-3 prohibits the carry over or creation
      of
      valuation allowances in the initial accounting of all loans acquired that are
      within the scope of the SOP. There were no loans acquired in the acquisition
      of
      DeKalb that were within the scope of SOP No. 03-3.





53
 *Table
            of Contents*





Note
      3 -
      BUSINESS COMBINATION *-
      Continued*




The
      following unaudited presentation reflects selected information from the
      "Consolidated Income Statements" on a Pro Forma basis as if the purchase
      transaction had been completed as of the beginning of the years
      presented:




For
                  Year Ending December 31,2006
              
              2005Total
                  revenues
              
              $
              31,645,855
              
              $
              27,470,457Income
                  before cumulative effect of change in accounting principle
              
              $
              3,584,026
              
              $
              3,198,382Net
                  Income
              
              $
              3,584,026
              
              $
              3,198,382Basic
                  EPS
              
              $
              1.10
              
              $
              1.00Diluted
                  EPS
              
              $
              1.08
              
              $
              0.96





Prior
      to
      the consummation of the merger DeKalb Bankshares had significant direct merger
      related expenses. These expenses of approximately $880,000 have been excluded
      in
      the pro-forma results for the fiscal year ended in 2006.





On
      October 1, 2004, First Community acquired DutchFork Bancshares, the holding
      company for Newberry Federal Savings Bank located in Newberry, South
      Carolina.  The merger enabled First Community to increase its market share
      in the Midlands of South Carolina. The total purchase price was $49,273,493,
      including $18,342,357 in cash, 1,169,898 shares of our common stock valued
      at
      $27,258,623, stock options valued at $2,587,000 and direct acquisition cost
      of
      $1,085,513.  The value of the common stock issued was determined based on
      the average closing price over the six day period beginning two days before
      and
      ending three days after the terms of the acquisition were agreed to and
      announced.  The intangible assets acquired in conjunction with the purchase
      are core deposit intangible and goodwill.  The core deposit intangible is
      being written off over a period of seven years using the straight-line
      method.  The transaction was a tax-free reorganization for federal income
      tax purposes and intangible assets are not deductible for tax
      purposes.





Note
      4 -
      INVESTMENT SECURITIES





The
      amortized cost and estimated fair values of investment securities are summarized
      below:





HELD-TO-MATURITY:




Amortized
                  Cost
                
                Gross
                  Unrealized
                  Gains
                
                Gross
                  Unrealized
                  Losses
                
                Fair
                    ValueDecember
                    31, 2006:State
                    and local government
                
                $
                6,428,796
                
                $
                39,449
                
                $
                19,097
                
                $
                6,449,148Other
                
                
                60,000
                
                
                —
                
                
                —
                
                
                60,000$
                6,488,796
                
                $
                39,449
                
                $
                19,097
                
                $
                6,509,148




December
                  31, 2005:State
                  and local government
              
              $
              5,653,830
              
              $
              58,316
              
              $
              25,698
              
              $
              5,686,448Other
              
              
              60,000
              
              
              —
              
              
              —
              
              
              60,000$
              5,713,830
              
              $
              58,316
              
              $
              25,698
              
              $
              5,746,448





54
 *Table
            of Contents*





Note
      4 -
      INVESTMENT SECURITIES *-
      Continued*





AVAILABLE-FOR-SALE:




****
            
            Amortized
              Cost
            
            Gross
              Unrealized
              Gains
            
            Gross
              Unrealized
              Losses
            
            Fair
                ValueDecember
                31, 2006:US
                Treasury securities
            
            $
            994,534
            
            $
            10,306
            
            $
            —
            
            $
            1,004,840Government
                sponsored enterprises
            
            
            57,420,136
            
            
            50,285
            
            
            810,126
            
            
            56,660,295Mortgage-backed
                securities
            
            
            80,234,695
            
            
            247,650
            
            
            1,056,242
            
            
            79,426,103State
                and local government
            
            
            4,438,933
            
            
            44,820
            
            
            2,644
            
            
            4,481,109Equity
                and other securities
            
            
            29,679,914
            
            
            12,046
            
            
            1,229,829
            
            
            28,462,131$
            172,768,212
            
            $
            365,107
            
            $
            3,098,841
            
            $
            170,034,478




December
                31, 2005:US
                Treasury securities
            
            $
            999,848
            
            $
            —
            
            $
            7,973
            
            $
            991,875Government
                sponsored enterprises
            
            
            58,674,004
            
            
            671
            
            
            1,195,657
            
            
            57,479,018Mortgage-backed
                securities
            
            
            70,967,405
            
            
            61,117
            
            
            1,234,803
            
            
            69,793,719State
                and local government
            
            
            249,359
            
            
            3,881
            
            
            ---
            
            
            253,240Equity
                and other securities
            
            
            45,419,667
            
            
            19,519
            
            
            3,299,268
            
            
            42,139,918$
            176,310,283
            
            $
            85,188
            
            $
            5,737,701
            
            $
            170,657,770




At
      December 31, 2006, equity and other investment securities available for sale
      included the following recorded at fair value: Federal Home Loan Mortgage
      Corporation preferred stock of $14,005,100, corporate bonds of $8,791,583,
      Federal Home Loan Bank Stock of $2,349,600, Federal Reserve Bank Stock of
      $1,858,194, mutual funds of $838,846, community bank stocks of $509,288 and
      other common stock at $109,520. At December 31, 2005, equity and other
      investments in securities available for sale included the following recorded
      at
      fair value: Federal Home Loan Mortgage Corporation preferred stock of
      $16,125,200, Federal National Mortgage Association preferred stock of
      $12,088,560, corporate bonds of $8,607,057, Federal Home Loan Bank Stock of
      $2,351,200, Federal Reserve Bank Stock of $1,624,500, mutual funds of $1,233,452
      and community bank stocks of $110,000. Federal Home Loan Bank and Federal
      Reserve Bank Stock are carried at cost since there is no ready
      market.





For
      the
      year ended December 31, 2006, proceeds from the sales of securities
      available-for-sale amounted to $21,241,484. Gross realized gains amounted to
      $58,505 and gross realized losses amounted to $127,467 in 2006. For the year
      ended December 31, 2005, proceeds from the sale of securities available-for-sale
      amounted to $39,071,729. Gross realized gain amounted to $294,661 and gross
      realized losses amounted to $106,243 in 2005  For the year ended December
      31, 2004, proceeds from the sale of securities available-for-sale amounted
      to
      $56,586,668. Gross realized gain amounted to $16,119 and gross realized losses
      amounted to $4,738 in 2004. The tax provision (benefit) applicable to the net
      realized gain (loss) was approximately ($20,200), $65,000 and $3,400 for 2006,
      2005 and 2004, respectively.




The
      amortized cost and fair value of investment securities at December 31, 2006,
      by
      contractual maturity, follow. Expected maturities differ from contractual
      maturities because borrowers may have the right to call or prepay the
      obligations with or without prepayment penalties.




Held-to-maturity
                
                Available-for-saleAmortized
                  Cost
                
                Fair
                  Value
                
                Amortized
                  Cost
                
                Fair
                  ValueDue
                    in one year or less
                
                $
                430,395
                
                $
                430,779
                
                $
                28,770,603
                
                $
                28,526,327Due
                    after one year through five years
                
                
                4,246,252
                
                
                4,259,417
                
                
                75,163,715
                
                
                73,761,597Due
                    after five years through ten years
                
                
                1,812,149
                
                
                1,818,952
                
                
                28,515,992
                
                
                27,829,215Due
                    after ten years
                
                
                ---
                
                
                ---
                
                
                40,317,902
                
                
                39,917,339$
                6,488,796
                
                $
                6,509,148
                
                $
                172,768,212
                
                $
                170,034,478


55
 *Table
            of Contents*





Note
      4 -
      INVESTMENT SECURITIES *-
      Continued*





Securities
      with an amortized cost of $52,857,719 and fair value of $51,778,371 at December
      31, 2006, were pledged to secure FHLB Advances, public deposits, demand notes
      due the U.S. Treasury and securities sold under agreements to
      repurchase.





The
      following table shows gross unrealized losses and fair values, aggregated by
      investment category and length of time that individual securities have been
      in a
      continuous loss position at December 31, 2006 and 2005.




December
                  31, 2006
              
              Less
                  than 12 months
              
              12
                  months or more
              
              TotalFair
                  Value
              
              Unrealized
                Loss
              
              Fair
                  Value
              
              Unrealized
                Loss
              
              Fair
                  Value
              
              Unrealized
                LossAvailable-for-sale
                  securities:US
                  Treasury and Government sponsored enterprises
              
              $
              7,523,200
              
              $
              49,994
              
              $
              41,658,875
              
              $
              760,132
              
              $
              49,182,075
              
              $
              810,126Federal
                  agency mortgage-backed securities
              
              
              2,246,558
              
              
              13,318
              
              
              26,276,885
              
              
              688,067
              
              
              28,523,443
              
              
              701,385Non-agency
                  mortgage-backed securities
              
              
              4,421,937
              
              
              41,658
              
              
              17,480,973
              
              
              313,199
              
              
              21,902,910
              
              
              354,857FHLMC
                  preferred stock
              
              
              ---
              
              
              ---
              
              
              14,005,100
              
              
              244,275
              
              
              14,005,100
              
              
              244,275Corporate
                  bonds
              
              
              3,949,171
              
              
              861,344
              
              
              1,402,698
              
              
              92,823
              
              
              5,351,869
              
              
              954,167State
                  and local government
              
              
              462,355
              
              
              2,644
              
              
              ---
              
              
              ---
              
              
              462,355
              
              
              2,644Other
              
              
              ---
              
              
              ---
              
              
              910,966
              
              
              31,387
              
              
              1,410,719
              
              
              34,03118,603,221
              
              
              968,958
              
              
              101,735,497
              
              
              2,129,883
              
              
              120,338,718
              
              
              3,098,841Held-to-maturity
                  securities:State
                  and local government
              
              
              630,319
              
              
              4,358
              
              
              1,244,491
              
              
              14,739
              
              
              1,874,810
              
              
              19,097Total
              
              $
              19,233,540
              
              $
              973,316
              
              
              102,979,988
              
              $
              2,144,622
              
              $
              120,213,528
              
              $
              3,117,938






December
                  31, 2005
              
              **Less
                  than 12 months**
              
              **12
                  months or more**
              
              **Total****Fair
                  Value**
              
              **Unrealized**
                **Loss**
              
              **Fair
                  Value**
              
              **Unrealized**
                **Loss**
              
              **Fair
                  Value**
              
              **Unrealized**
                **Loss**Available-for-sale
                  securities:US
                  Treasury and US Government agency securities
              
              $
              4,531,185
              
              $
              73,959
              
              $
              50,689,215
              
              $
              1,129,671
              
              $
              55,220,400
              
              $
              1,203,630Federal
                  agency mortgage-backed securities
              
              
              12,631,631
              
              
              272,280
              
              
              20,596,312
              
              
              562,265
              
              
              33,227,943
              
              
              834,545Non-agency
                  mortgage-backed securities
              
              
              11,748,240
              
              
              160,835
              
              
              10,332,955
              
              
              239,423
              
              
              22,081,195
              
              
              400,258FNMA
                  and FHLMC preferred stock
              
              
              ---
              
              
              ---
              
              
              28,213,718
              
              
              3,140,111
              
              
              28,213,718
              
              
              3,140,111Corporate
                  bonds
              
              
              499,500
              
              
              19
              
              
              1,872,218
              
              
              123,314
              
              
              2,371,718
              
              
              123,333Other
              
              
              1,233,452
              
              
              35,824
              
              
              ---
              
              
              ---
              
              
              1,233,452
              
              
              35,82430,644,008
              
              
              542,917
              
              
              111,704,418
              
              
              5,194,784
              
              
              142,348,426
              
              
              5,737,701Held-to-maturity
                  securities:State
                  and local government
              
              
              495,600
              
              
              4,400
              
              
              1,382,203
              
              
              21,298
              
              
              1,877,803
              
              
              25,698Total
              
              $
              31,139,608
              
              $
              547,317
              
              $
              113,086,621
              
              $
              5,216,082
              
              $
              144,226,229
              
              $
              5,763,399




U.S.
      Treasury and Government Sponsored Enterprises: **** The
      unrealized losses on the Company’s investments in U.S. Treasury obligations and
      Government sponsored enterprises were caused by interest rate increases. The
      contractual terms of those investments do not permit the issuer to settle the
      securities at a price less than the amortized cost of the investment. Because
      the Company has the ability and intent to hold those investments until a
      recovery of fair value, which may be maturity, the Company does not consider
      those investments to be other-than-temporarily impaired at December 31,
      2006.





56
 *Table
            of Contents*





Note
      4 -
      INVESTMENT SECURITIES *-
      Continued*





Federal
      Agency Mortgage-Backed Securities: **** The
      unrealized losses on the Company’s investment in federal agency mortgage-backed
      securities were caused by interest rate increases. The contractual cash flows
      of
      those investments are guaranteed by an agency of the U.S. government.
      Accordingly, it is expected that the securities would not be settled at a price
      less than the amortized cost of the Company’s investment. Because the decline in
      market value is attributable to changes in interest rates and not credit
      quality, and because the Company has the ability and intent to hold those
      investments until a recovery of fair value, which may be maturity, the Company
      does not consider those investments to be other-than-temporarily impaired at
      December 31,2006.





Non-agency
      Mortgage-Backed Securities: **** The
      unrealized losses on the Company’s investment in non-agency mortgage-backed
      securities were caused by interest rate increases. The contractual cash flows
      of
      these investments are current and none of the obligations are deemed to be
      invested in high-risk tranches. Accordingly, it is expected that the securities
      would not be settled at a price less than the amortized cost of the Company’s
      investment. Because the decline in market value is attributable to changes
      in
      interest rates and not credit quality, and because the Company has the ability
      and intent to hold those investments until a recovery of fair value, which
      may
      be maturity, the Company does not consider those investments to be
      other-than-temporarily impaired at December 31,2006.





FHLMC
      Preferred Stock: All of the agency preferred stock securities held by the
      Company are adjustable rate securities. The securities reprice over a five
      year
      period. The current cost basis of these securities are at a discount to the
      stated par value. The rating agencies have rated these securities Aa3 (Moody’s)
      AA- (S&P). Given the adjustable rate nature of the securities the dividend
      rates will adjust to a level more in line with current or future interest rates
      at a preset time in the future. Based on the evaluation by the Company and
      the
      ability and intent to hold these securities for a reasonable period of time
      sufficient for a recovery of fair value, the Company does not consider these
      securities to be other-than-temporarily impaired at December 31, 2006.





Corporate
      Bonds: The Company’s unrealized loss on investments in corporate bonds relates
      to bonds with five different issuers. The unrealized losses were caused by
      increases in interest rates. Each of these bonds is rated A or better (S&P)
      and there have been no downgrades during the last twelve months. The Company
      has
      the ability and intent to hold these investments until a recovery of fair value,
      which may be maturity. The Company does not consider those investments to be
      other-than-temporarily impaired at December 31, 2006.





State
      and
      Local Governments and Other: The unrealized losses on these investments are
      attributable to increases in interest rates, rather than credit quality. The
      Company has the ability and intent to hold these investments until a recovery
      of
      fair value and does not consider them to be other-than-temporarily impaired
      at
      December 31, 2006.





Note
      5 -
      LOANS





Loans
      summarized by category are as follows:




****
            
            December
                31,2006
            
            2005Commercial,
                financial and agricultural
            
            $
            23,595,321
            
            $
            22,090,454Real
                estate - construction
            
            
            31,473,364
            
            
            19,955,124Real
                estate - mortgageCommercial
            
            
            138,885,778
            
            
            112,914,726Residential
            
            
            47,949,770
            
            
            37,251,173Consumer
            
            
            33,284,334
            
            
            29,456,155$
            275,188,567
            
            $
            221,667,632




Activity
      in the allowance for loan losses was as follows:


December
                  31,2006
              
              2005
              
              2004Balance
                  at the beginning of year
              
              $
              2,700,647
              
              $
              2,763,988
              
              $
              1,705,082Allowance
                  purchased in acquisition
              
              
              320,000
              
              
              —
              
              
              994,878Provision
                  for loan losses
              
              
              528,124
              
              
              328,679
              
              
              245,000Charged
                  off loans
              
              
              (444,702
              )
              
              (521,278
              )
              
              (293,479
              )Recoveries
              
              
              110,555
              
              
              129,258
              
              
              112,507Balance
                  at end of year
              
              $
              3,214,624
              
              $
              2,700,647
              
              $
              2,763,988





57
 *Table
            of Contents*





Note
      5 -
      LOANS *-
      Continued*





At
      December 31, 2006, the bank had $449,000 loans in a non accrual status. 
Loans classified impaired at December 31, 2006 and 2005 totaled $449,000 and
      $101,000.  These loans were recorded at or below fair value.  The
      average recorded investment in loans classified as impaired for the years ended
      December 31, 2006 and 2005 amounted to approximately $205,000 and $316,000,
      respectively.




Loans
      outstanding to bank directors, executive officers and their related business
      interests amounted to $8,105,209 and $4,182,129 at December 31, 2006 and 2005,
      respectively.  Repayments on these loans during the year ended December 31,
      2006 were $3,676,438 and loans made amounted to $6,958,901. Loans acquired
      in
      the DeKalb acquisition amounted to $640,617. Repayments on these loans during
      the year ended December 31, 2005 were $332,642 and loans made amounted to
      $2,195,918. Related party loans are made on substantially the same terms,
      including interest rates and collateral, as those prevailing at the time for
      comparable transactions with unrelated persons and generally do not involve
      more
      than the normal risk of collectibility.




Note
      6 -
      PROPERTY AND EQUIPMENT




Property
      and equipment consisted of the following:




****
            
            December
                31,2006
            
            2005Land
            
            $
            5,775,465
            
            $
            5,146,966Premises
            
            
            14,133,715
            
            
            7,862,983Equipment
            
            
            5,944,366
            
            
            4,734,620Construction
                in progress
            
            
            —
            
            
            2,227,94125,853,546
            
            
            19,972,510Accumulated
                depreciation
            
            
            4,893,214
            
            
            3,990,481$
            20,960,332
            
            $
            15,982,029




Provision
      for depreciation included in operating expenses for the years ended December
      31,
      2006, 2005 and 2004 amounted to $1,000,804, $926,776 and $761,277,
      respectively.





Note
      7 -
      GOODWILL, CORE DEPOSIT INTANGIBLE AND OTHER ASSETS




Intangible
      assets (excluding goodwill) consisted of the following:




December
                31,2006
            
            2005Core
                deposit premiums, gross carrying amount
            
            $
            4,650,658
            
            $
            4,148,273Accumulated
                amortization
            
            
            (1,997,741
            )
            
            (1,381,199
            )Net
            
            $
            2,652,917
            
            $
            2,767,074




Amortization
      of the core deposit intangibles amounted to $636,542, $594,741 and $276,685
      for
      the years ended December 31, 2006, 2005 and 2004, respectively. Amortization
      of
      the intangibles is scheduled to be as follows:





2007
            
            $
            669,6372008
            
            
            506,8222009
            
            
            491,5242010
            
            
            491,5242011
            
            
            387,306Thereafter
            
            
            106,104$
            2,652,917





58
 *Table
            of Contents*





Note
      7 -
      GOODWILL, CORE DEPOSIT INTANGIBLE AND OTHER ASSETS *-
      Continued*





Goodwill
      at December 31, 2006 and 2005 amounted to $27,761,219 and $24,256,020,
      respectively. This represents $4,902,943 acquired in the DeKalb acquisition
      in
      2006, $22,822,441 acquired in the DutchFork acquisition in 2004 and $35,835
      resulting from a branch acquisition in 2003. The goodwill from each of these
      acquisitions is tested for impairment annually in accordance with SFAS 142.
      The
      fair value is estimated using a cash flow approach based upon the present value
      of the expected cash flows by separately grouping the offices acquired in each
      of these transactions. These valuations indicated that no impairment charge
      was
      required during the year ended December 31, 2006. However, in 2006 the Company
      identified $1,397,744 that related to the DutchFork acquisition and therefore
      management reclassed this amount to a deferred tax asset.





With
      the
      acquisition of DutchFork Bancshares the company acquired certain bank-owned
      life
      insurance policies that provide benefits to various former and existing
      employees and officers. In addition, during 2006 the bank acquired an additional
      $3,500,000 in bank-owned life insurance that provides benefits to various
      existing officers.  The carrying value of these policies at December 31,
      2006 and 2005 was $9,606,657 and $5,811,302, respectively and are included
      in
      other assets.





Note
      8 -
      DEPOSITS




At
      December 31, 2006, the scheduled maturities of Certificates of Deposits are
      as
      follows:





2007
            
            $
            168,714,4772008
            
            
            5,520,4802009
            
            
            14,048,1032010
            
            
            7,444,2902011
            
            
            4,560,426$
            200,287,776





Note
      9 -
      SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED MONEY





Securities
      sold under agreements to repurchase generally mature within one to four days
      from the transaction date.  The weighted average interest rate at December
      31, 2006 and 2005, was 3.90% and 3.38%, respectively. The maximum month-end
      balance during 2006 and 2005 was $27,699,000 and $14,858,500 respectively.
      Securities sold under agreements to repurchase are collateralized by securities
      with a fair market value of 100% of the agreement.




Other
      borrowed money at December 31, 2006 and 2005 consisted of $148,886 and $169,233,
      respectively which was due under the treasury tax and loan note program.





At
      December 31, 2006 and 2005, the Company had unused short-term lines of credit
      totaling $20,000,000.





59
 *Table
            of Contents*





Note
      10 -
      ADVANCES FROM FEDERAL HOME LOAN BANK AND LONG-TERM DEBT




Advances
      from the Federal Home Loan Bank of Atlanta at December 31, 2006 consisted of
      the
      following:




2006
            
            2005Maturing
            
            Weighted
              Average
                Rate
            
            Amount
            
            Weighted
              Average
                Rate
            
            Amount2006
            
            
            —
            
            $
            —
            
            
            2.83
            %
            $
            1,500,0002008
            
            
            3.79
            %
            
            1,954,408
            
            
            3.42
            %
            
            5,251,3452010
            
            
            3.64
            %
            
            26,852,972
            
            
            3.64
            %
            
            27,305,7872011
            
            
            5.35
            %
            
            500,000
            
            
            
            
            
            —More
                than five years
            
            
            1.00
            %
            
            450,165
            
            
            
            
            
            467,2773.64
            %
            $
            29,757,545
            
            
            3.54
            %
            $
            34,524,409




As
      collateral for its advances, the Company has pledged in the form of blanket
      liens, eligible single-family loans, in the amount of $33,732,000 at December
      31, 2006.  In addition, securities with a fair value of
      $6,126,136 have been pledged as collateral for advances as of December 31,
      2006.  At December 31, 2005 loans in the amount of $70,397,000 and
      securities with a fair value of $8,050,723 were pledged as collateral for
      advances.  In addition, the Company’s investment in Federal Home Loan Bank
      stock is pledged for advances.  Advances are subject to prepayment
      penalties.  The average advances during 2006 and 2005 were $31,073,406 and
      $41,290,862, respectively.  The average interest rate for 2006 and 2005 was
      3.61% and 3.49%, respectively. The maximum outstanding amount at any month
      end
      was $43,347,349 and $46,613,103 for 2006 and 2005.




Purchase
      premiums included in advances acquired in the acquisition of DutchFork reflected
      in the advances maturing in 2010 amount to $1,852,972 at December 31, 2006.
      At
      December 31, 2005 the premium on the advances were $251,345 for 2008 maturities
      and $2,305,787 for the 2010 maturity.  The coupon rate on the $25,000,000
      advance maturing in 2010 is 5.76%. Advances of $2,000,000 acquired in the DeKalb
      merger maturing in 2008 reflect a discount of $45,592 at December 31, 2006.
      The
      coupon rate on this advance is 3.79%.




Note
      11 -
      JUNIOR SUBORDINATED DEBENTURES





On
      September 16, 2004, FCC Capital Trust I (Trust I), a wholly owned subsidiary
      of
      the Company, issued and sold floating rate securities having an aggregate
      liquidation amount of $15,000,000. The Trust I securities accrue and pay
      distributions quarterly at a rate per annum equal to LIBOR plus 257 basis
      points.  The distributions are cumulative and payable in arrears.  The
      company has the right, subject to events of default, to defer payments of
      interest on the Trust I securities for a period not to exceed 20 consecutive
      quarters, provided no extension can extend beyond the maturity date of September
      16, 2034.  The Trust I securities are mandatorily redeemable upon maturity
      at September 16, 2034.  If the Trust I securities are redeemed on or after
      September 16, 2009, the redemption price will be 100% of the principal amount
      plus accrued and unpaid interest. The Trust I securities may be redeemed in
      whole but not in part, at any time prior to September 16, 2009 following the
      occurrence of a tax event, a capital treatment event or an investment company
      event.  Currently these securities qualify under risk-based capital
      guidelines as Tier 1 capital, subject to certain limitations.  The company
      has no current intention to exercise its right to defer payments of interest
      on
      the Trust I securities.





Note
      12 -
      INCOME TAXES




Income
      tax expense for the years ended December 31, 2006, 2005 and 2004 consists of
      the
      following:




Year
                ended December 312006
            
            2005
            
            2004CurrentFederal
            
            $
            1,301,617
            
            $
            137,642
            
            $
            651,304State
            
            
            213,102
            
            
            83,545
            
            
            104,0721,514,719
            
            
            221,187
            
            
            722,376DeferredFederal
            
            
            (62,494
            )
            
            737,272
            
            
            197,474State
            
            
            —
            
            
            74,145
            
            
            10,000(62,494
            )
            
            811,413
            
            
            207,474Income
                tax expense
            
            $
            1,452,225
            
            $
            1,032,600
            
            $
            962,850





60
 *Table
            of Contents*





Note
      12 -
      INCOME TAXES - *Continued*





Reconciliation
      from expected federal tax expense to effective income tax expense for the
      periods indicated are as follows:




Year
                  ended December 312006
              
              2005
              
              2004Expected
                  federal income tax expense
              
              $
              1,684,160
              
              $
              1,402,592
              
              $
              1,101,742State
                  income tax net of federal benefit
              
              
              140,647
              
              
              104,075
              
              
              37,584Tax
                  exempt interest
              
              
              (99,764
              )
              
              (73,999
              )
              
              (64,126
              )Nontaxable
                  dividends
              
              
              (146,347
              )
              
              (321,912
              )
              
              (101,821Increase
                  in cash surrender value life insurance
              
              
              (112,416
              )
              
              (87,883
              )
              
              (18500Other
              
              
              (14,055
              )
              
              9,727
              
              
              7,971$
              1,452,225
              
              $
              1,032,600
              
              $
              962,850
 
 The
        following is a summary of the tax effects of temporary differences that give
        rise to significant portions of the deferred tax assets and deferred tax
        liabilities:
  December
                  31,2006
              
              2005Assets:Allowance
                  for loan losses
              
              $
              1,092,972
              
              $
              971,980Excess
                  tax basis of deductible intangible assets
              
              
              188,328
              
              
              165,998Premium
                  on purchased FHLB Advances
              
              
              630,010
              
              
              920,329Net
                  operating loss carry forward
              
              
              3,626,451
              
              
              4,353,842Excess
                  tax basis of assets acquired
              
              
              1,030,356
              
              
              488,534Unrealized
                  loss on available-for sale-securities
              
              
              983,611
              
              
              2,046,309Compensation
                  expense deferred for tax purposes
              
              
              132,290
              
              
              144,915Other
              
              
              168,987
              
              
              676,360Total
                  deferred tax asset
              
              
              7,853,005
              
              
              9,768,267Liabilities:Tax
                  depreciation in excess of book depreciation
              
              
              103,752
              
              
              149,713Excess
                  tax basis of non-deductible intangible assets
              
              
              836,232
              
              
              862,174Excess
                  financial reporting basis of assets acquired
              
              
              1,305,574
              
              
              948,074Income
                  tax bad debt reserve recapture adjustment
              
              
              —
              
              
              1,196,952Other
              
              
              63,243
              
              
              66,946Total
                  deferred tax liabilities
              
              
              2,308,801
              
              
              3,223,859Net
                  deferred tax asset recognized
              
              $
              5,544,204
              
              $
              6,544,408




At
      December 31, 2006, the Company has net operating loss carry forwards acquired
      in
      the acquisitions of DutchFork and DeKalb for federal income tax purposes of
      approximately $10,666,033 available to offset future taxable income through
      2025. There was no valuation allowance for deferred tax assets at either
      December 31, 2006 or 2005.  No valuation allowance has been established as
      it is management’s belief that realization of the deferred tax asset is more
      likely than not.  The ultimate realization of deferred tax assets is
      dependent upon the generation of future taxable income during the periods in
      which the temporary differences become deductible.  Management considers
      the scheduled reversal of deferred income tax liabilities, projected future
      taxable income and tax planning strategies in making this assessment.  The
      amount of these deferred tax assets considered to be realizable could be reduced
      in the near term if estimates of future taxable income during the carry forward
      period are reduced.  The net deferred asset is included in other assets on
      the consolidated balance sheets.





A
      portion
      of the change in the net deferred tax asset relates to unrealized gains and
      losses on securities available-for-sale.  The change in the tax benefit
      related to unrealized gains on available for sale securities of $1,062,698
      has
      been recorded directly to shareholders’ equity.  During the year ended
      December 31, 2006 it was determined that certain differences recognized in
      the
      DutchFork acquisition as well as temporary differences related to state taxes
      should not be classified as “temporary differences”. The primary difference
      related to the deferred tax liability established for bad debt reserve
      recapture. Temporary differences in the amount of $1,397,444 were reclassified
      from the net deferred tax asset to goodwill in the year ended December 31,
      2006.
      The balance of the change in the net deferred tax asset results from current
      period deferred tax benefit of $62,494.





61
 *Table
            of Contents*





Note
      13 -
      FAIR VALUE OF FINANCIAL INSTRUMENTS




Statement
      of Financial Accounting Standards No. 107, “Disclosure about Fair Value of
      Financial Instruments” (SFAS 107), requires the Company to disclose estimated
      fair values for its financial instruments.  Fair value estimates, methods,
      and assumptions are set forth below.




Cash
      and
      short term investments - The carrying amount of these financial instruments
      (cash and due from banks, federal funds sold and securities purchased under
      agreements to resell) approximates fair value.  All mature within 90 days
      and do not present unanticipated credit concerns.




Investment
      Securities - Fair values are based on quoted market prices, where
      available.  If quoted market prices are not available, fair values are
      based on quoted market prices of comparable instruments.




Loans
      -
      The fair value of loans are estimated by discounting the future cash flows
      using
      the current rates at which similar loans would be made to borrowers with similar
      credit ratings and for the same remaining maturities.  As discount rates
      are based on current loan rates as well as management estimates, the fair values
      presented may not be indicative of the value negotiated in an actual
      sale.




Accrued
      Interest Receivable - The fair value approximates the carrying
      value.





Interest
      rate cap/floor - The fair value approximates the carrying value.





Deposits
      - The fair value of demand deposits, savings accounts, and money market accounts
      is the amount payable on demand at the reporting date.  The fair value of
      fixed-maturity certificates of deposits is estimated by discounting the future
      cash flows using rates currently offered for deposits of similar remaining
      maturities.




Federal
      Home Loan Bank Advances - Fair value is estimated based on discounted cash
      flows
      using current market rates for borrowings with similar terms.




Short
      Term Borrowings - The carrying value of short term borrowings (securities sold
      under agreements to repurchase and demand notes to the U.S. Treasury)
      approximates fair value.




Junior
      Subordinated Debentures - The fair values of junior subordinated debentures
      is
      estimated by using discounted cash flow analyses based on incremental borrowing
      rates for similar types of instruments.




Accrued
      Interest Payable - The fair value approximates the carrying value.




Commitments
      to Extend Credit - The fair value of these commitments is immaterial because
      their underlying interest rates approximate market.





62
 *Table
            of Contents*





Note
      13 -
      FAIR VALUE OF FINANCIAL INSTRUMENTS *-
      Continued*





The
      carrying amount and estimated fair value of the Company’s financial instruments
      are as follows:




December
                31, 2006
            
            December
                31, 2005Carrying
              Amount
            
            Fair
              Value
            
            Carrying
              Amount
            
            Fair
              ValueFinancial
                Assets:Cash
                and short term investments
            
            $
            10,069,567
            
            $
            10,069,567
            
            $
            12,864,146
            
            $
            12,864,146Held-to-maturity
                securities
            
            
            6,488,796
            
            
            6,509,148
            
            
            5,713,830
            
            
            5,746,448Available-for-sale
                securities
            
            
            170,034,478
            
            
            170,034,478
            
            
            170,657,770
            
            
            170,657,770Loans
                receivable
            
            
            275,188,567
            
            
            271,352,722
            
            
            221,667,632
            
            
            218,651,290Allowance
                for loan losses
            
            
            3,214,624
            
            
            —
            
            
            2,700,647
            
            
            —Net
                loans
            
            
            271,973,943
            
            
            271,352,722
            
            
            218,966,985
            
            
            218,651,290Accrued
                interest
            
            
            2,545,560
            
            
            2,545,560
            
            
            2,001,957
            
            
            2,001,957Interest
                rate cap/floor
            
            
            371,632
            
            
            371,632
            
            
            192,898
            
            
            192,898Financial
                liabilities:Non-interest
                bearing demand
            
            $
            73,676,415
            
            $
            73,676,415
            
            $
            57,326,637
            
            $
            57,326,637NOW
                and money market accounts
            
            
            114,842,382
            
            
            114,842,382
            
            
            106,337,887
            
            
            106,337,887Savings
            
            
            26,134,834
            
            
            26,134,834
            
            
            29,818,705
            
            
            29,818,705Certificates
                of deposit
            
            
            200,287,776
            
            
            201,341,483
            
            
            156,120,922
            
            
            156,541,947Total
                deposits
            
            
            414,941,407
            
            
            415,995,114
            
            
            349,604,151
            
            
            350,025,176Federal
                Home Loan Bank Advances
            
            
            29,757,545
            
            
            28,238,223
            
            
            34,524,409
            
            
            32,590,242Short
                term borrowings
            
            
            19,621,466
            
            
            19,621,466
            
            
            13,975,633
            
            
            13,975,633Junior
                subordinated debentures
            
            
            15,464,000
            
            
            15,464,000
            
            
            15,464,000
            
            
            15,464,000Accrued
                interest payable
            
            
            3,726,963
            
            
            3,726,963
            
            
            2,053,833
            
            
            2,053,833




Note
      14 -
      COMMITMENTS, CONCENTRATIONS OF CREDIT RISK AND CONTINGENCIES




The
      Bank
      is party to financial instruments with off-balance-sheet risk in the normal
      course of business to meet the financing needs of its customers.  These
      financial instruments include commitments to extend credit.  These
      instruments involve, to varying degrees, elements of credit risk in excess
      of
      the amount recognized in the consolidated balance sheets.





The
      Bank’s exposure to credit loss in the event of nonperformance by the other party
      to the financial instrument for commitments to extend credit is represented
      by
      the contractual amount of these instruments. The Bank uses the same credit
      policies in making commitments as for on-balance sheet instruments.  At
      December 31, 2006 and 2005, the Bank had commitments to extend credit including
      unused lines of credit of $56,643,000 and $38,700,000 respectively.





Commitments
      to extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established in the contract.  Commitments
      generally have fixed expiration dates or other termination clauses and may
      require a payment of a fee.  Since commitments may expire without being
      drawn upon, the total commitments do not necessarily represent future cash
      requirements.  The Bank evaluates each customer’s creditworthiness on a
      case-by-case basis.  The amount of collateral obtained, if deemed necessary
      by the Bank upon extension of credit, is based on management’s credit evaluation
      of the party.  Collateral held varies but may include inventory, property
      and equipment, residential real estate and income producing commercial
      properties.




The
      primary market area served by the Bank is Lexington, Richland, Newberry and
      Kershaw Counties within the Midlands of South Carolina.  Management closely
      monitors its credit concentrations and attempts to diversify the portfolio
      within its primary market area. The Company considers concentrations of credit
      risk to exist when pursuant to regulatory guidelines, the amounts loaned to
      multiple borrowers engaged in similar business activities represent 25% or
      more
      of the bank’s risk based capital, or approximately $11.6 million. Based on this
      criteria, the Bank had three such concentrations at December 31, 2006, including
      $32.9 million (12.0% of total loans) to lessors of residential properties,
      $35.5
      million (12.9% of total loans) of lessors of non-residential properties and
      $13.3 million (4.8% of total loans) to religious organizations.   Although
      the Bank’s loan portfolio, as well as existing commitments, reflect the
      diversity of its primary market area, a substantial portion of its debtor’s
      ability to honor their contracts is dependent upon the economic stability of
      the
      area.





63
 *Table
            of Contents*





Note
      14 -
      COMMITMENTS, CONCENTRATIONS OF CREDIT RISK AND CONTINGENCIES *-
      Continued*





The
      nature of the business of the company and bank may at times result in a certain
      amount of litigation.  The bank is involved in certain litigation that is
      considered incidental to the normal conduct of business.  Management
      believes that the liabilities, if any, resulting from the proceedings will
      not
      have a material adverse effect on the consolidated financial position,
      consolidated results of operations or consolidated cash flows of the
      company.





At
      December 31, 2006, the Bank has entered into the following interest rate cap
      and
      floor agreements:





Notional
                Amount
            
            Description
            
            Cap/Floor
                Rate
            
            Contract
                Date
            
            Expiration
                Date
            
            Fair
                Value
              12/31/2006$10,000,000
            
            Interest
                Rate Cap
            
            4.50%
            
            September
                6, 2005
            
            August
                31, 2009
            
            $ 
                 180,461$10,000,000
            
            Interest
                Rate Floor
            
            5.00%
            
            July
                24, 2006
            
            August
                1, 2011
            
            191,171$  
                371,632





The
      fair
      value of the cap contract at December 31, 2005 was $192,898. These agreements
      were entered into to protect assets and liabilities from the negative effects
      of
      volatility in interest rates. The agreements provide for a payment to the Bank
      of the difference between the cap/floor rate of interest and the market rate
      of
      interest. The Bank’s exposure to credit risk is limited to the ability of the
      counterparty to make potential future payments required pursuant to the
      agreement. The Bank’s exposure to market risk of loss is limited to the market
      value of the cap and floor. Any gain or loss on the value of this contract
      is
      recognized in earnings on a current basis. The Bank has received payments under
      the terms of the cap contract in the amount $49,248 during the year ended
      December 31, 2006. No payments were received under the terms of the cap contract
      in 2005 and no payments have been received under the terms of the floor contract
      in 2006. The Bank recognized $18,409 and $37,897 in other income to reflect
      the
      increase in the value of the contracts for the years ended December 31, 2006
      and
      2005, respectively.




Note
      15 -
      OTHER EXPENSES




A
      summary
      of the components of other non-interest expense is as follows:





****
            
            December
                31,2006
            
            2005
            
            2004Data
                processing
            
            $
            264,689
            
            $
            199,347
            
            $
            127,031Supplies
            
            
            271,362
            
            
            262,251
            
            
            190,972Telephone
            
            
            380,806
            
            
            291,911
            
            
            205,908Correspondent
                services
            
            
            169,312
            
            
            167,442
            
            
            140,182Insurance
            
            
            254,810
            
            
            246,132
            
            
            149,482Postage
            
            
            167,574
            
            
            164,260
            
            
            110,798Professional
                fees
            
            
            833,435
            
            
            414,726
            
            
            189,525Other
            
            
            861,911
            
            
            815,022
            
            
            513,572$
            3,203,899
            
            $
            2,561,091
            
            $
            1,627,470





64
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            of Contents*





Note
      16 -
      STOCK OPTIONS




The
      Company has adopted a Stock Option Plan whereby shares have been reserved for
      issuance by the Company upon the grant of stock options or restricted stock
      awards. At December 31, 2006 the Company has 160,542 shares reserved for
      future grants. The plan provides for the grant of options to key employees
      and
      Directors as determined by a Stock Option Committee made up of at least two
      members of the Board of Directors. Options are exercisable for a period of
      ten
      years from date of grant.





Stock
      option transactions for the years ended December 31, 2006, 2005 and 2004 are
      summarized as follows:




Shares
              
              Weighted
                Average
                Exercise
                  Price
              
              Weighted-
                Average
                Remaining
                Contractual
                Term
                  (Years)
              
              Aggregate
                Intrinsic
                  ValueBalance
                  December 31, 2003
              
              
              150,763
              
              
              9.91Exercised
              
              
              (15,409
              )
              
              9.01Granted
              
              
              3,000
              
              
              22.17Granted
                  in acquisition
              
              
              180,685
              
              
              9.23Forfeited
              
              
              (1,602
              )
              
              13.67Outstanding
                  December 31, 2004
              
              
              317,437
              
              
              9.66Exercised
              
              
              (52,845
              )
              
              8.57Granted
              
              
              63,500
              
              
              20.20Outstanding
                  December 31, 2005
              
              
              328,092
              
              $
              11.87Exercised
              
              
              (112,932
              )
              
              8.66Forfeited
              
              
              (6,116
              )
              
              19.05Granted
                  in acquisition
              
              
              71,227
              
              
              13.32Outstanding
                  December 31, 2006
              
              
              280,271
              
              $
              13.38
              
              
              5.21
              
              $
              936,143Exercisable
                  at December 31, 2006
              
              
              280,271
              
              $
              13.38
              
              
              5.21
              
              $
              936,143





Stock
      options outstanding and exercisable as of December 31, 2006, are as
      follows:





Range
                of Exercise Prices
              Low/High
            Number
                of Option Shares
              Outstanding
              and
                Exercisable
            Weighted
                Average
              Remaining
                Contractual
              Life
                (Years)
            Weighted
              Average
                Exercise
              Price$  9.23
                / $ 13.63
            145,186
            4.14
            $ 
                9.96$14.00
                / $ 16.70
            70,585
            4.85
            14.14$19.00
                / $ 22.50
            64,500
            8.02
            20.24280,271
            5.21
            $
                13.38





The
      options granted in conjunction with the 2006 acquisition of DeKalb had an
      average fair value of $8.21. There were no other options granted in 2006. The
      total intrinsic value of share options exercised during the year ended December
      31, 2006, 2005 and 2004 was approximately $1,059,488, $588,780 and $196,407,
      respectively. The total fair value of options granted, excluding shares granted
      in conjunction with acquisitions, in 2005 and 2004 was $429,383 and $21,468,
      respectively.





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires companies to
      measure all employee stock-based compensation awards using a fair value method
      and record such expense in its financial statements. In addition, the adoption
      of SFAS No. 123(R) required additional accounting and disclosures related to
      the
      income tax and cash flow effects resulting from share-based payment
      arrangements. SFAS No. 123(R) was effective beginning as of the first annual
      reporting period beginning after December 15, 2005. The board of directors
      upon
      the recommendation of the Human Resources Committee approved accelerating the
      vesting of 67,000 unvested stock options. The acceleration vesting was effective
      as of December 31, 2005. All of the other terms and conditions applicable to
      the
      outstanding stock options at that time remained unchanged. The decision to
      accelerate vesting of these options resulted in avoiding recognition of pre-tax
      compensation expense by the Company upon the adoption of SFAS 123R for the
      previously issued options. In the Company’s view, the future compensation
      expense outweighed the incentive and retention value associated with the stock
      options. The future pre-tax compensation expense that was avoided using
      estimated Black-Scholes value calculations, and based upon the effective date
      of
      January 1, 2006, was approximately $123,000, $76,000 and $45,000 in fiscal
      years
      2006, 2007 and 2008, respectively. The acceleration meets the criteria for
      variable accounting under FIN No. 44. Under the provisions of FIN No. 44 the
      acceleration did not result in any pre-tax charge to earnings in the year ended
      December 31, 2005.





65
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            of Contents*





Note
      17 -
      EMPLOYEE BENEFIT PLAN




The
      Company maintains a 401 (k) plan, which covers substantially all
      employees.  Participants may contribute up to the maximum allowed by the
      regulations.  During the year ended December 31, 2006, 2005 and 2004 the
      plan expense amounted to $110,830, $102,130 and $137,177, respectively. The
      Company matches 50% of an employee’s contribution up to a 6.00% participant
      contribution.




The
      Company acquired various single premium life insurance policies from DutchFork
      that are funding fringe benefits to certain employees and officers. A Salary
      Continuation Plan was established payable to two key individuals upon attainment
      of age 63. The plan provides for monthly benefits of $2,500 each for seventeen
      years. Other plans acquired were supplemental life insurance covering certain
      key employees. No expense is accrued relative to these benefits, as the life
      insurance covers the anticipated payout with the Company receiving the
      remainder, thereby recovering its investment in the policies. In 2006, the
      Company established a salary continuation plan which covers six additional
      key
      officers. The plan provides for monthly benefits upon normal retirement age
      of
      varying amounts for a period of fifteen years. Additional single premium life
      insurance policies were purchased in 2006 in the amount of $3,500,000 designed
      to offset the funding of these additional fringe benefits. The cash surrender
      value at December 31, 2006 of all bank owned life insurance was $9,606,657.
      Expenses accrued for the anticipated benefits under the Salary Continuation
      Plans for the year ended December 31, 2006, 2005 and 2004 amounted to $186,440,
      $95,427, 9,360, respectively. .





Note
      18 -
      EARNINGS PER SHARE




The
      following reconciles the numerator and denominator of the basic and diluted
      earnings per share computation:




Year
                ended December 31,2006
            
            2005
            
            2004Numerator
                (Included in basic and diluted earnings per share)
            
            $
            3,501,199
            
            $
            3,092,671
            
            $
            2,184,985DenominatorWeighted
                average common shares outstanding for:Basic
                earnings per share
            
            
            3,096,866
            
            
            2,834,404
            
            
            1,903,209Dilutive
                securities:Stock
                options - Treasury stock method
            
            
            77,319
            
            
            134,104
            
            
            102,536Diluted
                earnings per share
            
            
            3,174,185
            
            
            2,968,508
            
            
            2,005,745




The
      average market price used in calculating the assumed number of shares issued
      for
      the years ended December 31, 2006, 2005 and 2004 was $17.92, $19.15 and $21.67,
      respectively.





Note
      19 -
      CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS




The
      Company and Bank are subject to various federal and state regulatory
      requirements, including regulatory capital requirements.  Failure to meet
      minimum capital requirements can initiate certain mandatory, and possibly
      additional discretionary, actions that, if undertaken, could have a direct
      material effect on the Company’s financial statements.  Under capital
      adequacy guidelines and the regulatory framework for prompt corrective action,
      the Company and Bank must meet specific capital guidelines that involve
      quantitative measures of the Company’s assets, liabilities, and certain
      off-balance sheet items as calculated under regulatory accounting
      practices.  The Company’s and Bank’s capital amounts and classification are
      also subject to qualitative judgments by the regulators about components, risk
      weighting, and other factors.  The Company and Bank are required to
      maintain minimum Tier 1 capital, total risked based capital and Tier 1 leverage
      ratios of 4%, 8% and 3%, respectively.





At
      December 31, 2006, the most recent notification from the Comptroller of the
      Currency categorized the bank as well capitalized under the regulatory framework
      for prompt corrective action.  To be well capitalized the bank must
      maintain minimum Tier 1 capital, total risk-based capital and Tier 1 leverage
      ratios of 6%, 10% and 5%, respectively.  There are no conditions or events
      since that notification that management believes have changed the bank’s
      well-capitalized status.





66
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            of Contents*





Note
      19 -
      CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS *-
      Continued*





The
      actual capital amounts and ratios as well as minimum amounts for each regulatory
      defined category for the Bank and the Company are as follows:




Actual
            
            Required
                to be Categorized
              Adequately
                Capitalized
            
            Required
                to be
              Categorized
              Well
                CapitalizedAmount
            
            Ratio
            
            Amount
            
            RatioDecember
                31, 2006First
                Community CorporationTier
                1 Capital
            
            $
            47,238,000
            
            
            13.48
            %
            $
            14,030,000
            
            
            4.00
            %
            
            N/A
            
            
            N/ATotal
                Risked Based Capital
            
            
            50,453,000
            
            
            14.40
            %
            
            28,060,000
            
            
            8.00
            %
            
            N/A
            
            
            N/ATier
                1 Leverage
            
            
            47,238,000
            
            
            9.29
            %
            
            20,343,000
            
            
            4.00
            %
            
            N/A
            
            
            N/AFirst
                Community Bank, NATier
                1 Capital
            
            $
            43,039,000
            
            
            12.30
            %
            $
            14,009,000
            
            
            4.00
            %
            $
            21,014,000
            
            
            6.00
            %Total
                Risked Based Capital
            
            
            46,254,000
            
            
            13.22
            %
            
            28,018,000
            
            
            8.00
            %
            
            35,023,000
            
            
            10.00
            %Tier
                1 Leverage
            
            
            43,039,000
            
            
            8.49
            %
            
            20,267,000
            
            
            4.00
            %
            
            25,334,000
            
            
            5.00
            %December
                31, 2005First
                Community CorporationTier
                1 Capital
            
            $
            40,898,000
            
            
            13.24
            %
            $
            12,354,000
            
            
            4.00
            %
            
            N/A
            
            
            N/ATotal
                Risked Based Capital
            
            
            43,599,000
            
            
            14.12
            %
            
            24,709,000
            
            
            8.00
            %
            
            N/A
            
            
            N/ATier
                1 Leverage
            
            
            40,898,000
            
            
            9.29
            %
            
            17,616,000
            
            
            4.00
            %
            
            N/A
            
            
            N/AFirst
                Community Bank, NATier
                1 Capital
            
            $
            36,179,000
            
            
            11.75
            %
            $
            12,320,000
            
            
            4.00
            %
            $
            18,479,000
            
            
            6.00
            %Total
                Risked Based Capital
            
            
            38,880,000
            
            
            12.62
            %
            
            24,640,000
            
            
            8.00
            %
            
            30,799,000
            
            
            10.00
            %Tier
                1 Leverage
            
            
            36,179,000
            
            
            8.16
            %
            
            17,740,000
            
            
            4.00
            %
            
            22,176,000
            
            
            5.00
            %




Under
      applicable federal law, the Comptroller of the Currency restricts a national
      bank’s total dividend payments in any calendar year to net profits of that year
      combined with retained net profits for the two preceding years At December
      31,
      2006 there was $8,212,000 of retained net profits free of such restriction.





Note
      20 -
      PARENT COMPANY FINANCIAL INFORMATION




The
      balance sheets, statements of operations and cash flows for First Community
      Corporation (Parent Only) follow:




Condensed
      Balance Sheets


At
                December 31,2006
            
            2005Assets:Cash
                on deposit
            
            $
            2,713,340
            
            $
            3,511,344,Securities
                purchased under agreement to resell
            
            
            122,144
            
            
            66,842Investment
                securities available-for-sale
            
            
            1,221,675
            
            
            1,360,000Investment
                in bank subsidiary
            
            
            74,037,238
            
            
            61,048,462Other
            
            
            846,291
            
            
            494,154Total
                assets
            
            $
            78,940,688
            
            $
            66,480,802Liabilities:Junior
                subordinated debentures
            
            $
            15,464,000
            
            $
            15,464,000Other
            
            
            269,037
            
            
            250,017Total
                liabilities
            
            
            15,733,037
            
            
            15,714,017Shareholders’
                equity
            
            
            63,207,651
            
            
            50,766,785Total
                liabilities and shareholders’ equity
            
            $
            78,940,688
            
            $
            66,480,802





67
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            of Contents*





Note
      20 -
      PARENT COMPANY FINANCIAL INFORMATION - *Continued*





Condensed
      Statements of Operations


****
            
            Year
                ended December 31,2006
            
            2005
            
            2004Income:Interest
                income
            
            $
            54,994
            
            $
            51,323
            
            $
            72,795Dividend
                income from bank subsidiary
            
            
            1,314,000
            
            
            1,327,125
            
            
            366,000Equity
                in undistributed earnings of subsidiary
            
            
            3,421,593
            
            
            2,715,875
            
            
            2,073,865Total
                income
            
            
            4,790,587
            
            
            4,094,323
            
            
            2,512,660Expenses:Interest
                expense
            
            
            1,160,895
            
            
            885,344
            
            
            214,813Other
            
            
            128,493
            
            
            116,308
            
            
            112,862Total
                expense
            
            
            1,289,388
            
            
            1,001,652
            
            
            327,675Income
                before taxes
            
            
            3,501,199
            
            
            3,092,671
            
            
            2,184,985Income
                taxes
            
            
            —
            
            
            —
            
            
            —Net
                Income
            
            $
            3,501,199
            
            $
            3,092,671
            
            $
            2,184,985




Condensed
      Statements of Cash Flows


Year
                ended December 31,2006
            
            2005
            
            2004Cash
                flows from operating activities:Net
                Income
            
            $
            3,501,199
            
            $
            3,092,671
            
            $
            2,184,985Adjustments
                to reconcile net income to net cash provided by operating
                activitiesIncrease
                in equity in undistributed earnings of subsidiary
            
            
            (3,421,593
            )
            
            (2,715,875
            )
            
            (2,073,865
            )Other-net
            
            
            (3,493
            )
            
            120,200
            
            
            84,600
            )Net
                cash provided by operating activities
            
            
            56,113
            
            
            496,996
            
            
            195,720Cash
                flows from investing activities:Purchase
                of investment security available-for-sale
            
            
            —
            
            
            —
            
            
            (110,000
            )Maturity
                of investment security available-for-sale
            
            
            —
            
            
            —
            
            
            —Investment
                in bank subsidiary
            
            
            —
            
            
            —
            
            
            (2,897,905
            )Net
                cash received (disbursed) in business combination
            
            
            26,893
            
            
            —
            
            
            (11,131,142
            )Net
                cash provided (used) by investing activities
            
            
            26,893
            
            
            —
            
            
            (14,139,047
            )Cash
                flows from financing activities:Dividends
                paid
            
            
            (708,222
            )
            
            (565,432
            )
            
            (381,878
            )Proceeds
                from issuance of junior subordinated debentures
            
            
            —
            
            
            —
            
            
            15,000,000Purchase
                of common stock
            
            
            (1,254,090
            )
            
            —
            
            
            —Proceeds
                from issuance of common stock
            
            
            1,136,604
            
            
            579,840
            
            
            315,430Net
                cash used in financing activities
            
            
            (825,708
            )
            
            14,408
            
            
            14,933,552Increase
                (decrease) in cash and cash equivalents
            
            
            (742,702
            )
            
            511,404
            
            
            990,225Cash
                and cash equivalents, beginning of period
            
            
            3,578,186
            
            
            3,066,782
            
            
            2,076,557Cash
                and cash equivalents, end of period
            
            $
            2,835,484
            
            $
            3,578,186
            
            $
            3,066,782





68
 *Table
            of Contents*





Note
      21 -
      QUARTERLY FINANCIAL DATA (UNAUDITED)





The
      following provides quarterly financial data for 2006 and 2005.





**2006**
            
            Fourth
              Quarter
            
            Third
              Quarter
            
            Second
              Quarter
            
            First
              QuarterInterest
                Income
            
            $
            7,481,601
            
            $
            7,288,462
            
            $
            6,537,866
            
            $
            5,937,017Net
                interest income
            
            
            3,775,215
            
            
            3,750,622
            
            
            3,469,979
            
            
            3,327,439Provision
                for loan losses
            
            
            139,400
            
            
            140,395
            
            
            128,629
            
            
            119,700Gain
                (loss) on sale of securities
            
            
            78
            
            
            342
            
            
            -
            
            
            (69,382
            )Income
                before income taxes
            
            
            1,198,756
            
            
            1,278,586
            
            
            1,286,296
            
            
            1,189,786Net
                income
            
            
            860,686
            
            
            902,906
            
            
            901,321
            
            
            836,286Net
                income per share, basic
            
            
            0.26
            
            
            0.28
            
            
            0.30
            
            
            0.29Net
                income per share , diluted
            
            
            0.26
            
            
            0.27
            
            
            0.29
            
            
            0.28**2005**Interest
                Income
            
            $
            5,801,814
            
            $
            5,434,136
            
            $
            5,244,425
            
            $
            4,864,375Net
                interest income
            
            
            3,358,686
            
            
            3,206,394
            
            
            3,259,560
            
            
            3,169,780Provision
                for loan losses
            
            
            111,679
            
            
            79,000
            
            
            72,000
            
            
            66,000Gain
                on sale of securities
            
            
            -
            
            
            -
            
            
            7,322
            
            
            181,097Income
                before income taxes
            
            
            1,122,369
            
            
            994,783
            
            
            950,223
            
            
            1,057,896Net
                income
            
            
            853,924
            
            
            751,658
            
            
            706,823
            
            
            780,266Net
                income per share, basic
            
            
            0.30
            
            
            0.26
            
            
            0.25
            
            
            0.28Net
                income per share , diluted
            
            
            0.29
            
            
            0.25
            
            
            0.24
            
            
            0.26








69
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            of Contents*





**Item
      9.  Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure.**




On
      May
      16, 2006, we dismissed Clifton D. Bodiford, CPA as our independent registered
      public accounting firm and engaged Elliott Davis, LLC as our independent
      registered public accounting firm.




The
      reports of Clifton D. Bodiford, CPA on our financial statements for the fiscal
      years ended December 31, 2005 and 2004 did not contain an adverse opinion or
      a
      disclaimer of opinion and were not qualified or modified as to uncertainty,
      audit scope, or accounting principles, nor was there any event of the type
      requiring disclosure under Item 304(a)(1)(v) of Regulation S-K. In connection
      with its audits for the fiscal years ended December 31, 2005 and 2004 and during
      the subsequent interim period preceding our dismissal of Clifton D. Bodiford,
      CPA , there were no disagreements with Clifton D. Bodiford, CPA on any matter
      of
      accounting principles or practices, financial statement disclosure, or auditing
      scope or procedure that, if not resolved to the satisfaction of Clifton D.
      Bodiford, CPA, would have caused Clifton D. Bodiford, CPA to make reference
      to
      the subject matter of the disagreement(s) in connection with its report.




**Item
      9A.  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 December 31, 2006.  There have been no
      significant changes in our internal controls over financial reporting during
      the
      fourth fiscal quarter ended December 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.





**Item
      9B.  Other Information**





None.




**PART
      III**




**Item
      10.  Directors, Executive Officers, and Corporate
      Governance** **.**




The
      information required by Item 10 is hereby incorporated by reference from our
      proxy statement for our 2007 annual meeting of shareholders to be held on May
      16, 2007.




We
      have
      adopted a Code of Ethics that applies to our directors, executive officers
      (including our principal executive officer and principal financial officer)
      and
      employees in accordance with the Sarbanes-Oxley Corporate Responsibility Act
      of
      2002. The Code of Ethics is available on our web site at:
      www.firstcommunitysc.com.





**Item
      11.  Executive Compensation.**




The
      information required by Item 11 is hereby incorporated by reference from our
      proxy statement for our 2007 annual meeting of shareholders to be held on May
      16, 2007.





70
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            of Contents*





**Item
      12.  Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters.**




The
      following table sets forth equity compensation plan information at December
      31,
      2006.  All information has been adjusted for any stock splits and stock
      dividends effected during the periods presented.





**Equity
                Compensation Plan Information****Plan
                Category**
            
            **Number
                of securities**
              **to
                be issued**
              **upon
                exercise of**
              **outstanding
                options,**
              **warrants
                and rights**
            
            **Weighted-average**
              **exercise
                price of**
              **outstanding
                options,**
              **warrants
                and rights**
            
            **Number
                of securities**
              **remaining
                available for**
              **future
                issuance under**
              **equity
                compensation**
              **plans
                (c)**
              **(excluding
                securities**
              **reflected
                in column(a))****(a)**
            
            **(b)**Equity
                compensation plans approved by security holders(1)
            
            
            100,281
            
            $
            18.04
            
            
            156,500Total(2)
            
            
            100,281
            
            $
            18.04
            
            
            156,500




_________________________


(1)
            The
                number of shares of common stock available for issuance under the
                1999
                Stock Incentive Plan automatically increases on the first trading
                day each
                calendar year beginning January 1, 2000, by an amount equal to 3%
                of the
                shares of common stock outstanding.





(2)
            The
                total does not include 111,191 shares with a weighted average exercise
                price of $9.23 issuable under the First Community Corporation / DutchFork
                Bancshares, Inc. Stock Incentive Plan.  The total does not include
                68,799 shares with a weighted average exercise price of $13.32 issuable
                under the First Community Corporation / DeKalb Bankshares, Inc. Stock
                Incentive Plan. These plans, and the outstanding awards, were assumed
                by
                us in connection with the merger with DutchFork Bancshares, Inc. and
                DeKalb Bankshares, Inc. We are not authorized to make any additional
                awards under these plans.




The
      additional information required by this Item 12 is set forth under “Security
      Ownership of Certain Beneficial Owners and Management” and hereby incorporated
      by reference from our proxy statement for our 2007 annual meeting of
      shareholders to be held on May 16, 2007.




**Item
      13.  Certain Relationships and Related Transactions,
      and Director Independence.**




The
      information required by Item 13 is hereby incorporated by reference from our
      proxy statement for our 2007 annual meeting of shareholders to be held on May
      16, 2007.





**Item
      14. Principal Accounting Fees and
      Services**





The
      information required by Item 14 is hereby incorporated by reference from our
      proxy statement for our 2007 annual meeting of shareholders to be held on May
      16, 2007.





**Item
      15.  Exhibits** **,
      Financial Statement Schedules**





(a)(1)
      Financial Statements





The
      following consolidated financial statements are located in Item 8 of this
      report.


·
            Report
                of Independent Registered Public Accounting
                Firm


·
            Consolidated
                Balance Sheets as of December 31, 2006 and
                2005


·
            Consolidated
                Statements of Income for the years ended December 31, 2006, 2005
                and
                2004


·
            Consolidated
                Statements of Changes in shareholders’ Equity and Comprehensive Income for
                the years ended December 31, 2006, 2005 and
                2004


·
            Consolidated
                Statements of Cash Flows for the years ended December 31, 2006, 2005
                and
                2004


·
            Notes
                to the Consolidated Financial
                Statements





(2)
            Financial
                Statement Schedules





These
      schedules have been omitted because they are not required, are not applicable
      or
      have been included in our consolidated financial statements.





71
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            of Contents*





(3)
            Exhibits





The
      following exhibits are required to be filed with this Report on Form 10-K by
      Item 601 of Regulation S-K.





2.1
            Agreement
                and Plan of Merger between First Community Corporation and DeKalb
                Bankshares, Inc. dated January 19, 2006(incorporated
                by reference to Exhibit 2.1 of the company’s Form 8-K filed on January 20,
                2006).3.1
            Amended
                and Restated Articles of Incorporation (incorporated by reference
                to
                Exhibit 3.1 to the company’s Registration Statement No. 33-86258
                on Form S-1).3.2
            Bylaws
                (incorporated by reference to Exhibit 3.2 to the company’s
                Registration Statement No. 33-86258 on
                Form S-1).4.1
            Provisions
                in the company’s Articles of Incorporation and Bylaws defining the rights
                of holders of    the company’s Common Stock (incorporated
                by reference to Exhibit 4.1 to the company’s Registration Statement
                No. 33-86258 on Form S-1).10.1
            Employment****Agreement
                dated January 16, 2007, by and between Michael C. Crapps and the
                Company
                (incorporated by reference to Exhibit 10.1 to the Company’s Current
                Report on Form 8-K filed on January 19, 2007).*10.2
            Employment
                Agreement dated June 1, 1994, by and between James C. Leventis and
                the Company (incorporated by reference to Exhibit 10.2 to the company’s
                Registration Statement No. 33-86258 on Form S-1).*10.3
            1996
                Stock Option Plan and Form of Option Agreement (incorporated by reference
                to Exhibit 10.6 to the company’s annual report for fiscal year ended
                December 31, 1995 on Form 10-KSB).*10.4
            First
                Community Corporation 1999 Stock Incentive Plan and Form of Option
                Agreement (Incorporated by reference to the Company’s 1998 Annual Report
                and Form 10-KSB).*10.5
            Employment
                Agreement dated September 2, 2002 by and between David K. Proctor
                and the
                Company (incorporated by reference to Exhibit 10.4 to the company’s
                2002 annual report and Form 10-KSB).*10.6
            Employment
                Agreement dated June 12, 2002 by and between Joseph G. Sawyer and the
                Company (incorporated by reference to Exhibit 10.5 to the company’s
                2002 annual report and Form 10-KSB).*10.7
            First
                Amendment to the First Community Corporation 1999 Stock Incentive
                Plan
                (incorporated by reference to the company's Form 10-K for the period
                ended
                December 31, 2005).*10.8
            Agreement
                between First Community Bank and Summerfield Associates, Inc. dated
                June
                28, 2005 (incorporated by reference to Exhibit 10.1 of the company’s Form
                8-K filed on August 15, 2005).10.9
            Divided
                Reinvestment Plan dated July 7, 2003 (incorporated by reference to
                Form
                S-3/D filed with the SEC on July 14, 2003, File No.
                333-107009).*10.10
            Employment,
                Consulting, and Noncompete Agreement between First Community Bank,
                N.A.,
                Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and Steve
                P.
                Sligh dated April 12, 2004 (incorporated by reference to Exhibit
                10.6 to
                the company’s Registration Statement No. 333-116242 on Form
                S-4).10.11
            Employment,
                Consulting, and Noncompete Agreement between First Community Bank,
                N.A.,
                Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and J.
                Thomas
                Johnson dated April 12, 2004 (incorporated by reference to Exhibit
                10.7 to
                the company’s Registration Statement No. 333-116242 on Form
                S-4).10.12
            Amendment
                No. 1 to the Employment, Consulting, and Noncompete Agreement between
                First Community Bank N.A., and Steve P. Sligh dated September 14,
                2005 (incorporated by reference to Exhibit 10.1 to the company’s Form 8-K
                filed on September 15, 2005).10.13
            Form
                of Salary Continuation Agreement dated August 2, 2006 (incorporated
                by
                reference to Exhibit 10.1 to the company's Form 8-K filed on August
                3,
                2006).




72
 *Table
          of Contents*




10.14
            Form
                of Non-Employee Director Deferred Compensation Plan approved September
                30,
                2006 (incorporated by reference to the company's Form 8-K filed October
                4,
                2006).16
            Letter
                to SEC from Clifton D. Bodiford, CPA (incorporated by reference as
                Exhibit
                16 to the company's Form 8-K as filed May 19, 2006).21.1
            Subsidiaries
                of the company.23.1
            Consent
                of Independent Registered Public Accounting Firm - Clifton D. Bodiford,
                CPA23.2
            Consent
                of Independent Registered Public Accounting Firm - Elliott Davis,
                LLC**.**24.1
            Power
                of Attorney (contained on the signature page hereto).31.1
            Rule
                13a-14(a) Certification of the Chief Executive Officer.31.2
            Rule
                13a-14(a) Certification of the Chief Financial Officer.32
            Section
                1350 Certifications.


_________________________


*
            Management
                contract of compensatory plan or arrangement required to be filed
                as an
                Exhibit to this Annual Report on
                Form 10-K.





73
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            of Contents*





**SIGNATURES**




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




Date:
                  March 20, 2007
              **FIRST
                  COMMUNITY CORPORATION**By:
              /s/
                  Michael C. CrappsMichael
                  C. CrappsPresident
                  and Chief Executive Officer




KNOW
      ALL
      MEN BY THESE PRESENTS, that each person whose signature appears below
      constitutes and appoints Michael C. Crapps, his true and lawful attorney-in-fact
      and agent, with full power of substitution and resubstitution, for him and
      in
      his name, place and stead, in any and all capacities, to sign any and all
      amendments to this report, and to file the same, with all exhibits thereto,
      and
      other documents in connection therewith, with the Securities and Exchange
      Commission, granting unto attorney-in-fact and agent full power and authority
      to
      do and perform each and every act and thing requisite or necessary to be done
      in
      and about the premises, as fully to all intents and purposes as he might or
      could do in person, hereby ratifying and confirming all that attorney-in-fact
      and agent, or his substitute or substitutes, may lawfully do or cause to be
      done
      by virtue hereof.




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, this report has been signed below by the following persons on behalf
      of
      the registrant and in the capacities and on the dates indicated.




**Signature**
            
            **Title**
            
            **Date**/s/
                Richard K. Bogan
            
            Director
            
            March
                20, 2007Richard
                K. Bogan/s/
                Thomas C. Brown
            
            
            Director
            
            March
                20, 2007Thomas
                C. Brown/s/
                Chimin J. Chao
            
            
            Director
            
            March
                20, 2007Chimin
                J. Chao/s/
                Michael C. Crapps
            
            
            Director,
                President,
            
            March
                20, 2007Michael
                C. Crapps
            
            &
                Chief Executive Officer/s/
                Hinton G. Davis
            
            
            Director
            
            March
                20, 2007Hinton
                G. Davis/s/
                Anita B. Easter
            
            
            Director
            
            March
                20, 2007Anita
                B. Easter/s/
                O. A. Ethridge
            
            
            Director
            
            March
                20, 2007O.
                A. Ethridge/s/
                George H. Fann, Jr.
            
            
            Director
            
            March
                20, 2007George
                H. Fann, Jr./s/
                J. Thomas Johnson
            
            Director,
                Vice Chairman of the Board,
            
            March
                20, 2007J.
                Thomas Johnson
            
            &
                Executive Vice President/s/
                W. James Kitchens, Jr.
            
            
            Director
            
            March
                20, 2007W.
                James Kitchens, Jr./s/
                James C. Leventis
            
            
            Director,
                Chairman of the
            
            March
                20, 2007James
                C. Leventis
            
            Board,
                & Secretary




74
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            of Contents*




/s/Alexander
                Snipes, Jr.
            
            
            Director
            
            March
                20, 2007Alexander
                Snipes, Jr./s/Richard
                M. Todd, Jr.
            
            
            Director
            
            March
                20, 2007Richard
                M. Todd, Jr./s/
                Loretta R. Whitehead
            
            
            Director
            
            March
                20, 2007Loretta
                R. Whitehead/s/
                Mitchell M. Willoughby
            
            
            Director
            
            March
                20, 2007Mitchell
                M. Willoughby/s/
                Joseph G. Sawyer
            
            
            Chief
                Financial Officer
            
            March
                20, 2007Joseph
                G. Sawyer
            
            
            and
                Principal Accounting Officer




75
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            of Contents*




**Exhibit
      List**





The
      following exhibits are required to be filed with this Report on Form 10-K by
      Item 601 of Regulation S-K.





2.1
            Agreement
                and Plan of Merger between First Community Corporation and DeKalb
                Bankshares, Inc. dated January 19, 2006 (incorporated by reference
                to
                Exhibit 2.1 of the company’s Form 8-K filed on January 20,
                2006).3.1
            Amended
                and Restated Articles of Incorporation (incorporated by reference
                to
                Exhibit 3.1 to the company’s Registration Statement No. 33-86258
                on Form S-1).3.2
            Bylaws
                (incorporated by reference to Exhibit 3.2 to the company’s
                Registration Statement No. 33-86258 on
                Form S-1).4.1
            Provisions
                in the company’s Articles of Incorporation and Bylaws defining the rights
                of holders of    the company’s Common Stock (incorporated
                by reference to Exhibit 4.1 to the company’s Registration Statement
                No. 33-86258 on Form S-1).10.1
            Employment****Agreement
                dated January 16, 2007, by and between Michael C. Crapps and the
                Company
                (incorporated by reference to Exhibit 10.1 to the Company’s Current
                Report on Form 8-K filed on January 19, 2007).*10.2
            Employment
                Agreement dated June 1, 1994, by and between James C. Leventis and
                the Company (incorporated by reference to Exhibit 10.2 to the company’s
                Registration Statement No. 33-86258 on Form S-1).*10.3
            1996
                Stock Option Plan and Form of Option Agreement (incorporated by reference
                to Exhibit 10.6 to the company’s annual report for fiscal year ended
                December 31, 1995 on Form 10-KSB).*10.4
            First
                Community Corporation 1999 Stock Incentive Plan and Form of Option
                Agreement (Incorporated by reference to the Company’s 1998 Annual Report
                and Form 10-KSB).*10.5
            Employment
                Agreement dated September 2, 2002 by and between David K. Proctor
                and the
                Company (incorporated by reference to Exhibit 10.4 to the company’s
                2002 annual report and Form 10-KSB).*10.6
            Employment
                Agreement dated June 12, 2002 by and between Joseph G. Sawyer and the
                Company (incorporated by reference to Exhibit 10.5 to the company’s
                2002 annual report and Form 10-KSB).*10.7
            First
                Amendment to the First Community Corporation 1999 Stock Incentive
                Plan
                (incorporated by reference to the company's Form 10-K for the period
                ended
                December 31, 2005).*10.8
            Agreement
                between First Community Bank and Summerfield Associates, Inc. dated
                June
                28, 2005 (incorporated by reference to Exhibit 10.1 of the company’s Form
                8-K filed on August 15, 2005).10.9
            Divided
                Reinvestment Plan dated July 7, 2003 (incorporated by reference to
                Form
                S-3/D filed with the SEC on July 14, 2003, File No.
                333-107009).*10.10
            Employment,
                Consulting, and Noncompete Agreement between First Community Bank,
                N.A.,
                Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and Steve
                P.
                Sligh dated April 12, 2004 (incorporated by reference to Exhibit
                10.6 to
                the company’s Registration Statement No. 333-116242 on Form
                S-4).10.11
            Employment,
                Consulting, and Noncompete Agreement between First Community Bank,
                N.A.,
                Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and J.
                Thomas
                Johnson dated April 12, 2004 (incorporated by reference to Exhibit
                10.7 to
                the company’s Registration Statement No. 333-116242 on Form
                S-4).10.12
            Amendment
                No. 1 to the Employment, Consulting, and Noncompete Agreement between
                First Community Bank N.A., and Steve P. Sligh dated September 14,
                2005 (incorporated by reference to Exhibit 10.1 to the company’s Form 8-K
                filed on September 15, 2005).10.13
            Form
                of Salary Continuation Agreement dated August 2, 2006 (incorporated
                by
                reference to Exhibit 10.1 to the company's Form 8-K filed on August
                3,
                2006).10.14
            Form
                of Non-Employee Director Deferred Compensation Plan approved September
                30,
                2006 (incorporated by reference to the company's Form 8-K filed October
                4,
                2006).




76
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          of Contents*




16
            Letter
                to SEC from Clifton D. Bodiford, CPA (incorporated by reference as
                Exhibit
                16 to the company's Form 8-K as filed May 19, 2006).21.1
            Subsidiaries
                of the company.23.1
            Consent
                of Independent Registered Public Accounting Firm - Clifton D. Bodiford,
                CPA23.2
            Consent
                of Independent Registered Public Accounting Firm - Elliott Davis,
                LLC**.**24.1
            Power
                of Attorney (contained on the signature page hereto).31.1
            Rule
                13a-14(a) Certification of the Chief Executive Officer.31.2
            Rule
                13a-14(a) Certification of the Chief Financial Officer.32
            Section
                1350 Certifications.




_________________________


*
            Management
                contract of compensatory plan or arrangement required to be filed
                as an
                Exhibit to this Annual Report on
                Form 10-K.