**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.  20549**




**Form
      10-K**


**(Mark
      One)**




**ý**
            
            **Annual
                Report under Section 13 or 15(d) of the Securities Exchange Act of
                1934****For
                the fiscal year ended December 31, 2005****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: None.


Securities
      registered pursuant to Section 12(g) 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





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





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          to Table of Contents


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, 2005, the aggregate market value of the registrant’s common stock held
      by non-affiliates of the registrant was $45,198,756 based on the closing sale
      price of $18.24 on June 30, 2005, as reported on The NASDAQ Capital Market





2,874,192
      shares of the issuer’s common stock were issued and outstanding as of March 1,
      2006.





**Documents
      Incorporated by Reference**





Proxy
      Statement for the Annual Meeting of Shareholders   Part
      III
      (Portions of Items 10-14)


to
      be
      held on May 17, 2006.













**TABLE
      OF CONTENTS**




PART
                IItem
                1. BusinessItem
                1A. Risk FactorsItem
                1B. Unresolved SEC Staff CommentsItem
                2. PropertiesItem
                3. Legal ProceedingsItem
                4. Submission of Matters to a Vote of Security
                HoldersPART
                IIItem
                5. Market for Registrant’s Common Equity, Related
                Stockholder Matters, and Issuers Purchases of Equity
                SecuritiesItem
                6. Selected Financial DataItem
                7. Management’s Discussion and Analysis of Financial Conditionand Results of OperationsItem
                7A. Quantitative and Qualitative Disclosures About
                Market RiskItem
                8. Financial Statementsand Supplementary DataConsolidated
                Balance
                SheetsConsolidated
                Statements of
                IncomeConsolidated
                Statement of Changes in Shareholders’
                Equity and Comprehensive Income (Loss)Consolidated
                Statements of Cash
                FlowsNotes
                to Consolidated Financial
                StatementsItem
                9. Changes in and Disagreements with Accountants on
                Accounting and Financial DisclosureItem
                9A. Controls and ProceduresItem
                9B. Other InformationPart
                IIIItem
                10. Directors and Executive Officers of the
                RegistrantItem
                11. Executive CompensationItem
                12. Security Ownership of Certain Beneficial Owners
                and Management and Related Stockholder MattersItem
                13. Certain Relationships and Related
                TransactionsItem
                14. Principal Accounting Fees and
                ServicesItem
                15. Exhibits,
                Financial Statement SchedulesSIGNATURES








**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;


·
            disruption
                from the merger may make it more difficult to maintain relationships
                with
                customers, employees, or suppliers;


·
            the
                required governmental approvals of the merger may not be obtained
                on the
                proposed terms and schedule;


·
            DeKalb
                shareholders may not approve the
                merger;


·
            changes
                in economic conditions;


·
            movements
                in interest rates;


·
            competitive
                pressures on product pricing and
                services;


·
            success
                and timing of other business
                strategies;


·
            the
                nature, extent, and timing of governmental actions and reforms;
                and


·
            extended
                disruption of vital infrastructure





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**





**Pending
      Merger**





On
      January 19, 2006, we entered into an agreement and plan of merger with DeKalb
      Bankshares, Inc., the parent holding company for The Bank of Camden. Pursuant
      to
      the merger agreement, DeKalb will be merged with and into First Community
      Corporation and The Bank of Camden will be merged with and into First Community
      Bank. Each share of DeKalb common stock will be converted into the right to
      receive $3.875 in cash and 0.60705 shares of our common stock. Assuming no
      DeKalb shareholders exercise dissenters’ rights, and assuming the total number
      of outstanding shares of DeKalb common stock immediately prior to the effective
      time is 610,139, we will issue an aggregate of 370,384 shares of stock and
      $2,364,289 in cash. The
      boards of directors of both parties have approved the merger agreement, and
      the
      merger agreement and the transactions contemplated thereby are subject to the
      approval of the shareholders DeKalb, regulatory approvals, and other customary
      closing conditions.





**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.  We engage in a commercial banking business from our
      main
      office in Lexington, South Carolina and our 11 full-service offices are located
      in Lexington (two), Forest Acres, Irmo, Cayce-West Columbia, Gilbert, Chapin,
      Northeast Columbia, Prosperity, and Newberry (two). We
      offer
      a wide-


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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, 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, and Newberry counties of South
      Carolina and the surrounding areas.





Richland
      County, Lexington 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 and Newberry Counties ,
      which
      include the primary service areas for the existing eleven sites of the bank,
      had
      estimated populations in 2004 of 334,609, 231,057 and 37,209,
      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 and Newberry Counties had estimated
      median household incomes of $39,737, $45,677 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
      savings and loan associations, 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 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 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.




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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.




**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 and
      Newberry Counties and elsewhere.  As of June 30, 2005, there were 19
      financial institutions operating approximately 166 offices in Lexington,
      Richland 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, 2005, we had 123 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. 
Beginning with the enactment of the Financial Institutions Reform Recovery
      and
      Enforcement Act in 1989 and followed by the FDIC Improvement Act in 1991 and
      the
      Gramm-Leach-Bliley Act in 1999, numerous additional regulatory requirements
      have
      been placed on the banking industry, and additional changes have been
      proposed.  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.




**USA
      PATRIOT Act of 2002**




In
      October 2002, the USA PATRIOT Act of 2002 was enacted in response to the
      terrorist attacks in New York, Pennsylvania, and Washington D.C. that occurred
      on September 11, 2001.  The PATRIOT Act is intended to strengthen U.S. law
      enforcement’s and the intelligence communities’ abilities to work cohesively to
      combat terrorism on a variety of fronts.  The potential impact of the
      PATRIOT Act on financial institutions is significant and wide ranging.  The
      PATRIOT Act contains sweeping anti-money laundering and financial transparency
      laws and imposes various regulations, including standards for verifying client
      identification at account opening, and rules to promote cooperation among
      financial institutions, regulators, and law enforcement entities in identifying
      parties who may be involved in terrorism or money laundering.




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**Check
      21**




On
      October 28, 2003, President Bush signed into law the Check Clearing for the
      21st
      Century Act, also known as Check 21. This law 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
      recrediting of funds to an individual’s account on the next business day after a
      consumer proves that the financial institution has erred.




This
      new
      legislation will likely continue to effect bank capital spending as many
      financial institutions assess whether technological or operational changes
      are
      necessary to stay competitive and take advantage of the new opportunities
      presented by Check 21.




**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 and the South Carolina Banking and Branching Efficiency
      Act.




*The
      Bank Holding Company Act.* Under the Bank Holding Company Act, we are subject to periodic examination
      by
      the Federal Reserve and are required to file periodic reports of our operations
      and any additional information that the Federal Reserve may require.  Our
      activities at the bank and holding company levels are limited to:




•  banking
      and managing or controlling banks;


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


•  engaging
      in other activities that the Federal Reserve determines to be so closely related
      to banking and managing or controlling banks as to be a proper incident
      thereto.




*Investments,
      Control, and Activities.* With certain limited exceptions, the Bank Holding Company Act requires every
      bank holding company to obtain the prior approval of the Federal Reserve
      before:




•  acquiring
      substantially all the assets of any bank;


•  acquiring
      direct or indirect ownership or control of any voting shares of any bank if
      after the acquisition it would own or control more than 5% of the voting shares
      of such bank (unless it already owns or controls the majority of such shares);
      or


•  merging
      or consolidating with another bank holding company.




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 the Securities Exchange
      Act of 1934.  The regulations provide a procedure for rebutting control
      when ownership of any class of voting securities is below 25%.




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Under
      the
      Bank Holding Company Act, a bank holding company is generally prohibited from
      engaging in, or acquiring direct or indirect control of more than 5% of the
      voting shares of any company engaged in, nonbanking activities unless the
      Federal Reserve Board, by order or regulation, has found those activities to
      be
      so closely related to banking or managing or controlling banks as to be a proper
      incident thereto.  Some of the activities that the Federal Reserve Board
      has determined by regulation to be proper incidents to the business of a bank
      holding company include:




•  making
      or
      servicing loans and certain types of leases;


•  engaging
      in certain insurance and discount brokerage activities;


•  performing
      certain data processing services;


•  acting
      in
      certain circumstances as a fiduciary or investment or financial
      adviser;


•  owning
      savings associations; and


•  making
      investments in certain corporations or projects designed primarily to promote
      community welfare.




The
      Federal Reserve Board imposes certain capital requirements on the 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 will be 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.




*Source
      of Strength; Cross-Guarantee.* 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 nonbank subsidiary,
      other than a nonbank subsidiary of a bank, upon the Federal Reserve Board’s
      determination that such activity or control constitutes a serious risk to the
      financial soundness or stability of any depository institution subsidiary of
      the
      bank holding company.  Further, federal bank regulatory authorities have
      additional discretion to require a bank holding company to divest itself of
      any
      bank or nonbank subsidiaries if the agency determines that divestiture may
      aid
      the depository institution’s financial condition.




*The
      Gramm-Leach-Bliley Act.* The Gramm-Leach-Bliley Act was signed into law on November 12, 1999.  Among
      other things, the Act repealed the restrictions on banks affiliating with
      securities firms contained in sections 20 and 32 of the Glass-Steagall
      Act.  The Act also permits bank holding companies that become financial
      holding companies to engage in a statutorily provided list of financial
      activities, including insurance and securities underwriting and agency
      activities, merchant banking, and insurance company portfolio investment
      activities.  The Act also authorizes activities that are “complementary” to
      financial activities.  We have not elected to become a financial holding
      company.




The
      Act
      is intended, in part, to grant to community banks certain powers as a matter
      of
      right that larger institutions have accumulated on an ad hoc basis. 
Nevertheless, the Act may have the result of increasing the amount of
      competition that we face from larger institutions and other types of
      companies.  In fact, it is not possible to predict the full effect that the
      Act will have on us.




*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.  We are
      not required to obtain the approval of the 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.  Deposits in the bank are insured by the


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Federal
      Deposit Insurance Corporation (“FDIC”) up to a maximum amount, which is
      generally $100,000 per depositor subject to the aggregation rule.





The
      Office of the Comptroller of the Currency 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
      Office of the Comptroller of the Currency 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
      Office of 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.




Under
      the
      FDIC Improvement Act, 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 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 Improvement Act directs the FDIC to develop 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 FDIC
      Improvement Act also requires 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.




National
      banks and their holding companies which have been chartered or registered or
      have undergone a change in control within the past two years or which have
      been
      deemed by the Office of the Comptroller of the Currency or the Federal Reserve
      Board to be troubled institutions must give the Office of the Comptroller of
      the
      Currency or the Federal Reserve Board 30 days prior notice of the appointment
      of
      any senior executive officer or director.  Within the 30 day period, the
      Office of the Comptroller of the Currency or the Federal Reserve Board, as
      the
      case may be, may approve or disapprove any such appointment.




*Deposit
      Insurance -* The
      FDIC
      establishes rates for the payment of premiums by federally insured commercial
      banks and savings banks, or thrifts, for deposit insurance. The FDIC maintains
      a
      separate Bank Insurance Fund for banks and Savings Association Insurance Fund
      for savings banks and thrifts.  The FDIC has adopted a risk-based
      assessment system for determining an insured depository institutions’ insurance
      assessment rate.  The system


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takes
      into account the risks attributable to different categories and concentrations
      of assets and liabilities.  An institution is placed into one of three
      capital categories:  (1) well capitalized; (2) adequately capitalized; or
      (3) undercapitalized.  The FDIC also assigns an institution to one of three
      supervisory subgroups, based on the FDIC’s determination of the institution’s
      financial condition and the risk posed to the deposit insurance funds. 
Assessments range from 0 to 27 cents per $100 of deposits, depending on the
      institution’s capital group and supervisory subgroup.  In addition, the
      FDIC imposes assessments to help pay off the $780 million in annual interest
      payments on the $8 billion Financing Corporation bonds issued in the late 1980s
      as part of the government rescue of the thrift industry.  The FDIC
      assessment rate on our bank deposits currently is zero but may change in the
      future.  The FDIC may increase or decrease the assessment rate schedule on
      a semiannual basis.  An increase in the BIF or SAIF assessment rate could
      have a material adverse effect on our earnings, depending on the amount of
      the
      increase.




The
      FDIC
      may terminate its insurance of deposits if it finds that the institution has
      engaged in unsafe and unsound practices, is in an unsafe or unsound condition
      to
      continue operations, or has violated any applicable law, regulation, rule,
      order, or condition imposed by the FDIC.




*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.




The
      Federal Reserve Board has recently 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.  This
      regulation 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 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 Office of the Comptroller of the Currency 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.




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*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 Office of the Comptroller of
      the
      Currency.  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, in connection with examinations of
      financial institutions within their respective jurisdictions, the Federal
      Reserve, the FDIC, or the Office of the Comptroller of the Currency, shall
      evaluate the record of each financial institution 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.





*The
      Gramm-Leach-Bliley Act -* Under
      the
      Gramm-Leach-Bliley Act, 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 Gramm-Leach-Bliley Act 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 Gramm-Leach-Bliley Act imposes new
      restrictions on transactions between a bank and its financial subsidiaries
      similar to restrictions applicable to transactions between banks and nonbank
      affiliates.




The
      Gramm-Leach-Bliley Act also contains provisions regarding consumer
      privacy.  These provisions require financial institutions to disclose their
      policy for collecting and protecting confidential information.  Customers
      generally may prevent financial institutions from sharing personal financial
      information with nonaffiliated third parties except for third parties that
      market an institution’s own products and services.  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 the consumer.




*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;


•  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.




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*Capital
      Regulations -* The
      federal bank regulatory authorities have adopted risk-based capital guidelines
      for banks and bank holding companies that are designed to make regulatory
      capital requirements more sensitive to differences in risk profiles among banks
      and bank holding companies and account for off-balance sheet items.  The
      guidelines are minimums, and the federal regulators have noted that banks and
      bank holding companies contemplating significant expansion programs should
      not
      allow expansion to diminish their capital ratios and should maintain ratios
      in
      excess of the minimums.  We have not received any notice indicating that
      either First Community Corporation or First Community Bank, N.A. is subject
      to
      higher capital requirements.  The current guidelines require all bank
      holding companies and federally-regulated banks to maintain a minimum risk-based
      total capital ratio equal to 8%, of which at least 4% must be Tier 1
      capital.  Tier 1 capital includes common shareholders’ equity, qualifying
      perpetual preferred stock, and minority interests in equity accounts of
      consolidated subsidiaries, but excludes goodwill and most other intangibles
      and
      excludes the allowance for loan and lease losses.  Tier 2 capital includes
      the excess of any preferred stock not included in Tier 1 capital, mandatory
      convertible securities, hybrid capital instruments, subordinated debt and
      intermediate term-preferred stock, and general reserves for loan and lease
      losses up to 1.25% of risk-weighted assets.





The
      Federal Reserve guidelines contain an exemption from the capital requirements
      for “small bank holding companies.” On February 27, 2006, the Federal Reserve
      approved a new rule expanding the definition of a “small bank holding company.”
The new definition will include bank holding companies with less than $500
      million in total assets. Bank holding companies will not qualify under the
      new
      definition if they (i) are engaged in significant nonbanking activities either
      directly or indirectly through a subsidiary, (ii) conduct significant
      off-balance sheet activities, including securitizations or managing or
      administering assets for third parties, or (iii) have a material amount of
      debt
      or equity securities (including trust preferred securities) outstanding that
      are
      registered with the SEC. The new rule will be effective on March 30, 2006.
      Although we have less than $500 million in assets, it is unclear at this point
      whether we otherwise meet the requirements for qualifying as a “small bank
      holding company.” According to the Federal Reserve Board, the revision of the
      criterion to exclude any bank holding company that has outstanding a material
      amount of SEC-registered debt or equity securities reflects the fact that SEC
      registrants typically exhibit a degree of complexity of operations and access
      to
      multiple funding sources that warrants excluding them from the new policy
      statement and subjecting them to the capital guidelines. In the adopting release
      for the new rule, the Federal Reserve Board stated that what constitutes a
      "material" amount of SEC-registered debt or equity for a particular bank holding
      company depends on the size, activities and condition of the relevant bank
      holding company. In lieu of using fixed measurable parameters of materiality
      across all institutions, the rule provides the Federal Reserve with supervisory
      flexibility in determining, on a case-by-case basis, the significance or
      materiality of activities or securities outstanding such that a bank holding
      company should be excluded from the policy statement and subject to the capital
      guidelines. Prior to adoption of this new rule, our holding company was subject
      to these capital guidelines, as it had more than $150 million in assets. Until
      the Federal Reserve provides further guidance on the new rules, it will be
      unclear whether our holding company will be subject to the exemption from the
      capital requirements for small bank holding companies. Regardless, our bank
      falls under these minimum capital requirements as set per bank regulatory
      agencies, and both our bank and our holding company would be considered “well
      capitalized” under these guidelines.





Under
      these guidelines, banks’ and bank holding companies’ assets are given
      risk-weights of 0%, 20%, 50%, or 100%.  In addition, certain off-balance
      sheet items are given credit conversion factors to convert them to asset
      equivalent amounts to which an appropriate risk-weight applies.  These
      computations result in the total risk-weighted assets.  Most loans are
      assigned to the 100% risk category, except for first mortgage loans fully
      secured by residential property and, under certain circumstances, residential
      construction loans, both of which carry a 50% rating.  Most investment
      securities are assigned to the 20% category, except for municipal or state
      revenue bonds, which have a 50% rating, and direct obligations of or obligations
      guaranteed by the United States Treasury or United States Government agencies,
      which have a 0% rating.





The
      federal bank regulatory authorities also have implemented a leverage ratio,
      which is equal to Tier 1 capital as a percentage of average total assets less
      intangibles, to be used as a supplement to the risk-based guidelines.  The
      principal objective of the leverage ratio is to place a constraint on the
      maximum degree to which a bank holding company may leverage its equity capital
      base.  The minimum required leverage ratio for top-rated institutions is
      3%, but most institutions are required to maintain an additional cushion of
      at
      least 100 to 200 basis points.





The
      FDIC
      Improvement Act established a new capital-based regulatory scheme designed
      to
      promote early intervention for troubled banks, which requires the FDIC to choose
      the least expensive resolution of bank failures.  The new capital-based
      regulatory framework contains five categories of compliance with regulatory
      capital requirements, including “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized,” and “critically
      undercapitalized.”  To qualify as a “well capitalized” institution, a bank
      must have a


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leverage
      ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6%, and
      a
      total risk-based capital ratio of no less than 10%, and the bank must not be
      under any order or directive from the appropriate regulatory agency to meet
      and
      maintain a specific capital level.  Currently, we qualify as “well
      capitalized.”





Under
      the
      FDIC Improvement Act regulations, the applicable agency can treat an institution
      as if it were in the next lower category if the agency determines (after notice
      and an opportunity for hearing) that the institution is in an unsafe or unsound
      condition or is engaging in an unsafe or unsound practice.  The degree of
      regulatory scrutiny of a financial institution increases, and the permissible
      activities of the institution decrease, as it moves downward through the capital
      categories.  Institutions that fall into one of the three undercapitalized
      categories may be required to do some or all of the following:





•  submit
      a
      capital restoration plan;


•  raise
      additional capital;


•  restrict
      their growth, deposit interest rates, and other activities;


•  improve
      their management;


•  eliminate
      management fees; or


•  divest
      themselves of all or a part of their operations.





These
      capital guidelines can affect us in several ways. If we grow at a rapid pace,
      our capital may be depleted too quickly, and a capital infusion from our holding
      company may be necessary which could impact our ability to pay dividends. Our
      capital levels currently are adequate; however, rapid growth, poor loan
      portfolio performance, poor earnings performance, or a combination of these
      factors could change our capital position in a relatively short period of time.
      If we fail to meet these capital requirements, our bank would be required to
      develop and file a plan with the Office of the Comptroller of the Currency
      describing the means and a schedule for achieving the minimum capital
      requirements. In addition, our bank would generally not receive regulatory
      approval of any application that requires the consideration of capital adequacy,
      such as a branch or merger application, unless our bank could demonstrate a
      reasonable plan to meet the capital requirement within a reasonable period
      of
      time.  A bank that is not “well capitalized” is also subject to certain
      limitations relating to so-called “brokered” deposits.  Bank holding
      companies controlling financial institutions can be called upon to boost the
      institutions’ capital and to partially guarantee the institutions’ performance
      under their capital restoration plans.





*Enforcement
      Powers -* The
      Financial Institutions Reform Recovery and Enforcement Act expanded and
      increased civil and criminal penalties available for use by the federal
      regulatory agencies against depository institutions and certain
“institution-affiliated parties.”  Institution-affiliated parties primarily
      include management, employees, and agents of a financial institution, as well
      as
      independent contractors and consultants such as attorneys and accountants and
      others who participate in the conduct of the financial institution’s
      affairs.  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.





*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


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financial
      institutions.  We cannot predict whether or in what form any proposed
      regulation or statute will be adopted or the extent to which our business may
      be
      affected by any new regulation or statute.





**Item
      1A. Risk Factors**





***We
      cannot guarantee the consummation of our contemplated merger with DeKalb
      Bankshares, and if we do not complete the merger our results of operations
      and
      financial condition will be adversely affected.***





We
      will
      not be able to consummate the merger without the approval of certain state
      and
      federal regulatory agencies and the shareholders of DeKalb. Accordingly, we
      can
      give no assurances that those approvals will be obtained or that the acquisition
      will be completed. If we do not consummate the merger, our results of operations
      and financial condition will be adversely affected due to the costs we have
      incurred and time we have spent in preparing for the merger.





***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 and may not even be able
      to
      grow our business at all.  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 substantial 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. 
Because our loan portfolio has grown substantially, 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.


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***An
      economic downturn, especially one affecting the Lexington, Richland, and
      Newberry 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, and Newberry
      Counties and the surrounding area.  If the communities in which we operate
      do not grow or if prevailing economic conditions locally or nationally are
      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,
      or Newberry 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, 2005, 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


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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.




***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 clients, which could prevent us from obtaining
      clients and may cause us to pay higher interest rates to attract
      clients.***




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 client 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.***




Our
      acquisition of DeKalb Bankshares and The Bank of Camden is currently pending.
      If
      the merger is completed, we face a risk that the expected cost savings and
      any
      revenue synergies from the 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.





**Item
      1B. Unresolved SEC Staff Comments.**




None.





**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 is a 2.29 acre plot of land.  The site was purchased for
      $576,000.  We are operating 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 for future
      expansion.  This site was designed to allow for 24,000 to 48,000 square
      foot facility at some future date. The bank has begun construction of a 28,000
      square foot administrative center on the additional 2.0 acres. The total
      construction cost for the building is approximately $3.4 million. At December
      31, 2005 the company had disbursed


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 14


approximately
      $1.4 million under the terms of the contract. It is anticipated the facility
      will be completed in July 2006.




*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.




*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.




*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.




*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.





*Chapin
      Office.* We
      operate a branch office facility at 137 Amicks Ferry Rd., Chapin, South Carolina
      29036. The facility is approximately 2,200 square feet and is located on a
      three
      acre lot.  The total cost of the facility and land was approximately
      $695,000. The bank has entered into a contract to build a 3,000 square foot
      facility on the same property to replace the existing 2,200 square foot modular
      building. The total construction cost is approximately $650,000. At December
      31,
      2005 approximately $590,000 has been disbursed under the terms of the contract.
      The new facility was completed in February 2006.




*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.





*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.





*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.




*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.





*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.




*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.




**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.




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 15


**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.





**PART
      II**


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




As
      of
      March 1, 2006, there were approximately 1,190 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 2005 and 2004, 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****2005**Quarter
                ended March 31, 2005
            
            $
            21.75
            
            $
            18.80
            
            $
            0.05Quarter
                ended June 30, 2005
            
            $
            20.49
            
            $
            17.75
            
            $
            0.05Quarter
                ended September 30, 2005
            
            $
            20.45
            
            $
            18.50
            
            $
            0.05Quarter
                ended December 31, 2005
            
            $
            20.50
            
            $
            18.45
            
            $
            0.05**2004**Quarter
                ended March 31, 2004
            
            $
            24.50
            
            $
            21.75
            
            $
            0.05Quarter
                ended June 30, 2004
            
            $
            24.00
            
            $
            20.50
            
            $
            0.05Quarter
                ended September 30, 2004
            
            $
            22.97
            
            $
            20.00
            
            $
            0.05Quarter
                ended December 31, 2004
            
            $
            20.70
            
            $
            18.30
            
            $
            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, 2005, the bank had $6.3 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.





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 16


**Item
      6. Selected Financial Data**








**First
                Community Corporation****Selected
                Financial Data**(Amounts
                in thousands, except per share data)Year
                ended December 31,2005
            
            2004
            
            2003
            
            2002
            
            2001**Operations
                Statement Data:**Net
                interest income
            
            $
            12,994
            
            $
            9,596
            
            $
            7,648
            
            $
            7,044
            
            $
            5,523Provision
                for loan losses
            
            
            329
            
            
            245
            
            
            167
            
            
            677
            
            
            407Non-interest
                income
            
            
            3,298
            
            
            1,774
            
            
            1,440
            
            
            1,232
            
            
            938Non-interest
                expense
            
            
            11,838
            
            
            7,977
            
            
            6,158
            
            
            5,377
            
            
            4,381Income
                taxes
            
            
            1,032
            
            
            963
            
            
            965
            
            
            758
            
            
            569Net
                income
            
            $
            3,093
            
            $
            2,185
            
            $
            1,797
            
            $
            1,464
            
            $
            1,104**Per
                Share Data:**Net
                income diluted (1)
            
            $
            1.04
            
            $
            1.09
            
            $
            1.08
            
            $
            0.90
            
            $
            $
                $ 0.68Cash
                dividends
            
            
            .20
            
            
            0.20
            
            
            0.19
            
            
            0.12
            
            
            -Book
                value at period end (1)
            
            
            17.82
            
            
            18.09
            
            
            12.21
            
            
            11.61
            
            
            10.56Tangible
                book value at period end (1)
            
            
            8.34
            
            
            8.19
            
            
            11.74
            
            
            11.02
            
            
            9.85**Balance
                Sheet Data:**Total
                assets
            
            $
            467,455
            
            $
            455,706
            
            $
            215,029
            
            $
            195,201
            
            $
            156,555Loans,
                net
            
            
            221,668
            
            
            184,007
            
            
            119,304
            
            
            98,466
            
            
            86,518Securities
            
            
            176,372
            
            
            196,026
            
            
            58,954
            
            
            69,785
            
            
            46,366Deposits
            
            
            349,604
            
            
            337,064
            
            
            185,259
            
            
            168,062
            
            
            134,402Shareholders'
                equity
            
            
            50,767
            
            
            50,463
            
            
            19,509
            
            
            18,439
            
            
            16,776Average
                shares outstanding (1)
            
            
            2,847
            
            
            1,903
            
            
            1,590
            
            
            1,588
            
            
            1,585**Performance
                Ratios:**Return
                on average assets
            
            
            0.67
            %
            
            0.76
            %
            
            0.88
            %
            
            0.82
            %
            
            0.77
            %Return
                on average equity
            
            
            6.12
            %
            
            8.00
            %
            
            9.49
            %
            
            8.35
            %
            
            8.00
            %Return
                on average tangible equity
            
            
            13.33
            %
            
            10.39
            %
            
            9.94
            %
            
            8.87
            %
            
            7.40
            %Net
                interest margin
            
            
            3.30
            %
            
            3.72
            %
            
            4.02
            %
            
            4.26
            %
            
            4.19
            %Dividend
                payout ratio
            
            
            18.35
            %
            
            17.39
            %
            
            16.81
            %
            
            13.04
            %
            
            N/A**Asset
                Quality Ratios:**Allowance
                for loan losses to periodend
                total loans
            
            
            1.22
            %
            
            1.48
            %
            
            1.41
            %
            
            1.53
            %
            
            1.14
            %Allowance
                for loan losses tonon-performing
                assets
            
            
            487.48
            %
            
            2,291.34
            %
            
            2,123.60
            %
            
            1,059.24
            %
            
            247.00
            %Non-performing
                assets to total assets
            
            
            .12
            %
            
            .03
            %
            
            .04
            %
            
            .07
            %
            
            0.26
            %Net
                charge-offs (recoveries) to average loans
            
            
            .19
            %
            
            .13
            %
            
            (.01
            %)
            
            .16
            %
            
            0.35
            %**Capital
                and Liquidity Ratios:**Tier
                1 risk-based capital
            
            
            13.24
            %
            
            12.91
            %
            
            13.21
            %
            
            14.03
            %
            
            14.90
            %Total
                risk-based capital
            
            
            14.12
            %
            
            13.86
            %
            
            14.42
            %
            
            15.28
            %
            
            15.90
            %Leverage
                ratio
            
            
            9.29
            %
            
            8.51
            %
            
            8.87
            %
            
            8.77
            %
            
            10.00
            %Equity
                to assets ratio
            
            
            10.86
            %
            
            9.60
            %
            
            9.07
            %
            
            9.45
            %
            
            10.72
            %Average
                loans to average deposits
            
            
            59.81
            %
            
            61.00
            %
            
            63.33
            %
            
            60.71
            %
            
            68.66
            %(1)
                Adjusted for the June 30, 2001 5% stock dividend and
                the February 28, 2002 5-for-4 stock split.




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**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 11 full-service offices are located
      in Lexington (two), Forest Acres, Irmo, Cayce-West Columbia, Gilbert, Chapin,
      Northeast Columbia, Prosperity, and Newberry (two).  During
      the fourth quarter of 2004,
      we
      completed our first acquisition of another financial institution when we merged
      with DutchFork Bancshare s,
      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
      2005, we continued to implement our strategy to fully leverage the DutchFork
      acquisition. We experienced significant loan growth of 18.7 %,
      or
      $34.9 million. This was particularly important since in planning the merger
      with
      DutchFork management considered the need to leverage the existing deposit base
      in Newberry County through quality growth in the loan portfolio. This growth
      was
      funded by deposit growth of approximately 3.7%, or $12.5 million, along with
      cash flow generated from a decrease in the size of the investment portfolio.
      During the fourth quarter of 2004 and first quarter of 2005, we restructured
      much of the investment portfolio in order to provide the needed cash flow to
      fund loan growth. Total assets grew to $467.5 million, loans to $221.7 million
      and deposits to $349.6 million at December 31, 2005.




Our
      net
      income increased $908,000 in 2005, or 41.6%, over the year ended December 31,
      2004. The increase was attributable to having the operation of the DutchFork
      acquisition included for a full year in 2005 as compared to only three months
      during 2004. Net income was $3.1 million, or $1.04 diluted earnings per share
      in
      2005, compared to $2.2 million, or $1.09 diluted earnings per share in 2004.




The
      following discussion describes our
      results of operations for 2005 as compared to 2004 (and 2004 compared to 2003)
      and also analyzes our financial condition as of December 31, 2005 as compared
      to
      December 31, 2004. 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 2005,
      2004 and 2003
      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.


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 18


**Mergers**





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 millio n,
      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 year ended December 31, 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 impacted by the merger.




On
      January 19, 2006, we announced that we had signed a definitive agreement to
      acquire DeKalb Bankshares, Inc., the holding company for the Bank of Camden.
      The
      agreement provides, among other things, that DeKalb will merge with and into
      First Community with First Community as the surviving entity.  Immediately
      following the merger, the Bank of Camden will merge with and into First
      Community Bank, N.A., with First Community Bank, N.A. being the surviving
      entity. Pursuant to the agreement, each share of DeKalb common stock issued
      and
      outstanding immediately before the effective date (as defined in the agreement)
      will be converted into the right to receive $3.875 in cash and 0.60705 shares
      of
      First Community common stock. Assuming no DeKalb shareholders exercise
      dissenters’ rights, and assuming the total number of outstanding shares of
      DeKalb common stock immediately prior to the effective time is 610,139, First
      Community will issue an aggregate of 370,384 shares of stock and $2,364,289
      in
      cash. The
      boards of directors of both parties have approved the merger agreement, and
      the
      merger agreement and the transactions contemplated thereby are subject to the
      approval of the shareholders DeKalb, regulatory approvals, and other customary
      closing conditions.




**Results
      of Operations**




Our
      net
      income was $3.1 million, or $1.04 diluted earnings per share, for the year
      ended
      December 31, 2005, as compared to net income of $2.2 million, or $1.09 diluted
      earnings per share, for the year ended December 31, 2004, and $1.8 million,
      or
      $1.08 diluted earnings per share for the year ended December 31, 2003. The
      increase in net income for 2005 as compared to 2004 resulted primarily from
      an
      increase in the level of average earning assets of $136.0 million. The effect
      of
      the increase in earning assets was offset by a decrease in the net interest
      margin from 3.72% during 2004 to 3.30% during 2005. On a tax equivalent basis,
      the net interest margin was 3.44% and 3.82% for the years ended December 31,
      2005 and 2004, respectively. Net interest spread, the difference between the
      yield on earning assets and the rate paid on interest-bearing liabilities,
      was
      3.05% in 2005 as compared to 3.46% in 2004 and 3.71% in 2003. Net interest
      income increased from $9.6 million in 2004 to $13.0 million for the year ended
      December 31, 2005. The provision for loan losses was $329,000 in 2005 as
      compared to $245,000 in 2004. Non-interest income increased from $1.8 million
      in
      2004 to $3.3 million in 2005 due primarily to increased deposit service charges
      resulting from higher average deposit account balances. In
      addition, there were gains on sale of securities of $188,000 in 2005 as compared
      to $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 .




The
      increase in net income from 200 3
      to 2004
      resulted primarily from an
      increase in the level of average earning assets of $67.6 million , which
      was
      partially offset by a decrease in the net interest margin from 4.02% in 2003
      compared to 3.72% in 2004. Earning assets averaged $ 257.9
      million in 2004 as compared to $190.3 million in 2003. Non-interest income
      increased from $1.4 million in 2003 to $1.8 million in 2004 due to increased
      deposit service charges and increases in ATM/debit card fees and ATM surcharge
      fees. Non-interest expense increased to $8.0 million in 2004 as compared to
      $6.2
      million in 2003. This increase is
      attributable to increases in all expense categories required to support the
      continued growth of the bank as well as expenses related to the operations
      of
      the branches acquired in the DutchFork acquisition on October 1,
      2004.






**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.


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 19


Net
      interest income totaled $13.0 million in 2005, $9.6 million in 2004 and $7.6
      million in 2003. The yield on earning assets, which was 5.27% in 2003, decreased
      to 5.06% in 2004 and increased to 5.42% in 2005. The rate paid on
      interest-bearing liabilities was 1.56% in 2003, 1.60% in 2004 and 2.37% in
      2005 .
      The net
      interest margin was 4.02% in 2003, 3.72% in 2004 and 3.30% in 2005. The
      continued decrease in net interest margin in 2005 as compared to 2004 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. The flattening
      of the yield curve as well as a very competitive deposit and lending environment
      also contributed the decline in the net interest margin. As a result of the
      acquisition of DutchFork ,
      our
      loan to deposit ratio on average during 2005 was 59.8%, slightly lower then
      the
      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, 2005,
      the
      loan to deposit ratio had increased to 63.4%.





The
      yield
      on earning assets increased by 36 basis points in 2005 as compared to 2004
      whereas, the cost of interest-bearing funds increased by 77 basis points during
      the same period. The higher increase in the cost of funds as compared to yield
      on interest earning assets was due to the higher reliance on borrowed funds
      in
      2005 as compared to 2004. The average borrowed funds to total interest
      bearing-liabilities in 2003 was 5.2%, as compared to 11.4% and 19.2% in 2004
      and
      2005, 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. These longer term borrowed funds
      typically have a higher interest rate than our mix of deposit products. This
      contributed to the increases in the rates paid on interest-bearing liabilities
      from 1.56%, 1.60% and 2.37% in 2003, 2004 and 2005 respectively. The increased
      reliance on borrowed funds contributed to the decline in the net interest margin
      to 3.30% in 2005 as compared to 3.72% and 4.02% in 2004 and 2003, respectively.





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 20


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.


(In
                    thousands)
                
                Year
                    ended December 31,2005
                
                2004
                
                2003Average
                
                Income/
                
                Yield/
                
                Average
                
                Income/
                
                Yield/
                
                Average
                
                Income/
                
                Yield/Balance
                
                Expense
                
                Rate
                
                Balance
                
                Expense
                
                Rate
                
                Balance
                
                Expense
                
                Rate**Assets**Earning
                    assetsLoans
                
                $
                202,143
                
                $
                13,608
                
                
                6.73
                %
                $
                141,793
                
                $
                9,063
                
                
                6.39
                %
                $
                111,928
                
                $
                7,582
                
                
                6.77
                %Securities
                
                
                184,057
                
                
                7,465
                
                
                4.06
                %
                
                92,933
                
                
                3,647
                
                
                3.92
                %
                
                60,261
                
                
                2,267
                
                
                3.76
                %Other
                    short-term investments (2)
                
                
                7,670
                
                
                271
                
                
                3.54
                %
                
                23,167
                
                
                334
                
                
                1.44
                %
                
                18,089
                
                
                179
                
                
                0.99
                %Total
                    earning assets
                
                
                393,871
                
                
                21,344
                
                
                5.42
                %
                
                257,893
                
                
                13,044
                
                
                5.06
                %
                
                190,278
                
                
                10,028
                
                
                5.27
                %Cash
                    and due from banks
                
                
                10,456
                
                
                
                
                
                
                
                
                8,425
                
                
                
                
                
                
                
                
                6,626Premises
                    and equipment
                
                
                14,710
                
                
                
                
                
                
                
                
                9,740
                
                
                
                
                
                
                
                
                7,440Other
                    assets
                
                
                42,724
                
                
                
                
                
                
                
                
                12,173
                
                
                
                
                
                
                
                
                2,195Allowance
                    for loan losses
                
                
                (2,774
                )
                
                
                
                
                
                
                
                (2,063
                )
                
                
                
                
                
                
                
                (1,744
                )Total
                    assets
                
                $
                458,987
                
                
                
                
                
                
                
                $
                286,168
                
                
                
                
                
                
                
                $
                204,795**Liabilities**Interest-bearing
                    liabilitiesInterest-bearing
                    transaction accounts
                
                $
                55,289
                
                
                187
                
                
                0.34
                %
                $
                36,906
                
                
                66
                
                
                0.30
                %
                $
                31,892
                
                
                66
                
                
                0.21
                %Money
                    market accounts
                
                
                41,615
                
                
                829
                
                
                1.99
                %
                
                29,568
                
                
                284
                
                
                0.96
                %
                
                25,122
                
                
                231
                
                
                0.92
                %Savings
                    deposits
                
                
                31,988
                
                
                214
                
                
                0.67
                %
                
                22,070
                
                
                155
                
                
                0.70
                %
                
                12,041
                
                
                84
                
                
                0.70
                %Time
                    deposits
                
                
                156,131
                
                
                4,513
                
                
                2.89
                %
                
                102,322
                
                
                2,180
                
                
                2.13
                %
                
                75,.391
                
                
                1,927
                
                
                2.56
                %Other
                    borrowings
                
                
                67,941
                
                
                2,606
                
                
                3.84
                %
                
                24,596
                
                
                719
                
                
                2.92
                %
                
                7,855
                
                
                72
                
                
                0.92
                %Total
                    interest-bearing liabilities
                
                
                352,964
                
                
                8,349
                
                
                2.37
                %
                
                215,462
                
                
                3,448
                
                
                1.60
                %
                
                152,301
                
                
                2,380
                
                
                1.56
                %Demand
                    deposits
                
                
                52,964
                
                
                
                
                
                
                
                
                41,663
                
                
                
                
                
                
                
                
                32,304Other
                    liabilities
                
                
                2,536
                
                
                
                
                
                
                
                
                1,573
                
                
                
                
                
                
                
                
                1,243Shareholders'
                    equity
                
                
                50,522
                
                
                
                
                
                
                
                
                27,470
                
                
                
                
                
                
                
                
                18,947Total
                    liabilities and shareholders' equity
                
                $
                458,986
                
                
                
                
                
                
                
                $
                286,168
                
                
                
                
                
                
                
                $
                204,795Net
                    interest spread
                
                
                
                
                
                
                
                
                3.05
                %
                
                
                
                
                
                
                
                3.46
                %
                
                
                
                
                
                
                
                3.71
                %Net
                    interest income/margin
                
                
                
                
                $
                12,994
                
                
                3.30
                %
                
                
                
                $
                9,596
                
                
                3.72
                %
                
                
                
                $
                7,648
                
                
                4.02
                %(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.








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 21


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)2005
                versus 2004
            
            2004
                versus 2003Increase
                (decrease ) due
              to
            
            Increase
                (decrease ) due
              toVolume
            
            Rate
            
            Net
            
            Volume
            
            Rate
            
            Net**Assets**Earning
                assetsLoans
            
            $
            4,092
            
            $
            453
            
            $
            4,545
            
            $
            1,929
            
            $
            (448
            )
            $
            1,481Investment
                securities
            
            
            3,700
            
            
            118
            
            
            3,818
            
            
            1,287
            
            
            93
            
            
            1,380Other
                short-term investments (1)
            
            
            (
                326
            )
            
            262
            
            
            (
                64
            )
            
            14
            
            
            141
            
            
            155Total
                earning assets
            
            
            7,445
            
            
            854
            
            
            8,299
            
            
            3,435
            
            
            (419
            )
            
            3,016Interest-bearing
                liabilitiesInterest-bearing
                transaction accounts
            
            
            65
            
            
            12
            
            
            77
            
            
            8
            
            
            36
            
            
            44Money
                market accounts
            
            
            150
            
            
            394
            
            
            544
            
            
            42
            
            
            11
            
            
            53Savings
                deposits
            
            
            67
            
            
            (7
            )
            
            60
            
            
            71
            
            
            1
            
            
            72Time
                deposits
            
            
            2,418
            
            
            (85
            )
            
            2,333
            
            
            610
            
            
            (357
            )
            
            253Other
                short term borrowings
            
            
            1,603
            
            
            284
            
            
            1,887
            
            
            321
            
            
            325
            
            
            646Total
                interest-bearing liabilities
            
            
            6,394
            
            
            (1,493
            )
            
            4,901
            
            
            1,013
            
            
            55
            
            
            1,068Net
                interest income
            
            
            
            
            
            
            
            $
            3,398
            
            
            
            
            
            
            
            $
            1,948







**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
      changes in the volume and mix of earning assets and interest-bearing
      liabilities.




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 22


The
      following table illustrates our interest rate sensitivity at December 31,
      2005.






**Interest
      Sensitivity Analysis**




*(In
        thousands*


Within
              
              One
                  to
              
              Three
                  to
              
              OverOne
                  Year
              
              Three
                  Years
              
              Five
                  Years
              
              Five
                  Years
              
              TotalAssetsEarning
                  assetsLoans
                  (1)
              
              $
              115,297
              
              $
              55,128
              
              $
              49,355
              
              $
              1,787
              
              $
              221,567Securities
              
              
              50,858
              
              
              46,480
              
              
              49,586
              
              
              35,100
              
              
              182,024Federal
                  funds sold, securitiespurchased under agreements toresell
                  and other earning assets
              
              
              1,162
              
              
              -
              
              
              -
              
              
              -
              
              
              1,162Total
                  earning assets
              
              
              167,317
              
              
              101,608
              
              
              98,941
              
              
              36,887
              
              
              404,753LiabilitiesInterest
                  bearing liabilitiesInterest
                  bearing depositsNOW
                  accounts
              
              
              15,188
              
              
              27,340
              
              
              9,114
              
              
              9,113
              
              
              60,755Money
                  market accounts
              
              
              21,967
              
              
              23,616
              
              
              -
              
              
              -
              
              
              45,583Savings
                  deposits
              
              
              8,946
              
              
              12,524
              
              
              4,174
              
              
              4,174
              
              
              29,818Time
                  deposits
              
              
              107,338
              
              
              23,633
              
              
              25,130
              
              
              20
              
              
              156,121Total
                  interest-bearing deposits
              
              
              153,439
              
              
              87,113
              
              
              38,418
              
              
              13,307
              
              
              292,277Other
                  borrowings
              
              
              30,939
              
              
              5,251
              
              
              27,306
              
              
              467
              
              
              63,963Total
                  interest-bearing liabilities
              
              
              184,378
              
              
              92,364
              
              
              65,724
              
              
              13,774
              
              
              356,240Period
                  gap
              
              
              ($
                  17,061
              )
              $
              9,244
              
              $
              33,217
              
              $
              23,113
              
              $
              48,513Cumulative
                  gap
              
              
              ($
                  17,061
              )
              
              ($
                  7,817
              )
              $
              25,400
              
              $
              48,513
              
              $
              48,513Ratio
                  of cumulative gap to totalearning
                  assets
              
              
              (4.22
              %)
              
              (1.93
              %)
              
              6.28
              %
              
              11.99
              %
              
              11.99
              %







(1)
            Loans
                classified as non-accrual as of December 31, 2005 are not included
                in the
                balances.


(2)
            Securities
                based on amortized cost.





We
      are
      currently liability sensitive within one year. However, our gap analysis is
      not
      a precise indicator of our interest sensitivity position. The analysis presents
      only a static view of the timing of maturities and repricing opportunities,
      without taking into consideration that changes in interest rates do not affect
      all assets and liabilities equally. Net
      interest income is also impacted
      by other significant factors, including changes in the volume and mix of earning
      assets and interest-bearing liabilities. The GAP analysis includes the carrying
      amounts of interest rate sensitive assets and liabilities in the periods in
      which they next reprice to market rates or mature. To reflect anticipated
      prepayments, certain asset and liability categories are shown in the table
      using
      estimated cash flows rather than contractual cash flows.




During
      the quarter ended September 30, 2005, we entered into an interest rate cap
      agreement with a notional amount of $10.0 million expiring on September 1,
      2009.
      The cap rate of interest is 4.50% and the index is the three month LIBOR. The
      agreement was entered into to protect assets and liabilities from the negative
      effects of increasing interest rates. The agreement provides for a payment
      to us
      of the difference between the cap rate of interest and the market rate of
      interest. Our exposure to credit risk is limited to the ability of the
      counterparty to make potential future payments required pursuant to the
      agreement. Our exposure to market risk of loss is limited to the market value
      of
      the cap. At December 31, 2005, the market value of this cap was $193,000. Any
      gain or loss on the value of this contract is recognized in earnings on a
      current basis. We have not received any payments under the terms of the
      contract. During the year ended December 31, 2005, we recognized $37,500 in
      other income to reflect the increase in the value of the contract





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 23


Through
      simulation modeling, management monitors 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, 2005 and 2004 over the subsequent 12 months.





*Net
      Interest Income Sensitivity*




Change
                  in
                short-term
                interest
                rates
              Hypothetical
                percentage
                  changein
                net
                  interest income
                December
                  31,2005
              2004+200bp
              +
                  0.74%
              +
                  1.56%+100bp
              +
                  0.75%
              +
                  0.96%Flat
              -
              --100bp
              -
                  2.79%
              -
                  6.44%-200bp
              -
                  8.30%
              -
                  14.33%





As
      a
      result of the size of the investment portfolio that was acquired in the
      DutchFork merger and the amount and type of fixed rate longer term investments
      that were in the portfolio ,
      we
      emphasized restructuring the portfolio in the fourth quarter of 2004 and in
      the
      first quarter of 2005. The purpose was to shorten the average life of the
      portfolio and acquire investments that provided cash flow and/or were adjustable
      rate instruments. Although this
      resulted in a reduction in investment yield, we believe that the
      restructuring positioned us more appropriately for interest rate
      volatility and
      continues to provide a significant amount of additional cash flow to fund
      desired loan growth.





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, 2005 and 2004 the PVE, exposure in a plus 200 basis point increase
      in market interest rates was estimated to be 8.03% and 6.5%,
      respectively.




**Provision
      and Allowance for Loan Losses**




At
      December 31, 2005, the allowance for loan losses amounted to $2.7 million,
      or
      1.22% of total loans, as compared to $2.8 million, or 1.48% of total loans,
      at
      December 31, 2004. Our provision for loan loss was $329,000 for the year ended
      December 31, 2005 as compared to $245,000 and $167,000 for the years ended
      December 31, 2004 and 2003, respectively. The provisions are 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. 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


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 24


allowance
      consist of an allocated and unallocated allowance. The allocated portion is
      determined by types and ratings of 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, 2005, 2004, and 2003, we had non-accrual loans in the amount of
      $101,000, $0, and $80,000 ,
      respectively. There
      were $387,000, $411,000 and $96,000 in loans delinquent greater than 30 days
      at
      December 31, 2005, 2004 and 2003, respectively. There were $39,000, $80,000
      and
      $109,000 in loans greater than 90 days delinquent and still accruing interest
      at
      December 31, 2005, 2004 and 2003, respectively. As
      a
      result of the merger with DutchFork, we acquired an allowance for loan losses
      in
      the amount of $995,000. This allowance for loan losses had been recorded through
      the provision for loan losses for DutchFork prior to the merger, which was
      consummated on October 1, 2004.





Our
      management continuously monitors non-performing, classified and past due loans,
      to identify deterioration regarding the condition of these loans. We identified
      four loans in the amount of $618,000 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)




2005
            
            2004
            
            2003
            
            2002
            
            2001Average
                loans outstanding
            
            $
            202,143
            
            $
            141,793
            
            $
            111,928
            
            $
            93,992
            
            $
            79,466Loans
                outstanding at period end
            
            $
            221,668
            
            $
            186,771
            
            $
            121,009
            
            $
            99,991
            
            $
            87,519Total
                nonaccrual loans
            
            $
            101
            
            
            -
            
            $
            80
            
            $
            144
            
            $
            404Loanspast due 90 days and still accruing
            
            $
            34
            
            $
            80
            
            $
            109
            
            $
            24
            
            $
            -Beginning
                balance of allowance
            
            $
            2,764
            
            $
            1,705
            
            $
            1,525
            
            $
            1,000
            
            $
            873Loans
                charged-off:1-4
                family residential mortgage
            
            
            119
            
            
            5
            
            
            27
            
            
            -
            
            
            7Home
                equity
            
            
            274
            
            
            -
            
            
            -
            
            
            -
            
            
            -Commercial
            
            
            56
            
            
            196
            
            
            157
            
            
            156
            
            
            270Installment
                & credit card
            
            
            72
            
            
            93
            
            
            51
            
            
            16
            
            
            7Total
                loans charged-off
            
            
            521
            
            
            294
            
            
            235
            
            
            172
            
            
            284Recoveries:1-4
                family residential mortgage
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Home
                equity
            
            
            -
            
            
            -
            
            
            -
            
            
            19
            
            
            -Commercial
            
            
            99
            
            
            90
            
            
            247
            
            
            1
            
            
            4Installment
                & credit card
            
            
            30
            
            
            23
            
            
            1
            
            
            -
            
            
            -Total
                recoveries
            
            
            129
            
            
            113
            
            
            248
            
            
            20
            
            
            4Net
                loans charged off (recovered)
            
            
            392
            
            
            181
            
            
            (
                13
            )
            
            152
            
            
            280Provision
                for loan losses
            
            
            329
            
            
            245
            
            
            167
            
            
            677
            
            
            407Purchased
                in acquisition
            
            
            -
            
            
            995
            
            
            -
            
            
            -
            
            
            -Balance
                at period end
            
            $
            2,701
            
            $
            2,764
            
            $
            1,705
            
            $
            1,525
            
            
            1,000Net
                charge -offs to average loans
            
            
            0.19
            %
            
            0.13
            %
            
            (0.01
            %)
            
            0.16
            %
            
            0.35
            %Allowance
                as percent of total loans
            
            
            1.22
            %
            
            1.48
            %
            
            1.41
            %
            
            1.53
            %
            
            1.14
            %Non-performing
                loans as % of total loans
            
            
            .05
            %
            
            -
            
            
            0.07
            %
            
            0.14
            %
            
            0.46
            %Allowance
                as % of non-performing loans
            
            
            2674.26
            %
            
            -
            
            
            2123.60
            %
            
            1059.03
            %
            
            247.52
            %






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 25


The
      following table presents an estimated allocation of the allowance for loan
      losses at the end of each of the past three 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*




2005
            
            2004
            
            2003Amount
            
            %
                of
              loans
                in
              category
            
            Amount
            
            %
                of
              loans
                in
              category
            
            Amount
            
            %
                of
              loans
                in
              categoryCommercial,
                Financial and Agricultural
            
            $
            574
            
            
            10.0
            %
            $
            462
            
            
            10.2
            %
            $
            167
            
            
            9.5
            %Real
                Estate Construction
            
            
            611
            
            
            9.0
            %
            
            348
            
            
            4.3
            %
            
            214
            
            
            6.4
            %Real
                Estate Mortgage:Commercial
            
            
            953
            
            
            50.9
            %
            
            1,285
            
            
            51.8
            %
            
            792
            
            
            60.1
            %Residential
            
            
            275
            
            
            16.8
            %
            
            478
            
            
            19.0
            %
            
            293
            
            
            9.8
            %Consumer
            
            
            213
            
            
            13.3
            %
            
            135
            
            
            14.7
            %
            
            85
            
            
            14.2
            %Unallocated
            
            
            75
            
            
            N/A
            
            
            56
            
            
            N/A
            
            
            36
            
            
            N/ATotal
            
            $
            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.





**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 and we receives 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, 2005
      was $3.3 million as compared to $1.8 million for 2004, an
      increase of $1.5 million, or 85.9%.
      This increase is due
      primarily to increased deposit service charges resulting from higher average
      deposit account balances. 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 which 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 $1.2 million in 2005
      as
      compared to $615,000 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


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 26


2005
      as
      compared to only three months in 2004.




Noninterest
      income amounted to $1.4 million in 2003. The increase in 2004 of $334,000, or 23.2% ,
      as
      compared to 2003 is also primarily attributable to increased deposit account
      balances and the related deposit account fees. Deposit account fees increased
      $ 179,000,
      or 25.6% ,
      in 2004
      as compared to 2003. ATM/debit
      card fees and ATM surcharge fees increased approximately $80,000 in 2004 as
      compared to 2003. This increase resulted from installing ATM’s at all branch
      locations as well as increased usage in card activity as a result of increases
      in numbers of accounts.  M ortgage
      loan fees decreased
      approximately $76,000 from $343,000 in 2003 to $268,000 in 2004. Despite
      interest rates remaining at relatively low levels, the refinancing level of
      the
      prior two years was not maintained throughout 2004. As
      a
      result of the merger with
      DutchFork in
      October 2004, noninterest income for
      three new
      offices was
      included in the results of operation for the last quarter of 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 evaluates and
      monitors growth in discretionary expense categories in order to control future
      increases. We have expanded our branch network over the last five years and
      opened our eleventh office in February 2005. Along with this branch expansion,
      we have continued to improve the support infrastructure to enable our company
      to
      effectively manage the growth experienced over the last five
      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 and the full year in 2005. As a result
      of management’s expansion strategy, all categories of noninterest 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.


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. These
      employees were included in operations for three months during 2004 and for
      the
      full year in 2005. The number of full time equivalent employees at December
      31,
      2005 was 123 as compared to 115 at the same time in 2004. These other 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. We continue to evaluate our
      technology systems in order to enhance our delivery of services. Noninterest
      expense in 2005,
      2004 and 2003 included amortization of the deposit premium intangible of $595,000,
      $213,000 and $179,000, 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.





Other
      noninterest expense increased to $2.6 million in 2005 as compared to $1.7
      million in 2004. Substantially
      all areas in this category increased due to the growth the company experienced
      as a result of the merger with DutchFork. 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. 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. To comply with certain aspects of the Sarbanes-Oxley Act,
      particularly Section 404, we hired an outside consultant to assist with certain
      documentation and testing of internal control functions. The Securities and
      Exchange Commission has granted an extension to non-accelerated filers to comply
      with the provisions of Section 404 to December 31, 2007. A significant portion
      of the documentation and consulting work was performed in 2005 in anticipation
      of having to comply as of an earlier implementation date. The direct cost
      relative to this work was approximately $35,000 in 2005. There will be continued
      cost incurred relative to complying with the requirements of Section 404 into
      2006 and beyond. We continue to evaluate the best options for utilizing
      consulting/outside resources for implementation and compliance with the
      requirements of Section 404.




Noninterest
      expense increased to $8.0 million for the year ended December 2004 from $6.2
      million for the year ended December 31, 2003. Salary and employee benefit
      expense increased $ 957,000
      in 2004 as compared to


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 27


2003.
      This increase resulted from an increase of 45 full time equivalent employees
      from 70 at December 31, 2003 to 115 at December 31, 2004. Approximately 30 of these employees were added October 1, 2004 as a result
      of
      the DutchFork merger. Equipment expense increased by $188,000 in 2004 as
      compared to 2004. This is primarily attributable to increased depreciation
      and
      maintenance contract expense related to equipment purchased to upgrade and
      improve technology. Marketing
      and public relations expense for 2004 as compared to 2003 increased by $52,000
      as a result of planned increases in advertising.





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


(In
                thousands)Year
                ended December 31,2005
            
            2004
            
            2003Salary
                and employee benefits
            
            $
            6,292
            
            $
            4,263
            
            $
            3,307Occupancy
            
            
            807
            
            
            489
            
            
            395Equipment
            
            
            1,246
            
            
            992
            
            
            803Marketing
                and public relations
            
            
            337
            
            
            325
            
            
            273Data
                processing
            
            
            199
            
            
            127
            
            
            87Supplies
            
            
            262
            
            
            191
            
            
            126Telephone
            
            
            291
            
            
            206
            
            
            147Correspondent
                services
            
            
            167
            
            
            140
            
            
            78Insurance
            
            
            246
            
            
            149
            
            
            141Professional
                fees
            
            
            415
            
            
            190
            
            
            194Postage
            
            
            164
            
            
            111
            
            
            85Amortization
                of intangibles
            
            
            595
            
            
            280
            
            
            179Other
            
            
            817
            
            
            514
            
            
            343$
            11,838
            
            $
            7,977
            
            $
            6,158




**Income
      Tax Expense**




Income
      tax expenses for the year ended December 31, 2005 were $1.0 million, or 25.0%
      of
      income before taxes ,
      as
      compared to $963,000 ,
      or
      30.6% of income before taxes, for the year ended December 31, 2004. Income
      taxes
      for 2003 were $965,000, or 34.9% 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, 2005 and 2004. The decrease in the effective tax rate in 2005
      over the prior year is primarily a result of non-taxable dividends received
      on
      preferred stock held in the available-for-sale portfolio as well as the
      non-taxable increase in the cash surrender value of life insurance. 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, 2005, we continue
      to hold preferred stock with a fair value of $28.2 million in the available
      for
      sale portfolio and bank owned life insurance with a book value of $5.8 million
      included in other assets. These holdings will continue to reduce the company’s
      effective tax rate in future periods. The decrease in the effective tax rate
      in
      2004 as compared to 2003 was also a primarily a result of these assets being
      held for the fourth quarter of 2004.





**Financial
      Position**




Total
      assets at December 31, 2005 were $467.5 million as compared to $455.7 million
      at
      December 31, 2004. Average earning assets increased to $393.9 million during
      2005 from $257.9 million during 2004. Asset growth included growth
      in loans of $34.9
      million during 2005. Loans
      at
      December 31, 2005 were $221.7 as
      compared to $186.8 million at December 31, 2004. Investment securities decreased
      from $196.0 at December 31, 2004 to $176.4 million at December 31, 2005. The
      $11.8
      million growth in assets was primarily funded by an increase in deposit account
      balances of $12.5 million. Securities sold under agreements to repurchase
      increased by $6.3 million at December 31, 2005 as compared to December 31,
      2004.
      Federal Home Loan Advances decreased by $8.0 million as of December 31, 2005
      compared to December 31, 2004. Shareholders’
      equity totaled $50.8 million
      at December 31, 2005 as compared to $50.5 million at December 31, 2004. The
      increase was a result of retained earnings of $2.5 million and proceeds from
      issuance of stock under stock option plans and the dividend reinvestment plan
      of $580,000.
      These increases were offset by an increase of the unrealized loss on
      available-for-sale securities of $2.8 million during 2005.


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 28


**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. At
      December 31, 2005, loans accounted for 55.5% of earning assets as compared
      to
      47.6% of earning assets at December 31, 2004. As
      a
      result of the merger with DutchFork ,
      the
      ratio of loans to total earning assets decreased considerably from 2003 to
      2004.
      In evaluating the merger with DutchFork, we
      considered the need to leverage the existing deposit base in the
      Newberry County market through quality growth of the loan portfolio. The 7.9%
      increase in the ratio during 2005 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
      2006 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 its asset mix goals without sacrificing asset
      quality. Loans averaged $202.1 million during 2005, as compared to $141.8
      million in 2004.




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




December
                31,(In
                thousands)
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001Commercial,
                financial & agricultural
            
            $
            22,091
            
            $
            19,001
            
            $
            11,518
            
            $
            10,688
            
            $
            12,408Real
                estate:Construction
            
            
            19,955
            
            
            8,066
            
            
            7,782
            
            
            7,533
            
            
            10,146Mortgage
                -
                residential
            
            
            37,251
            
            
            35,438
            
            
            11,804
            
            
            11,055
            
            
            9,272Mortgage
                -
                commercial
            
            
            112,915
            
            
            96,811
            
            
            72,668
            
            
            55,290
            
            
            41,744Consumer
            
            
            29,456
            
            
            27,455
            
            
            17,237
            
            
            15,425
            
            
            13,968Total
                gross loans
            
            
            221,668
            
            
            186,771
            
            
            121,009
            
            
            99,991
            
            
            87,518Allowance
                for loan losses
            
            
            (2,701
            )
            
            (2,764
            )
            
            (1,705
            )
            
            (1,525
            )
            
            (1,000
            )Total
                net loans
            
            $
            218,967
            
            $
            184,007
            
            $
            119,303
            
            $
            98,466
            
            $
            86,518




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 2005 and 2004, were commercial
      mortgage loans in the amount of $112.9 million and $96.8 million, representing
      50.9% and 51.8% 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 believes 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,
      2005.




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




(In
                thousands)
            
            December
                31, 2005Over
                OneOne
                Year
            
            Year
                Through
            
            Overor
                Less
            
            Five
                Years
            
            Five
                Years
            
            TotalCommercial,
                financial & agricultural
            
            $
            9,175
            
            $
            11,990
            
            $
            925
            
            $
            22,090Real
                estate - construction
            
            
            16,132
            
            
            3,824
            
            
            -
            
            
            19,956All
                other loan
            
            
            26,658
            
            
            113,628
            
            
            39,336
            
            
            179,622$
            51,965
            
            $
            129,442
            
            $
            40,261
            
            $
            221,668Loans
                maturing after one year with:Fixed
                interest rates
            
            
            
            
            
            
            
            
            
            
            $
            109,486Floating
                interest rates
            
            
            
            
            
            
            
            
            
            
            
            60,217$
            169,703





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 29


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.




**Investment
      Securities**





The
      investment securities portfolio is a significant component of our total earning
      assets. Total securities averaged $184.1 million in 2005, as compared to $92.9
      million in 2004. This represents 46.7% and 36.0% of the average earning assets
      for the year ended December 31, 2005 and 2004, respectively. The investment
      portfolio increased as a percent of average earning assets during
      2005 as a result of the merger
      with DutchFork in the
      fourth quarter of 2004.  At
      December 31, 2005, the portfolio was 44.2% of earning assets. During the fourth
      quarter of 2004,
      and continuing into the
      first quarter of 2005, the combined portfolio was
      restructured. Although
      the portfolio acquired from DutchFork had a
      large percentage of investments with
      variable interest rates ,
      the
      investments did not provide significant cash flow. The objective of the
      restructuring was to shorten the maturity and purchase investments that provided
      ongoing cash flow. The proceeds from these sales were reinvested primarily
      in
      various mortgage-backed securities and collateralized mortgage obligations. Although
      shortening the life of the portfolio  resulted
      in a decrease in the overall yield in the portfolio, we believe that the
      restructuring enables us to better manage the interest rate risk associated
      with
      interest rate volatility. In addition, our objective is to increase the size
      of
      the loan portfolio as a percentage of total earning assets and the restructured
      portfolio provides the necessary cash flow to meet this objective.





In
      the
      fourth quarter of 2004, we acquired approximately $41.6 million in
      collateralized -mortgage backed securities (CMO’s). Of these securities, $30.0
      million were issued by agencies of the federal government and $11.6 million
      were
      non-agency securities. At December 31, 2005 we had mortgage backed securities
      including collateralized mortgage obligations with a fair value of $69.8
      million. Of these $39.2 million were issued by government agencies and $30.6
      million are non-agency securities. We believe that none of the CMOs held at
      December 31, 2005 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, 2005, we also had investments in variable rate preferred stock
      issued by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal
      National Mortgage Association (FNMA) with a fair value of $28.2 million, all
      of
      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. At December 31, 2005, the remaining five
      different preferred stock securities owned have an average book value of 90%
      of
      their par value. All of these securities have adjustable rates.





Although
      both of the issuing agencies have come under regulatory scrutiny relative to
      accounting practices, there have been no significant downgrades in the credit
      rating of the issuers. 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, 2005, the estimated weighted average life of the
      portfolio was 9.6
      years, duration of approximately 2.8 and a weighted average tax equivalent
      yield
      of approximately 4.58%. 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, 2005.


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 30


The
      following table shows the investment portfolio composition.




(In
      thousands)




**December
                31,****2005**
            
            **2004**
            
            **2003****Securities
                available-for-sale at fair value:****U.S.
                Treasury**
            
            **$**
            **992**
            
            **$**
            **997**
            
            **$**
            **3,027****U.S.
                Government agency**
            
            
            **57,479**
            
            
            **63,755**
            
            
            **35,596****Mortgage-backed
                securities**
            
            
            **69,794**
            
            
            **71,056**
            
            
            **14,395****State
                and local government**
            
            
            **253**
            
            
            **-**
            
            
            **-****FHLMC
                and FNMA preferred stock**
            
            
            **28,214**
            
            
            **42,128**
            
            
            **-****Corporate
                bonds**
            
            
            **8,607**
            
            
            **7,754**
            
            
            **-****Other**
            
            
            **5,319**
            
            
            **4,320**
            
            
            **941****170,658**
            
            
            **190,010**
            
            
            **53,959****Securities
                held-to-maturity (amortized cost):****State
                and local government**
            
            
            **5,654**
            
            
            **6,006**
            
            
            **4,985****Other**
            
            
            **60**
            
            
            **10**
            
            
            **10****5,714**
            
            
            **6,016**
            
            
            **4,995****Total**
            
            **$**
            **176,372**
            
            **$**
            **196,026**
            
            **$**
            **58,954**




The
      following table shows, at carrying value, the scheduled maturities and average
      yields of securities held at December 31, 2005.




(In
                thousands)December
                31, 2005After
                One But
            
            After
                Five ButWithin
                One Year
            
            Within
                Five Years
            
            Within
                Ten Years
            
            After
                Ten YearsHeld-to-maturity:
            
            Amount
            
            Yield
            
            Amount
            
            Yield
            
            Amount
            
            Yield
            
            Amount
            
            YieldState
                and local government
            
            $
            330
            
            
            4.46
            %
            $
            3,142
            
            
            3.85
            %
            $
            2,181
            
            
            3.89
            %
            $
            -Other
            
            
            -
            
            
            
            
            
            10
            
            
            5.85
            %
            
            50
            
            
            4.05
            %Total
                investment securities held-to-maturity
            
            
            330
            
            
            4.46
            %
            
            3,152
            
            
            3.86
            %
            
            2,231
            
            
            3.89
            %
            
            -Available-for-sale:U.S.
                treasury
            
            
            992
            
            
            2.78
            %U.S.
                government agencies
            
            
            13,271
            
            
            3.21
            %
            
            32,208
            
            
            3.76
            %
            
            10,513
            
            
            4.22
            %
            
            1,487
            
            
            4.37
            %Mortgage-backed
                securities
            
            
            12,479
            
            
            4.69
            %
            
            44,197
            
            
            4.37
            %
            
            6,204
            
            
            4.01
            %
            
            6,914
            
            
            5.71
            %State
                and local government
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            253
            
            
            4.15
            %FNMA
                and FHLMC preferred stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            28,214
            
            
            5.48
            %Corporate
            
            
            
            
            
            
            
            
            1,998
            
            
            4.41
            %
            
            4,149
            
            
            7.26
            %
            
            2,460
            
            
            4.54
            %Other
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,319
            
            
            4.10
            %Total
                investment securitiesavailable-for-sale
            
            
            26,742
            
            
            3.88
            %
            
            78,403
            
            
            4.12
            %
            
            20,866
            
            
            4.76
            %
            
            44,647
            
            
            5.26
            %Total
                investment securities
            
            $
            27,072
            
            
            3.89
            %
            $
            81,555
            
            
            4.11
            %
            $
            23,097
            
            
            4.38
            %
            $
            44,647
            
            
            5.26
            %




**Investment
      Securities Maturity Distribution and Yields**




**Short-Term
      Investments**




Short-term
      investments, which consist of federal funds sold, securities purchased under
      agreements to resell and interest bearing deposits, averaged $7.7 million
      in 2005, as compared to $23.2 million in 2004. At December 31, 2005,
      short-term investments totaled $1.1 million. These funds are a primary source
      of
      liquidity and are generally invested in an earning capacity on an overnight
      basis.




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 31


**Deposits
      and Other Interest-Bearing Liabilities**




*Deposits.* Average
      deposits were $338.0 million during 2005, compared to $232.5 million during
      2004. Average interest-bearing deposits were $285.0 million in 2005, as compared
      to $190.9 million in 2004.




The
      following table sets forth the deposits by category:


(In
                thousands)
            
            December
                31,2005
            
            2004
            
            2003%
                of
            
            
            
            %
                of
            
            
            
            %
                ofAmount
            
            Deposits
            
            Amount
            
            Deposits
            
            Amount
            
            DepositsDemand
                deposit accounts
            
            $
            57,327
            
            
            16.4
            %
            $
            49,520
            
            
            14.7
            %
            $
            37,045
            
            
            20.0
            %NOW
                accounts
            
            
            60,756
            
            
            17.4
            %
            
            59,723
            
            
            17.7
            %
            
            33,660
            
            
            18.2
            %Money
                market accounts
            
            
            45,582
            
            
            13.0
            %
            
            39,124
            
            
            11.6
            %
            
            23,355
            
            
            12.6
            %Savings
                accounts
            
            
            29,819
            
            
            8.5
            %
            
            35,370
            
            
            10.5
            %
            
            11,223
            
            
            6.0
            %Time
                deposits less than $100,000
            
            
            100,612
            
            
            28.8
            %
            
            100,629
            
            
            29.9
            %
            
            45,125
            
            
            24.4
            %Time
                deposits more than $100,000
            
            
            55,508
            
            
            15.9
            %
            
            52,698
            
            
            15.6
            %
            
            34,850
            
            
            18.8
            %$
            349,604
            
            
            100.0
            %
            $
            337,064
            
            
            100.0
            %
            $
            185,258
            
            
            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 $294.1 million and $284.4 million at December 31,
      2005 and 2004, 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, 2005After
                Three
            
            After
                Six
            
            AfterWithin
                Three
            
            Through
            
            Through
            
            TwelveMonths
            
            Six
                Months
            
            Twelve
                Months
            
            Months
            
            TotalCertificates
                of deposit of$100,000
                or
                more
            
            $
            12,622
            
            $
            8,514
            
            $
            17,017
            
            $
            17,355
            
            $
            55,508




There
      were no other
      time deposits of $100,000 or more at December 31, 2005.




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 are generally expensive and
      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 $11.0 million, $5.9 and $6.0 million during 2005, 2004
      and
      2003, respectively. The maximum month-end balance during 2005, 2004 and 2003
      was
      $14.9 million, $7.6 million and $8.2 million, respectively. The average rate
      paid during these periods was 3.38%, 0.71% and 0.51%, respectively. The balance
      of securities sold under agreements to repurchase were $13.8 million and $7.5
      million at December 31, 2005 and 2004, 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 2005 and 2004,
      the average outstanding advances amounted to $41.4 million and $13.4
      million, respectively.




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 32


The
      following is a schedule of the maturities for Federal Home Loan Bank Advances
      as
      of December 31, 2005 and 2004:




December
                31,(In
                thousands)
            
            2005
            
            2004Maturing
            
            Amount
            
            Rate
            
            Amount
            
            Rate2005
            
            $
            -
            
            
            -
            
            $
            2,500
            
            
            2.08
            %2006
            
            
            1,500
            
            
            2.83
            %
            
            1,500
            
            
            2.83
            %2008
            
            
            5,251
            
            
            3.42
            %
            
            10,707
            
            
            3.42
            %2010
            
            
            27,306
            
            
            3.64
            %
            
            27,742
            
            
            3.64
            %After
                five years
            
            
            467
            
            
            1.00
            %34,524
            
            
            3.54
            %
            $
            42,452
            
            
            3.46
            %




Purchase
      premiums included in advances acquired in the merger with DutchFork reflected
      in
      the advances maturing in 2008 and 2010 amount to $251,000 and $2.3
      million ,
      respectively, at December 31, 2005. The coupon rate on these advances is 5.67%
      and 5.76%, respectively. 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 mature on September 16, 2034.





**Capital**




Total
      shareholders’ equity as of December 31, 2005 was $50.8
      million as compared to $50.5 million as of December 31, 2004. This increase
      was
      attributable to retained net income for the year ended December 31, 2005 of
      $2.5
      million offset by an increase in the net unrealized loss of $2.8 million net
      of
      tax effect in the market value of investment securities available-for
      sale .
      During 2005 and
      2004, we paid quarterly cash dividends of $.05 per share. We paid a $.04 per share dividend in the first
      quarter of 2003 and $.05 per share dividends for the second through the fourth
      quarter of 2003. 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. As noted above under “Supervision and
      Regulation section - Capital Regulations,” the Federal Reserve is changing the
      rules relating to when a company would become subject to these minimum capital
      regulations. The new rules go into effect March 30, 2006 and exempt from these
      requirements certain bank holding companies which have less than $500 million
      in
      total assets. It is unclear at this point whether our company will qualify
      under
      this exemption.


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 33


The
      company and the bank exceeded their regulatory capital ratios at
      December 31, 2005 and 2004, as set forth in the following table.





Analysis
                of Capital(In
                thousands)
            
            Required
            
            
            
            Actual
            
            
            
            ExcessAmount
            
            %
            
            Amount
            
            %
            
            Amount
            
            %The
                Bank: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
            %December
                31, 2004Risk
                Based CapitalTier
                1
            
            $
            11,576
            
            
            4.0
            %
            $
            33,158
            
            
            11.5
            %
            $
            21,582
            
            
            6.5
            %Total
                Capital
            
            
            23,152
            
            
            8.0
            %
            
            35,922
            
            
            12.4
            %
            
            12,770
            
            
            4.4
            %Tier
                1
                Leverage
            
            
            17,367
            
            
            4.0
            %
            
            33,158
            
            
            7.6
            %
            
            15,791
            
            
            3.6
            %The
                Company: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
            %December
                31, 2004Risk
                Based CapitalTier
                1
            
            $
            11,612
            
            
            4.0
            %
            $
            37,485
            
            
            12.9
            %
            $
            25,873
            
            
            8.2
            %Total
                Capital
            
            
            23,224
            
            
            8.0
            %
            
            40,249
            
            
            13.9
            %
            
            17,025
            
            
            5.9
            %Tier
                1
                Leverage
            
            
            17,614
            
            
            4.0
            %
            
            37,485
            
            
            8.5
            %
            
            19,871
            
            
            4.5
            %




**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 July 1998, and the
      trust preferred offering completed in September 2004, we have
      maintained a high level of liquidity that has been adequate to meet planned
      capital expenditures, as well as providing the necessary cash requirements
      of
      the company and the bank needed for operations. Our funds sold and short-term
      interest bearing deposits, its primary source of liquidity, averaged $7.7
      million during the year ended December 31, 2005. The bank maintains federal
      funds purchased lines, in the amount of $10.0 million with several financial
      institutions, although these were not utilized in 2005. The FHLB Atlanta has
      approved a line of credit of up to 15% of the bank assets which would be
      collateralized 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


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 34


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, 2005


**(in
      thousands)**




Payments
                Due by PeriodOver
                One
            
            Over
                Two
            
            Over
                Three
            
            AfterWithin
            
            to
                Two
            
            to
                Three
            
            to
                Five
            
            FiveOne
                Year
            
            Years
            
            Years
            
            Years
            
            Years
            
            TotalCertificate
                accounts
            
            $
            107,141
            
            $
            19,082
            
            $
            4,632
            
            $
            25,266
            
            $
            
            
            $
            156,121Short-term
                borrowings
            
            
            13,975
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,975Long-term
                debt
            
            
            1,500
            
            
            
            
            
            5,251
            
            
            27,308
            
            
            15,464
            
            
            49,523Purchases
            
            
            2,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,000Total
                contractual obligations
            
            $
            124,616
            
            $
            19,082
            
            $
            9,883
            
            $
            52,574
            
            $
            15,464
            
            $
            221,619




**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 in 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.





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 35


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





The
      following tables set forth certain unaudited historical quarterly financial
      data
      for each of the eight consecutive quarters in fiscal 2005 and 2004. This
      information is derived from unaudited consolidated financial statements that
      include, in our opinion, all adjustments (consisting of normal recurring
      adjustments) necessary for a fair presentation when read in conjunction with
      our
      consolidated financial statements and notes thereto included elsewhere in this
      Form 10-K.





(In
      thousands, except per share data)





**2005**
            
            Fourth
            
            Third
            
            Second
            
            FirstQuarter
            
            Quarter
            
            Quarter
            
            QuarterInterest
                Income
            
            $
            5,801
            
            $
            5,434
            
            $
            5,244
            
            $
            4,864Net
                interest income
            
            
            3,359
            
            
            3,206
            
            
            3,260
            
            
            3,170Provision
                for loan losses
            
            
            112
            
            
            79
            
            
            72
            
            
            66Income
                before income taxes
            
            
            1,122
            
            
            995
            
            
            950
            
            
            1,058Net
                income
            
            
            854
            
            
            752
            
            
            707
            
            
            780Net
                income per share, basic
            
            
            0.30
            
            
            0.26
            
            
            0.25
            
            
            0.28Net
                income per share , diluted
            
            
            0.29
            
            
            0.25
            
            
            0.24
            
            
            0.26**2004**Interest
                Income
            
            $
            5,035
            
            $
            2,850
            
            $
            2,584
            
            $
            2,575Net
                interest income
            
            
            3,399
            
            
            2,167
            
            
            2,006
            
            
            2,023Provision
                for loan losses
            
            
            7
            
            
            40
            
            
            64
            
            
            66Income
                before income taxes
            
            
            1,105
            
            
            747
            
            
            659
            
            
            636Net
                income
            
            
            839
            
            
            493
            
            
            431
            
            
            422Net
                income per share, basic
            
            
            0.30
            
            
            0.31
            
            
            0.27
            
            
            0.26Net
                income per share , diluted
            
            
            0.28
            
            
            0.29
            
            
            0.26
            
            
            0.25


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          to Table of Contents
 36




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






The
      Board
      of Directors


First
      Community Corporation


Lexington,
      South Carolina






I
      have
      audited the accompanying balance sheets of First Community Corporation as of
      December 31, 2005 and 2004, and the related statements of operations,
      changes in shareholders’ equity and comprehensive income (loss), and cash flows
      for the three years ended December 31, 2005. These financial statements are
      the responsibility of management. My responsibility is to express an opinion
      on
      these 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 audits 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 financial statements referred to above present fairly, in all
      material respects, the financial position of First Community Corporation at
      December 31, 2005 and 2004 and the results of its operations and its cash
      flows for the three years ended December 31, 2005,
      in
      conformity with generally accepted accounting principles in the United States
      of
      America.




/s/Clifton
      D. Bodiford


Clifton
      D. Bodiford


Certified
      Public Accountant


Columbia,
      SC


January
      13, 2006




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          to Table of Contents
 37


**FIRST
                COMMUNITY CORPORATION****Consolidated
                Balance
                Sheets**December
                31,2005
            
            2004ASSETSCash
                and due from banks
            
            $
            11,701,764
            
            $
            9,391,494Interest-bearing
                bank balances
            
            
            83,178
            
            
            803,426Federal
                funds sold and securities purchased underagreements
                to
                resell
            
            
            1,079,204
            
            
            9,130,725Investment
                securities - available for sale
            
            
            170,657,770
            
            
            190,010,307Investment
                securities - held to maturity (market value of$5,746,448
                and
                $6,147,698 at December 31,2005
                and 2004, respectively)
            
            
            5,713,830
            
            
            6,015,745Loans
            
            
            221,667,632
            
            
            186,771,344Less,
                allowance for loan losses
            
            
            2,700,647
            
            
            2,763,988Net
                loans
            
            
            218,966,985
            
            
            184,007,356Property,
                furniture and equipment - net
            
            
            15,982,029
            
            
            14,313,090Goodwill
            
            
            24,256,020
            
            
            24,256,020Core
                deposit intangible
            
            
            2,767,074
            
            
            3,361,815Other
                assets
            
            
            16,247,239
            
            
            14,416,034Total
                assets
            
            $
            467,455,093
            
            $
            455,706,012LIABILITIESDeposits:Non-interest
                bearing demand
            
            $
            57,326,637
            
            $
            49,519,816NOW
                and
                money market accounts
            
            
            106,337,887
            
            
            98,846,828Savings
            
            
            29,818,705
            
            
            35,370,267Time
                deposits less than $100,000
            
            
            100,612,256
            
            
            100,629,304Time
                deposits $100,000 and over
            
            
            55,508,666
            
            
            52,698,069Total
                deposits
            
            
            349,604,151
            
            
            337,064,284Securities
                sold under agreements to repurchase
            
            
            13,806,400
            
            
            7,549,900Federal
                Home Loan Bank Advances
            
            
            34,524,409
            
            
            42,452,122Long
                term debt
            
            
            15,464,000
            
            
            15,464,000Other
                borrowed money
            
            
            169,233
            
            
            184,593Other
                liabilities
            
            
            3,120,115
            
            
            2,528,424Total
                liabilities
            
            
            416,688,308
            
            
            405,243,323SHAREHOLDERS'
                EQUITYPreferred
                stock, par value $1.00 per share; 10,000,000shares
                authorized; none issued and outstandingCommon
                stock, par value $1.00 per share;10,000,000
                shares authorized; issued and outstanding2,848,627
                in
                2005 and 2,788,902 in 2004
            
            
            2,848,627
            
            
            2,788,902Additional
                paid in capital
            
            
            42,352,205
            
            
            41,832,090Retained
                earnings
            
            
            9,240,088
            
            
            6,712,849Accumulated
                other comprehensive income
            
            
            (3,674,135
            )
            
            (871,152
            )Total
                shareholders' equity
            
            
            50,766,785
            
            
            50,462,689Total
                liabilities and shareholders' equity
            
            $
            467,455,093
            
            $
            455,706,012





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 38





**FIRST
                COMMUNITY CORPORATION****Consolidated
                Statements of
                Income**Year
                Ended December 31,2005
            
            2004
            
            2003Interest
                and dividend income:Loans,
                including fees
            
            $
            13,607,962
            
            $
            9,063,092
            
            $
            7,581,751Investment
                securities - available-for-sale
            
            
            7,241,453
            
            
            3,440,033
            
            
            2,069,345Investment
                securities - held-to-maturity
            
            
            223,059
            
            
            206,681
            
            
            198,234Other
                short term investments
            
            
            271,276
            
            
            334,518
            
            
            179,030Total
                interest and dividend income
            
            
            21,343,750
            
            
            13,044,324
            
            
            10,028,360Interest
                expense:Deposits
            
            
            5,743,340
            
            
            2,729,459
            
            
            2,307,974Securities
                sold
                under agreement to repurchase
            
            
            275,738
            
            
            40,934
            
            
            29,704Other
                borrowed money
            
            
            2,330,252
            
            
            677,830
            
            
            42,934Total
                interest expense
            
            
            8,349,330
            
            
            3,448,223
            
            
            2,380,612Net
                interest income
            
            
            12,994,420
            
            
            9,596,101
            
            
            7,647,748Provision
                for
                loan losses
            
            
            328,679
            
            
            245,000
            
            
            167,000Net
                interest income after provision for loan losses
            
            
            12,665,741
            
            
            9,351,101
            
            
            7,480,748Non-interest
                income:Deposit
                service charges
            
            
            1,462,111
            
            
            879,585
            
            
            700,359Mortgage
                origination fees
            
            
            361,856
            
            
            267,972
            
            
            343,472Gain
                on
                sale of securities
            
            
            188,419
            
            
            11,381
            
            
            -Gain
                on
                early extinguishment of debt
            
            
            124,436
            
            
            -
            
            
            -Other
            
            
            1,161,095
            
            
            614,783
            
            
            395,973Total
                non-interest income
            
            
            3,297,917
            
            
            1,773,721
            
            
            1,439,804Non-interest
                expense:Salaries
                and
                employee benefits
            
            
            6,292,239
            
            
            4,263,383
            
            
            3,306,714Occupancy
            
            
            807,258
            
            
            489,261
            
            
            395,380Equipment
            
            
            1,245,577
            
            
            991,793
            
            
            803,482Marketing
                and
                public relations
            
            
            337,481
            
            
            325,395
            
            
            273,257Amortization
                of
                intangibles
            
            
            594,741
            
            
            279,685
            
            
            178,710Other
            
            
            2,561,091
            
            
            1,627,470
            
            
            1,200,638Total
                non-interest expense
            
            
            11,838,387
            
            
            7,976,987
            
            
            6,158,181Net
                income before tax
            
            
            4,125,271
            
            
            3,147,835
            
            
            2,762,371Income
                taxes
            
            
            1,032,600
            
            
            962,850
            
            
            964,890Net
                income
            
            $
            3,092,671
            
            $
            2,184,985
            
            $
            1,797,481Basic
                earnings per common share
            
            $
            1.09
            
            $
            1.15
            
            $
            1.13Diluted
                earnings per common share
            
            $
            1.04
            
            $
            1.09
            
            $
            1.08**See
                Notes to Consolidated Financial
                Statements**





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          to Table of Contents
 39





**FIRST
                COMMUNITY
                CORPORATION****Consolidated
                Statement of Changes in Shareholders’ Equity and Comprehensive Income
                (loss)**AccumulatedAdditional
            
            
            
            OtherShares
            
            Common
            
            Paid-in
            
            Retained
            
            ComprehensiveIssued
            
            Stock
            
            Capital
            
            Earnings
            
            Income
                (loss)
            
            TotalBalance
                December 31, 2002
            
            
            1,587,970
            
            $
            1,587,970
            
            $
            12,771,383
            
            $
            3,414,234
            
            $
            665,136
            
            $
            18,438,723Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            1,797,481
            
            
            
            
            
            1,797,481Accumulated
                other comprehensive loss,net
                of
                income tax of $299,069
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (526,003
            )
            
            (526,003
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,271,478Cash
                dividend ($0.19 per share)
            
            
            
            
            
            
            
            
            
            
            
            (301,973
            )
            
            
            
            
            (301,973
            )Exercise
                of stock options
            
            
            6,923
            
            
            6,923
            
            
            45,909
            
            
            
            
            
            
            
            
            52,832Dividend
                reinvestment plan
            
            
            2,331
            
            
            2,331
            
            
            45,423
            
            
            
            
            
            
            
            
            47,754Balance
                December 31, 2003
            
            
            1,597,224
            
            
            1,597,224
            
            
            12,862,715
            
            
            4,909,742
            
            
            139,133
            
            
            19,508,814Comprehensive
                incomeNet
                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 gainsincluded
                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
            
            
            
            
            
            
            
            
            94,656Balance
                December 31, 2004
            
            
            2,788,902
            
            
            2,788,902
            
            
            41,832,090
            
            
            6,712,849
            
            
            (871,152
            )
            
            50,462,689Comprehensive
                incomeNet
                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 gainsincluded
                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
            
            
            
            
            
            
            
            
            127,181Balance
                December 31, 2005
            
            
            2,848,627
            
            $
            2,848,627
            
            $
            42,352,205
            
            $
            9,240,088
            
            $
            (3,674,135
            )
            $
            50,766,785**See
                Notes to Consolidated Financial
                Statements**


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 40











**FIRST
                COMMUNITY CORPORATION****Consolidated
                Statements of Cash Flows**Year
                Ended December 31,2005
            
            2004
            
            2003Cash
                flows from operating activities:Net
                income
            
            $
            3,092,671
            
            $
            2,184,985
            
            $
            1,797,481Adjustments
                to reconcile net income tonet cash used in operating activities:Depreciation
            
            
            926,776
            
            
            761,277
            
            
            631,356Premium
                amortization (Discount accretion)
            
            
            (345,763
            )
            
            (93,782
            )
            
            225,564Provision
                for
                loan losses
            
            
            328,679
            
            
            245,000
            
            
            167,000Amortization
                of
                intangibles
            
            
            594,741
            
            
            279,685
            
            
            178,710Gain
                on
                sale of other real estate owned
            
            
            (29,983
            )
            
            (21,707
            )
            
            -Gain
                on
                sale of securities
            
            
            (188,418
            )
            
            (11,381
            )
            
            -Gain
                on
                early extinguishment of debt
            
            
            (124,436
            )
            
            -
            
            
            -(Increase)
                decrease in other assets
            
            
            (693,657
            )
            
            (425,079
            )
            
            109,035Tax
                benefit from exercise of stock options
            
            
            -
            
            
            51,621
            
            
            -Increase
                (decrease) in accounts payable
            
            
            591,691
            
            
            14,681
            
            
            (68,241
            )Net
                cash provided in operating activities
            
            
            4,152,301
            
            
            2,985,300
            
            
            3,040,905Cash
                flows from investing activities:Proceeds
                from sale of securities available-for-sale
            
            
            39,071,729
            
            
            56,586,668
            
            
            -Purchase
                of investment securities available-for-sale
            
            
            (51,368,761
            )
            
            (108,265,814
            )
            
            (39,509,065
            )Maturity/call
                of investment securities available-for-sale
            
            
            27,267,768
            
            
            36,424,205
            
            
            49,297,109Purchase
                of investment securities held-to-maturity
            
            
            (50,000
            )
            
            (1,052,057
            )
            
            (767,685
            )Maturity/call
                of investment securities held-to-maturity
            
            
            325,000
            
            
            -
            
            
            760,000Increase
                in loans
            
            
            (35,288,308
            )
            
            (14,813,202
            )
            
            (21,004,651
            )Net
                cash disbursed in business combination
            
            
            -
            
            
            (11,131,142
            )
            
            -Proceeds
                from sale of other real estate owned
            
            
            401,733
            
            
            23,800
            
            
            -Purchase
                of property and equipment
            
            
            (
                2,595,715
            )
            
            (2,427,322
            )
            
            (1,801,427
            )Net
                cash used in investing activities
            
            
            (22,236,554
            )
            
            (44,654,864
            )
            
            (13,025,719
            )Cash
                flows from financing activities:Increase
                in deposit accounts
            
            
            12,539,867
            
            
            16,996,662
            
            
            17,195,399Proceeds
                from issuance of long term debt
            
            
            -
            
            
            15,000,000
            
            
            -Advances
                from the Federal Home Loan Bank
            
            
            19,580,000
            
            
            -
            
            
            5,000,000Repayment
                of advances from the Federal Home Loan Bank
            
            
            (26,752,661
            )
            
            (1,000,000
            )
            
            -Increase
                (decrease) in securities sold under agreements to
                repurchase
            
            
            6,256,500
            
            
            3,608,900
            
            
            (3,365,064
            )Increase
                (decrease) in other borrowings
            
            
            (15,360
            )
            
            24,517
            
            
            (4,211
            )Proceeds
                from exercise of stock options
            
            
            452,659
            
            
            169,153
            
            
            52,832Dividend
                reinvestment plan
            
            
            127,181
            
            
            94,656
            
            
            47,754Cash
                dividends paid
            
            
            (565,432
            )
            
            (381,878
            )
            
            (301,973
            )Net
                cash provided from financing activities
            
            
            11,622,754
            
            
            34,512,010
            
            
            18,624,737Net
                increase (decrease) in cash and cash equivalents
            
            
            (6,461,499
            )
            
            (7,157,554
            )
            
            8,639,923Cash
                and cash equivalents at beginningof
                period
            
            
            19,325,645
            
            
            26,483,199
            
            
            17,843,276Cash
                and cash equivalents at end of period
            
            $
            12,864,146
            
            $
            19,325,645
            
            $
            26,483,199Supplemental
                disclosure:Cash
                paid during the period for:Interest
            
            $
            7,941,548
            
            $
            3,139,817
            
            $
            2,431,318Taxes
            
            $
            445,000
            
            $
            907,268
            
            $
            1,000,000Non-cash
                investing and financing activities:Unrealized
                loss
                on securities available-for-sale
            
            $
            (4,312,281
            )
            $
            (1,554,287
            )
            $
            (825,072
            )Transfer
                of
                loans to foreclosed property
            
            $
            721,052
            
            $
            119,916
            
            $
            25,701Common
                stock issued in acquisition
            
            $
            -
            
            $
            29,845,623
            
            $
            -**See
                Notes to Consolidated Financial
                Statements**




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          to Table of Contents
 41




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). 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.




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.




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.


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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, 2005, 2004 and 2003.





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.





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.




Marketing
      and Public Relations Expense


The
      company expenses marketing and public relations expense as incurred




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.





Stock
      Based Compensation Cost


The
      Company applies Accounting Principles Board Opinion No. 25, “Accounting for
      Stock Issued to Employees”. Accordingly, compensation cost for stock options is
      measured as the excess, if any, of the market price of the Company’s stock at
      the date of the grant over the amount an employee must pay to acquire the stock.
      Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
      Compensation” (SFAS 123) was issued in October 1995, and encourages but
      does not require, adoption of a fair value method of accounting for employee
      stock based compensation plans. The company has adopted the disclosure-only
      provisions of SFAS 123 and has disclosed in the notes pro-forma net income
      and
      earnings per share information as if the fair value method had been
      applied.





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 remain unchanged as a result of the Acceleration. See note 15 for
      additional information relative to the Acceleration and Statement of Financial
      Accounting Standard 123 (revised 2004).





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.


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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 affect
      accounting, reporting, and disclosure of financial information by the
      Company:





In
      December 2003, the Accounting Standards Executive Committee (AcSEC) issued
      Statement of Position No. 03-3 (SOP No. 03-3), “Accounting for Certain
      Loans or Debt Securities Acquired in a Transfer.” SOP No. 03-3 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. SOP
      No. 03-3 is effective for loans acquired in years beginning after
      December 15, 2004, with early adoption encouraged. SOP
      03-3
      is not expected to have a material impact on the Company's results of operations
      or financial. The impact of SOP No. 03-3 will be meaningful if in the future
      the
      Company enters into a business combination with a financial institution and/or
      acquires in a transfer loan portfolio.





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) will require
      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) requires additional accounting and disclosures
      related to the income tax and cash flow effects resulting from share-based
      payment arrangements. SFAS No. 123(R) is effective beginning as of the first
      annual reporting period beginning after December 15, 2005. SFAS No. 123(R)
      allows for adoption using either the modified prospective or modified
      retrospective methods. The Company anticipates using the modified prospective
      method when this statement is adopted in the first quarter of 2006. See Note
      15.





In
      April
      2005, the Securities and Exchange Commission’s Office of the Chief Accountant
      and its Division of Corporation Finance issued Staff Accounting Bulletin (“SAB”)
      No.107 to provide guidance regarding the application of SFAS No.123(R). SAB
      No.
      107 provides interpretive guidance related to the interaction between SFAS
      No.123(R) and certain SEC rules and regulations, as well as the staff’s views
      regarding the valuation of share-based payment arrangements for public
      companies. SAB No. 107 also reminds public companies of the importance of
      including disclosures within filings made with the SEC relating to the
      accounting for share-based payment transactions, particularly during the
      transition to SFAS No.123(R).





In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
      an amendment of APB Opinion No. 29.” The standard is based on the principle that
      exchanges of nonmonetary assets should be measured based on the fair value
      of
      the assets exchanged and eliminates the exception under ABP Opinion No. 29
      for
      an exchange of similar productive assets and replaces it with an exception
      for
      exchanges of nonmonetary assets that do not have commercial substance. A
      nonmonetary exchange has commercial substance if the future cash flows of the
      entity are expected to change significantly as a result of the exchange. The
      standard is effective for nonmonetary exchanges occurring in fiscal periods
      beginning after June 15, 2005. The adoption of SFAS 153 is not expected to
      have
      a material impact on the Company's financial position or results of
      operations.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
      a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154
      establishes retrospective application as the required method for reporting
      a
      change in accounting principle, unless it is impracticable, in which case the
      changes should be applied to the latest practicable date presented. SFAS No.
      154
      also requires that a correction of an error be reported as a prior period
      adjustment by restating prior period financial statements. SFAS No. 154 is
      effective for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005.





In
      March
      2004, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The
      Meaning of Other-Than-Temporary Impairment and its Application to Certain
      Investments.” This issue addresses the meaning of other-than-temporary
      impairment and its application to investments classified as either available
      for
      sale or held to maturity under SFAS No. 115 and it also provides guidance on
      quantitative and qualitative disclosures. The disclosure requirements in
      paragraph 21 of this Issue were effective for annual financial statements for
      fiscal years ending after December 15, 2003 and were adopted by the Company
      effective December 31, 2003.





The
      recognition and measurement guidance in paragraphs 6-20 of this Issue was to
      be
      applied to other-than-temporary impairment evaluations in reporting periods
      beginning after June 15, 2004, but was delayed by FASB action in October 2004
      through the issuance of a proposed FASB Staff Position (“FSP”) on the issue. In
      July 2005, the FASB issued FSP FAS 115-1 and FAS 124-1 “The
      Meaning


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 44


of 
      Other-Than-Temporary Impairment and its Application to Certain Investments.”
This final guidance eliminated paragraphs10-18 of EITF-03-1 (paragraphs 19-20
      have no material impact on the financial position or results of operations
      of
      the Company) and will be effective for other-than-temporary impairment analysis
      conducted in periods beginning after December 15, 2005. The Company has
      evaluated the impact that the adoption of FSP FAS 115-1 and FAS 124-1 and has
      concluded that the adoption will not have a material impact on financial
      position and results of operations upon adoption.





In
      December 2005, the FASB issued FSP SOP 94-6-1, “Terms of Loan Products that May
      Give Rise to a Concentration of Credit Risk.” The disclosure guidance in this
      FSP is effective for interim and annual periods ending after December 19, 2005.
      The FSP states that the terms of certain loan products may increase a reporting
      entity's exposure to credit risk and thereby may result in a concentration
      of
      credit risk as that term is used in SFAS
      No.
      107 ,
      either
      as an individual product type or as a group of products with similar features. SFAS
      No.
      107 requires
      disclosures about each significant concentration, including “information about
      the (shared) activity, region, or economic characteristic that identifies the
      concentration.” The FSP suggests possible shared characteristics on which
      significant concentrations may be determined which include, but are not limited
      to:


borrowers
      subject to significant payment increases, loans with terms that permit negative
      amortization and loans with high loan-to-value ratios.





This
      FSP
      requires entities to provide the disclosures required by SFAS No. 107 for loan
      products that are determined to represent a concentration of credit risk in
      accordance with the guidance of this FSP for all periods presented. The Company
      adopted this disclosure standard effective December 31, 2005.





Note
      3 -
      BUSINESS COMBINATION





On
      October 1, 2004, First Community acquired DutchFork Bancshares, the holding
      company for Newberry Federal Savings Bank located I  n
      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**
              **Gain**
            
            **Gross**
              **Unrealized**
              **Loss**
            
            **Fair
                Value**December
                31, 2005:State
                and local government
            
            $
            5,653830
            
            $
            58,316
            
            $
            25,698
            
            $
            5,686,448OO
                Other
            
            
            60,000
            
            
            —
            
            
            —
            
            
            60,000$
            5,713,830
            
            $
            58,316
            
            $
            25,698
            
            
            5,746,448December
                31, 2004:State
                and local government
            
            $
            6,005,745
            
            $
            144,919
            
            $
            12,966
            
            
            6,137,698Other
            
            
            10,000
            
            
            —
            
            
            —
            
            
            10,000$
            6,015,745
            
            $
            144,919
            
            $
            12,966
            
            $
            6,147,698







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 45


AVAILABLE-FOR-SALE:




**Amortized**
                  **Cost**
                
                **Gross**
                  **Unrealized**
                  **Gain**
                
                **Gross**
                  **Unrealized**
                  **Loss**
                
                **Fair
                    Value**December
                    31, 2005:US
                    Treasury securities
                
                $
                999,848
                
                $
                —
                
                $
                7,973
                
                $
                991,875US
                    Government agency securities
                
                
                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
                
                $
                170,657,770December
                    31, 2004:US
                    Treasury securities
                
                $
                999,546
                
                $
                -
                
                $
                1,734
                
                $
                997,812US
                    Government agency securities
                
                
                64,106,098
                
                
                47,693
                
                
                398,390
                
                
                63,755,401Mortgage-backed
                    securities
                
                
                71,096,802
                
                
                155,312
                
                
                196,538
                
                
                71,055,576Equity
                    and other securities
                
                
                55,148,097
                
                
                189,631
                
                
                1,136,210
                
                
                54,201,518$
                191,350,543
                
                $
                392,636
                
                $
                1,732,872
                
                $
                190,010,307




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.
      At
      December 31, 2004, equity and other investment securities available for sale
      included the following recorded at fair value: Federal Home Loan Mortgage
      Corporation preferred stock of $23,159,175, Federal National Mortgage
      Association preferred stock of $18,969,620, corporate bonds of $7,754,246,
      Federal Home Loan Bank Stock of $2,631,000, Federal Reserve Bank Stock of
      $308,200, mutual funds of $1,269,276 and community bank stocks of $110,000





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 sales of securities
      available-for-sale amounted to $56,586,668. Gross realized gains amounted to
      $16,119 and gross realized losses amounted to $4,738 in 2004. The tax provision
      applicable to the realized net gains was approximately $65,000 and $3,400 for
      2005 and 2004, respectively.  There were no sales of securities in
      2003.




The
      amortized cost and fair value of investment securities at December 31, 2005,
      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-sale****Amortized**
              **Cost**
            
            **Fair**
              **Value**
            
            **Amortized**
              **Cost**
            
            **Fair**
              **Value**Due
                in one year or less
            
            $
            330,363
            
            $
            331,432
            
            $
            26,972,096
            
            $
            26,741,927Due
                after one year through five years
            
            
            3,152,139
            
            
            3,171,475
            
            
            80,214,252
            
            $
            78,403,274Due
                after five years through ten years
            
            
            2,231,328
            
            
            2,243541
            
            
            21,315,164
            
            $
            20,865,846Due
                after ten years
            
            
            ---
            
            
            ---
            
            
            47,808,771
            
            $
            44,646,723$
            5,713,830
            
            $
            5,746,448
            
            $
            176,310,283
            
            $
            170,657,770




Securities
      with an amortized cost of $49,941,250 and fair value of $48,957,410 at December
      31, 2005, were pledged to secure FHLB Advances, public deposits, demand notes
      due the U.S. Treasury and securities sold under agreements to
      repurchase.





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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, 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
              USGovernment
                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 U. S.Government agency securities: **** The
      unrealized losses on the Company’s investments in U.S. Treasury obligations and
      direct obligations of U.S. government agencies 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, 2005





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 31,2005.





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 31,2005.





FNMA
      and
      FHLMC Preferred Stock: All of the agency preferred stock securities held by
      the
      Company are adjustable rate securities. The securities reprice over periods
      ranging from three months to five years. The current cost basis of substantially
      all of these securities is at a discount to the stated par value. Over the
      last
      twelve to eighteen months the issuers of these agency preferred securities,
      FNMA
      and FHLMC have come under considerable regulatory scrutiny regarding
      misrepresentations relative to accounting practices. The rating agencies have
      expressed concern over the rating of the securities but there have been no
      significant downgrades in the ratings of the issuers and these securities are
      rated Aa3 (Moody’s). Given the adjustable rate nature of the securities each of
      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,
      2005.





Corporate
      Bonds: The Company’s unrealized loss on investments in corporate bonds relates
      to bonds with three 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, 2005.


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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, 2005.





Note
      5 -
      LOANS




Loans
      summarized by category are as follows:




**December
                31,****2005**
            
            **2004**Commercial,
                financial and agricultural
            
            $
            22,090,454
            
            $
            19,001,033Real
                estate - construction
            
            
            19,955,124
            
            
            8,065,516Real
                estate - mortgageCommercial
            
            
            112,914,726
            
            
            96,811,130Residential
            
            
            37,251,173
            
            
            35,438,373Consumer
            
            
            29,456,155
            
            
            27,455,292$
            221,667,632
            
            $
            186,771,344


Activity
      in the allowance for loan losses was as follows:




**December
                31,****2005**
            
            **2004**
            
            **2003**Balance
                at the beginning of year
            
            $
            2,763,988
            
            $
            1,705,082
            
            $
            1,525,308Allowance
                purchased in acquisition
            
            
            —
            
            
            994,878
            
            
            —Provision
                for loan losses
            
            
            328,679
            
            
            245,000
            
            
            167,000Charged
                off loans
            
            
            (521,278
            )
            
            (293,479
            )
            
            (235,183
            )Recoveries
            
            
            129,258
            
            
            112,507
            
            
            247,957Balance
                at end of year
            
            $
            2,700,647
            
            $
            2,763,988
            
            $
            1,705,082




At
      December 31, 2005, the Bank had $101,000 loans in a non accrual status. 
Loans classified impaired at December 31, 2005 and 2004 totaled $101,000 and
      $0.00.  These loans were recorded at or below fair value.  The average
      recorded investment in loans classified as impaired for the years ended December
      31, 2005 and 2004 amounted to $315,860 and $149,084, respectively.




Loans
      outstanding to Bank directors, executive officers and their related business
      interests amounted to $4,182,129 and $2,318,853 at December 31, 2005 and 2004,
      respectively.  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,****2005**
            
            **2004**Land
            
            $
            5,146,966
            
            $
            4,906,222Premises
            
            
            7,862,983
            
            
            7,174,008Equipment
            
            
            4,734,620
            
            
            4,245,711Construction
                in progress
            
            
            2,227,941
            
            
            1,050,85519,972,510
            
            
            17,376,796Accumulated
                depreciation
            
            
            3,990,481
            
            
            3,063,706$
            15,982,029
            
            $
            14,313,090




Provision
      for depreciation included in operating expenses for the years ended December
      31,
      2005, 2004 and 2003 amounted to $926,776, $761,277 and $631,356,
      respectively.





The
      company has entered into a contract to construct an approximate 28,000 square
      foot administrative center adjacent to it current
      main office. The total contract is approximately $3,400,000. In addition, the
      company is building a new branch office


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to
      replace an existing modular office site the total contract cost of the branch
      building is approximately $600,000. The company has
      disbursed approximately $1,400,000 and $550,000 on the administrative center
      and
      branch office at December 31, 2005, respectively.




Note
      7 -
      INTANGIBLE AND OTHER ASSETS




Intangible
      assets (excluding goodwill) consisted of the following:




**December
                31,****2005**
            
            **2004**Core
                deposit premiums, gross carrying amount
            
            $
            4,148,273
            
            $
            4,148,273Accumulated
                amortization
            
            
            (1,381,199
            )
            
            (786,458
            )Net
            
            $
            2,767,074
            
            $
            3,361,815




Amortization
      of the core deposit intangibles amounted to $594,741, $279,685 and $178,710
      for
      the years ended December 31, 2005, 2004 and 2003, respectively. Amortization
      is
      estimated to be approximately $595,000 for each of the next five
      years.





With
      the
      acquisition of DutchFork Bancshares the company acquired certain bank-owned
      life
      insurance policies that provide benefits to various employees and
      officers.  The carrying value of these policies at December 31, 2005 and
      2004 was $5,811,302 and $5,560,208, respectively and are included in other
      assets.




Note
      8 -
      DEPOSITS




At
      December 31, 2005, the scheduled maturities of Certificates of Deposits are
      as
      follows:





2006
            
            $
            107,141,1892007
            
            
            19,082,0292008
            
            
            4,632,1442009
            
            
            14,412,6772010
            
            
            10,852,883$
            156,120,922




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, 2005 and 2004, was 3.38% and 0.71%, respectively. The maximum month-end
      balance during 2005 and 2004 was $14,858,500 and $7,564,700 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, 2005 and 2004 consisted of $169,233 and $184,593,
      respectively which was due under the treasury tax and loan note program.




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




Advances
      from the Federal Home Loan Bank of Atlanta at December 31, 2005 consisted of
      the
      following:




**2005**
            
            **2004****Maturing**
            
            **Weighted**
              **Average
                Rate**
            
            **Amount**
            
            **Weighted**
              **Average
                Rate**
            
            **Amount**2005
            
            
            
            
            $
            —
            
            
            2.08
            %
            $
            2,500,0002006
            
            
            2.83
            %
            
            1,500,000
            
            
            2.83
            %
            
            1,500,0002008
            
            
            3.42
            %
            
            5,251,345
            
            
            3.42
            %
            
            10,709,6972010
            
            
            3.64
            %
            
            27,305,787
            
            
            3.64
            %
            
            27,742,425More
                than fiveyears
            
            
            1.00
            %
            
            467,277
            
            
            
            
            
            —3.54
            %
            $
            34,524,409
            
            
            3.46
            %
            $
            42,452,122




As
      collateral for its advances, the Company has pledged in the form of blanket
      liens, eligible single family loans, home equity lines of credit, second
      mortgage loans commercial real estate loans and multi family loans in the amount
      of $70,397,860 at December 31,


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 49


2005. 
      In addition, securities with a fair value of $8,050,723  have been pledged
      as collateral for advances as of December 31, 2005.  At December 31, 2004
      loans in the amount of $69,531,000 and securities with a fair value of
      $18,393,735 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 2005 and 2004 were $41,290,862 and $14,314,420,
      respectively.  The average interest rate for 2005 and 2004 was 3.49% and
      3.23%, respectively. The maximum outstanding amount at any month end was
      $46,613,103 and $42,556,961 for 2005 and 2004.




Purchase
      premiums included in advances acquired in the acquisition of DutchFork reflected
      in the advances maturing in 2008 and 2010 amount to $251,345 and $2,305,787
      at
      December 31, 2005 and $709,697 and $2,742,425, at December 31, 2004.  The
      coupon rate on these advances are 5.67% and 5.76%, respectively.




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
      of 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
      11 -
      INCOME TAXES




Income
      tax expense for the years ended December 31, 2005, 2004 and 2003 consists of
      the
      following:




**Year
                ended December 31****2005**
            
            **2004**
            
            **2003**CurrentFederal
            
            $
            137,642
            
            $
            651,304
            
            $
            869,508State
            
            
            83,545
            
            
            104,072
            
            
            97,727221,187
            
            
            755,376
            
            
            967,235DeferredFederal
            
            
            737,272
            
            
            197,474
            
            
            6,749State
            
            
            74,145
            
            
            10,000
            
            
            (9,094
            )811,413
            
            
            207,474
            
            
            (2,345
            )Change
                in valuation allowance
            
            
            —
            
            
            —
            
            
            —Income
                tax expense
            
            $
            1,032,600
            
            $
            962,850
            
            $
            964,890




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




**Year
                  ended December 31****2005**
              
              **2004**
              
              **2003**Expected
                  federal income tax expense
              
              $
              1,402,592
              
              $
              1,101,742
              
              $
              939,206State
                  income tax net of federal benefit
              
              
              104,075
              
              
              37,584
              
              
              64,600Tax
                  exempt interest
              
              
              (73,999
              )
              
              (64,126
              )
              
              (61,300
              )Nontaxable
                  dividends
              
              
              (321,912
              )
              
              (101,821
              )Increase
                  in cash surrender value life insurance
              
              
              (87,883
              )
              
              (18500
              )
              
              —Other
              
              
              9,727
              
              
              7,971
              
              
              22,384$
              1,032,600
              
              $
              962,850
              
              $
              964,890


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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,****2005**
            
            **2004**Assets:Provision
                for bad debts
            
            $
            971,980
            
            $
            994,777Excess
                tax basis of deductible intangible assets
            
            
            165,998
            
            
            131,376Premium
                on purchased FHLB Advances
            
            
            920,329
            
            
            1,242,441Net
                operating loss carry forward
            
            
            4,353,842
            
            
            5,161,156Excess
                tax basis of assets acquired
            
            
            488,534
            
            
            488,534Unrealized
                loss on available-for sale-securities
            
            
            2,046,309
            
            
            482,359Compensation
                expense deferred for tax purposes
            
            
            144,915
            
            
            453,385Other
            
            
            676,360
            
            
            859,779Deferred
                tax asset
            
            
            9,768,267
            
            
            9,813,807Liabilities:Tax
                depreciation in excess of book depreciation
            
            
            149,713
            
            
            266,919Excess
                tax basis of non-deductible intangible assets
            
            
            862,174
            
            
            1,012,121Excess
                financial reporting basis of assets acquired
            
            
            948,074
            
            
            1,022,207Income
                tax bad debt reserve recapture adjustment
            
            
            1,196,952
            
            
            1,653,746Other
            
            
            66,946
            
            
            66,943Total
                deferred tax liabilities
            
            
            3,223,859
            
            
            4,021,936Net
                deferred tax asset recognized
            
            $
            6,544,408
            
            $
            5,791,871




At
      December 31, 2005, the company has net operating loss carry forwards for state
      and federal income tax purposes of $12,097,000 available to offset future
      taxable income through 2023. There was no valuation allowance for deferred
      tax
      assets at either December 31, 2005 or 2004.  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 losses on available for sale securities of $1,563,950
      has
      been recorded directly to shareholders’ equity.  The balance of the change
      in the net deferred tax asset results from current period deferred tax expense
      of $811,413.





Note
      12 -
      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.




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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.




Long-term
      Debt - The fair values of long-term debt 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.




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




**December
                31, 2005**
            
            **December
                31, 2004****Carrying**
              **Amount**
            
            **Fair**
              **Value**
            
            **Carrying**
              **Amount**
            
            **Fair**
              **Value**Financial
                Assets:Cash
                and short term investments
            
            $
            12,864,146
            
            $
            12,864,146
            
            $
            19,325,645
            
            $
            19,325,645Held-to-maturity
                securities
            
            
            5,713,830
            
            
            5,746,448
            
            
            6,015,745
            
            
            6,147,698Available-for-sale
                securities
            
            
            170,657,770
            
            
            170,657,770
            
            
            190,010,307
            
            
            190,010,307Loans
                receivable
            
            
            221,667,632
            
            
            218,651,290
            
            
            186,771,344
            
            
            183,609,011Allowance
                for loan losses
            
            
            2,700,647
            
            
            —
            
            
            2,763,988
            
            
            —Net
                loans
            
            
            218,966,985
            
            
            218,651,290
            
            
            184,007,356
            
            
            183,609,011Accrued
                interest
            
            
            2,001,957
            
            
            2,001,957
            
            
            1,660,972
            
            
            1,660,972Interest
                rate cap
            
            
            192,898
            
            
            192,898
            
            
            —
            
            
            —Financial
                liabilities:Non-interest
                bearing demand
            
            $
            57,326,637
            
            $
            57,326,637
            
            $
            49,519,816
            
            $
            49,519,816NOW
                and money market accounts
            
            
            106,337,887
            
            
            106,337,887
            
            
            98,846,828
            
            
            98,846,828Savings
            
            
            29,818,705
            
            
            29,818,705
            
            
            35,370,267
            
            
            35,370,267Certificates
                of deposit
            
            
            156,120,922
            
            
            156,541,947
            
            
            153,327,373
            
            
            154,390,247Total
                deposits
            
            
            349,604,151
            
            
            350,025,176
            
            
            337,064,284
            
            
            338,127,158Federal
                Home Loan Bank Advances
            
            
            34,524,409
            
            
            32,590,242
            
            
            42,152,122
            
            
            41,422,224Short
                term borrowings
            
            
            13,975,633
            
            
            13,975,633
            
            
            7,734,493
            
            
            7,734,493Long-term
                debt
            
            
            15,464,000
            
            
            15,464,000
            
            
            15,464,000
            
            
            15,464,000Accrued
                interest payable
            
            
            2,053,833
            
            
            2,053,833
            
            
            1,015,435
            
            
            1,015,435




Note
      13 -
      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, 2005 and 2004, the Bank had commitments to extend credit including
      unused lines of credit of $38,700,000 and $32,499,000,
      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


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 52


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 and Newberry
      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
      $9.7 million. Based on this criteria, the Bank had three such concentrations
      at
      December 31, 2005, including $29.6 (13.4% of total loans) million to lessors
      of
      residential properties, $29.2 million (13.1% of total loans) of lessors of
      non-residential properties and $10.4 million (4.7% 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.




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, 2005, the Bank had entered into an interest rate cap agreement
      with
      a notional amount of $10.0 million with an interest rate cap on three month
      LIBOR of 4.50% expiring on September 1, 2009. The agreement was entered into
      to
      protect assets and liabilities from the negative effects of increasing interest
      rates. The agreement provides for a payment to the Bank of the difference
      between the cap 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.
      At
      December 31, 2005, the market value was $192,898. Any gain or loss on the value
      of this contract is recognized in earnings on a current basis. The Bank has
      not
      received any payments under the terms of the contract. During the year ended
      December 31, 2005, the bank recognized $37,898 in other income to reflect the
      increase in the value of the contract.




DutchFork
      had entered into several interest rate cap agreements prior to the date of
      acquisition. These included two agreements with notional amounts of $40.0
      million and $20.0 million with one month LIBOR cap rates of 3.5% and 3.0%,
      respectively. These agreements expired on November 15, 2004. In addition, they
      had two agreements with notional amounts of $25.0 million each with a one month
      LIBOR cap rate of 7.0%. These agreements expired on March 18, 2005. Due to
      the
      cap rate and the short period to expiration, these interest rate caps had no
      market value at the date of acquisition. The Company received no payments on
      these agreements and recorded no change in value during any period as they
      never
      regained their value from the date of acquisition until expiration **.**




Note
      14 -
      OTHER EXPENSES




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





****
            
            **December
                31,****2005**
            
            **2004**
            
            **2003**Data
                processing
            
            $
            199,347
            
            $
            127,031
            
            $
            87,161Supplies
            
            
            262,251
            
            
            190,972
            
            
            126,063Telephone
            
            
            291,911
            
            
            205,908
            
            
            146,940Correspondent
                services
            
            
            167,442
            
            
            140,182
            
            
            75,931Insurance
            
            
            246,132
            
            
            149,482
            
            
            113,064Postage
            
            
            164,260
            
            
            110,798
            
            
            84,512Professional
                fees
            
            
            414,726
            
            
            189,525
            
            
            194,380Other
            
            
            815,022
            
            
            513,572
            
            
            372,587$
            2,561,091
            
            $
            1,627,470
            
            $
            1,200,638





Note
      15 -
      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, 2005 the Company has 104,750 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.





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Stock
      option transactions for the years ended December 31, 2005, 2004 and 2003 are
      summarized as follows.


**Shares**
            
            **Weighted**
              **Average**
              **Exercise
                Price**Outstanding
                January 1, 2003
            
            
            158,501
            
            $
            9.66Exercised
            
            
            6,923
            
            
            8.54Granted
            
            
            3,500
            
            
            18.84Forfeited
            
            
            4,315
            
            
            11.78Outstanding
                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
            
            
            20.20Forfeited
            
            
            —
            
            
            —Outstanding
                December 31, 2005
            
            
            328,092
            
            $
            11.87Exercisable
                at December 31, 2005
            
            
            328,092
            
            $
            11.87




In
      October 1995, the Financial Accounting Standards Board (“FASB”) issued Statement
      of Financial Accounting Standards No. 123, “Accounting for Stock Based
      Compensation” (SFAS 123) The statement defines a fair value based method of
      accounting for employee stock options granted after December 31, 1994. 
However, SFAS 123 allows an entity to account for these plans according to
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees” (“APB 25”), provided pro forma disclosure of net income and earnings
      per share are made as if SFAS 123 had been applied.  The Company has
      elected to use APB 25 and provide the required pro-forma disclosures. 
Accordingly, no compensation cost has been recognized in the financial
      statements for the Company’s stock option plan.





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) will require
      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) requires additional accounting and disclosures
      related to the income tax and cash flow effects resulting from share-based
      payment arrangements. SFAS No. 123(R) is effective beginning as of the first
      annual reporting period beginning after December 15, 2005. The board of
      directors upon recommendation of the Human Resources Committee approved
      accelerating the vesting of 67,000 unvested stock options. The accelerated
      vesting is effective as of December 31, 2005. All of the other terms and
      conditions applicable to the outstanding stock options remained unchanged.
      The
      decision to accelerate vesting of these options will avoid recognition of
      pre-tax compensation expense by the Company upon the adoption of SFAS 123R.
      In
      the Company’s view, the future compensation expense could outweigh the incentive
      and retention value associated with the stock options. The future pre-tax
      compensation expense that will be avoided using estimated Black-Scholes value
      calculations, and based upon the effective date of January 1, 2006, is expected
      to be 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.




The
      following summarizes pro-forma data in accordance with SFAS 123 including the
      effects of the acceleration for the year ended December 31, 2005:




**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Net
                income, pro-forma
            
            $
            2,792,578
            
            $
            2,179,236
            
            $
            1,772,921Basic
                earnings/loss per common share, pro-forma
            
            $
            0.99
            
            $
            1.15
            
            $
            1.11Diluted
                earnings loss per common share, pro-forma
            
            $
            0.94
            
            $
            1.09
            
            $
            1.07




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 acquisition, during 2005, 2004 and
      2003
      was $6.87, $7.15 and $5.62.  Those granted in conjunction with the
      acquisition in 2004 had an average fair value of $14.32.





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 54


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**
            
            **2004**
            
            **2003**Dividend
                yield
            
            
            1.0
            %
            
            1.0
            %
            
            0.9
            %Expected
                volatility
            
            
            24.3
            %
            
            24.8
            %
            
            25.4
            %Risk-free
                interest rate
            
            
            4.3
            %
            
            4.3
            %
            
            3.0
            %Expected
                life
            
            
            8
                Years
            
            
            7
                Years
            
            
            7
                Years




Note
      16 -
      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, 2005, 2004 and 2003 the plan expense amounted
      to $102,130, $137,177 and $106,398 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. The cash
      surrender value at December 31, 2005 was $5,811,302. 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. Expenses
      accrued for the anticipated benefits for the year ended December 31, 2005
      amounted to $95,427. 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.





Note
      17 -
      EARNINGS PER SHARE




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




**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Numerator
                (Included in basic and diluted earnings per share)
            
            $
            3,092,671
            
            $
            2,184,985
            
            $
            1,797,481DenominatorWeighted
                average common shares outstanding for:Basic
                earnings per share
            
            
            2,834,404
            
            
            1,903,209
            
            
            1,590,052Dilutive
                securities:Stock
                options - Treasury stock method
            
            
            134,104
            
            
            102,536
            
            
            70,925Diluted
                earnings per share
            
            
            2,968,508
            
            
            2,005,745
            
            
            1,660,977




The
      average market price used in calculating the assumed number of shares issued
      for
      the years ended December 31, 2005, 2004 and 2003 was $19.15, $21.67 and $18.71,
      respectively.




Note
      18 -
      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, 2005, 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.





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 55


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
                Capitalized****Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**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
            %December
                31, 2004First
                Community CorporationTier
                1 Capital
            
            $
            37,485,000
            
            
            12.91
            %
            $
            11,612,000
            
            
            4.00
            %
            
            N/A
            
            
            N/ATotal
                Risked Based Capital
            
            
            40,249,000
            
            
            13.86
            %
            
            23,224,000
            
            
            8.00
            %
            
            N/A
            
            
            N/ATier
                1 Leverage
            
            
            37,485,000
            
            
            8.51
            %
            
            17,614,000
            
            
            4.00
            %
            
            N/A
            
            
            N/AFirst
                Community Bank, NATier
                1 Capital
            
            $
            33,158,000
            
            
            11.46
            %
            $
            11,576,000
            
            
            4.00
            %
            $
            17,364,000
            
            
            6.00
            %Total
                Risked Based Capital
            
            
            35,922,000
            
            
            12.41
            %
            
            23,152,000
            
            
            8.00
            %
            
            28,940,000
            
            
            10.00
            %Tier
                1 Leverage
            
            
            33,158,000
            
            
            7.64
            %
            
            17,367,000,
            
            
            4.00
            %
            
            21,703,000
            
            
            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,
      2005 there was $6,347,000 of retained net profits free of such restriction.





Note
      19 - 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,****2005**
            
            **2004**Assets:Cash
                on deposit
            
            $
            3,511,344
            
            $
            3,051,478Securities
                purchased under agreement to resell
            
            
            66,842
            
            
            15,304Investment
                securities available-for-sale
            
            
            1,360,000
            
            
            1,360,000Investment
                in bank subsidiary
            
            
            61,048,462
            
            
            61,135,575Other
            
            
            494,154
            
            
            537,321Total
                assets
            
            $
            66,480,802
            
            $
            66,099,678Liabilities:Long-term
                debt
            
            $
            15,464,000
            
            $
            15,464,000Other
            
            
            250,017
            
            
            172,989Total
                liabilities
            
            
            15,714,017
            
            
            15,636,989Shareholders’
                equity
            
            
            50,766,785
            
            
            50,462,689Total
                liabilities and shareholders’ equity
            
            $
            66,480,802
            
            $
            66,099,678





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 56


Condensed
      Statements of Operations




****
            
            **Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Income:Interest
                income
            
            $
            51,323
            
            $
            72,795
            
            $
            75,711Dividend
                income from bank subsidiary
            
            
            1,327,125
            
            
            366,000
            
            
            225,160Equity
                in undistributed earnings of subsidiary
            
            
            2,715,875
            
            
            2,073,865
            
            
            1,556,937Total
                income
            
            
            4,094,323
            
            
            2,512,660
            
            
            1,857,808Expenses:Interest
                expense
            
            
            885,344
            
            
            214,813
            
            
            —Other
            
            
            116,308
            
            
            112,862
            
            
            60,327Total
                expense
            
            
            1,001,652
            
            
            327,675
            
            
            60,327Income
                before taxes
            
            
            3,092,671
            
            
            2,184,985
            
            
            1,797,481Income
                taxes
            
            
            —
            
            
            —
            
            
            —Net
                Income
            
            $
            3,092,671
            
            $
            2,184,985
            
            $
            1,797,481




Condensed
      Statements of Cash Flows




**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Cash
                flows from operating activities:Net
                Income
            
            $
            3,092,671
            
            $
            2,184,985
            
            $
            1,797,481Adjustments
                to reconcile net income to net cash used by operating
                activitiesIncrease
                in equity in undistributed earnings of subsidiary
            
            
            (2,715,875
            )
            
            (2,073,865
            )
            
            (1,556,937
            )Other-net
            
            
            120,200
            
            
            84,600
            
            
            (54,105
            )Net
                cash provided (used) by operating activities
            
            
            496,996
            
            
            195,720
            
            
            186,439Cash
                flows from investing activities:Purchase
                of investment security available-for-sale
            
            
            —
            
            
            (110,000
            )
            
            (1,250,000
            )Maturity
                of investment security available-for-sale
            
            
            —
            
            
            —
            
            
            1,750,000Investment
                in bank subsidiary
            
            
            —
            
            
            (2,897,905
            )
            
            —Net
                cash disbursed in business combination
            
            
            —
            
            
            (11,131,142
            )
            
            —Net
                cash provided (used) by investing activities
            
            
            —
            
            
            (14,139,047
            )
            
            500,000Cash
                flows from financing activities:Cash
                in lieu of fractional shares
            
            
            —
            
            
            —
            
            
            —Dividends
                paid
            
            
            (565,432
            )
            
            (381,878
            )
            
            (301,973
            )Proceeds
                from issuance of long-term debt
            
            
            —
            
            
            15,000,000
            
            
            —Proceeds
                from issuance of common stock
            
            
            579,840
            
            
            315,430
            
            
            100,586Net
                cash provided by financing activities
            
            
            14,408
            
            
            14,933,552
            
            
            (201,387
            )Increase
                in cash and cash equivalents
            
            
            511,404
            
            
            990,225
            
            
            485,052Cash
                and cash equivalent, beginning of period
            
            
            3,066,782
            
            
            2,076,557
            
            
            1,591,505Cash
                and cash equivalent, end of period
            
            $
            3,578,186
            
            $
            3,066,782
            
            $
            2,076,557




Note
      20 -
      SUBSEQUENT EVENTS





On
      January 19, 2006, the Company entered into an Agreement and Plan of Merger
      (Agreement) with DeKalb Bankshares (DeKalb), the holding company for The Bank
      of
      Camden (Bank of Camden).  The Agreement provides, among other things, that
      DeKalb will merge with and into First Community with First Community as the
      surviving entity.  Immediately following the merger, Bank of Camden will
      merge with and into First Community Bank, N.A., with First Community Bank,
      N.A.
      being the surviving entity.




Pursuant
      to the Agreement, each share of DeKalb common stock issued and outstanding
      immediately before the Effective Date (as defined in the Agreement) will be
      converted into the right to receive $3.875 in cash and 0.60705 shares of First
      Community common stock. Assuming no DeKalb shareholders exercise dissenters’
rights, and assuming the total number of outstanding shares of DeKalb common
      stock immediately prior to the effective time is 610,139, First Community will
      issue an aggregate of 370,384 shares of stock and $2,364,289 in
      cash.  Consummation
      of the merger is subject to the satisfaction of certain conditions, including
      approval of the Agreement by the shareholders of DeKalb and approval by the
      appropriate regulatory agencies.


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 57


**Item
        9.  Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.**
  None.
  **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, 2005.  There have been no
        significant changes in our internal controls over financial reporting during
        the
        fourth fiscal quarter ended December 31, 2005 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 and Executive Officers of the
        Registrant****.**
  The
        information required by Item 10 is hereby incorporated by reference from
        our
        proxy statement for our 2006 annual meeting of shareholders to be held on
        May
        17, 2006.
  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 2006 annual meeting of shareholders to be held on
        May
        17, 2006.





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 58





**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,
        2005.  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)
            
            
            147,407
            
            $
            15.10
            
            
            104,750Total(2)
            
            
            147,407
            
            $
            15.10
            
            
            104,750







(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 180,685 shares with a weighted average exercise
                price of $9.23 issuable under the First Community Corporation / DutchFork
                Bancshares, Inc. Stock Incentive Plan.  This plan and the outstanding
                awards were assumed by us in connection with the merger with DutchFork
                Bancshares, Inc.  We are not authorized to make any additional awards
                under this plan.




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 2006 annual meeting of
      shareholders to be held on May 17, 2006.




**Item
      13.  Certain Relationships and Related
      Transactions.**




The
      information required by Item 13 is hereby incorporated by reference from our
      proxy statement for our 2006 annual meeting of shareholders to be held on May
      17, 2006.





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





The
      information required by Item 14 is hereby incorporated by reference from our
      proxy statement for our 2006 annual meeting of shareholders to be held on May
      17, 2006.





**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, 2005 and 2004


Consolidated
      Statements of Income for the years ended December 31, 2005, 2004 and
      2003


Consolidated
      Statements of Changes in shareholders’ Equity and Comprehensive Inc for the
      years ended December 31, 2005, 2004 and 2003


Consolidated
      Statements of Cash Flows for the years ended December 31, 2005, 2004 and
      2003


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.


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 59





(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 June 1, 1994, by and between Michael C. Crapps and the
      Company (incorporated by reference to Exhibit 10.1 to the company’s
      Registration Statement No. 33-86258 on Form S-1).*





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.*





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).*




21.1  Subsidiaries
      of the company.




23  Consent
      of Independent Registered Public Accounting Firm


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 60


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 onForm 10-K.


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 61





**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 15, 2006
            **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
                  15, 2006Richard
                  K. Bogan/s/
                  Thomas C. Brown
              
              Director
              
              March
                15, 2006Thomas
                  C. Brown/s/
                  Chimin J. Chao
              
              Director
              
              March
                  15, 2006Chimin
                  J. Chao/s/
                  Michael C. Crapps
              
              Director,
                  President,
              
              March
                  15, 2006Michael
                  C. Crapps
              
              &
                  Chief Executive Officer/s/
                  Hinton G. Davis
              
              Director
              
              March
                  15, 2006Hinton
                  G. Davis/s/
                  Anita B. Easter
              
              Director
              
              March
                  15, 2006Anita
                  B. Easter/s/
                  O. A. Ethridge
              
              Director
              
              March
                  15, 2006O.
                  A. Ethridge/s/
                  George H. Fann, Jr.
              
              Director
              
              March
                  15, 2006George
                  H. Fann, Jr./s/
                  J. Thomas Johnson
              
              Director,
                  Vice Chairman of the Board,
              
              March
                  15, 2006J.
                  Thomas Johnson
              
              &
                  Executive Vice President/s/
                  W. James Kitchens, Jr.
              
              Director
              
              March
                  15, 2006W.
                  James Kitchens, Jr./s/
                  James C. Leventis
              
              Director,
                  Chairman of the
              
              March
                  15, 2006James
                  C. Leventis
              
              Board,
                  & Secretary




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 62








/s/Alexander
                  Snipes, Jr.
              
              Director
              
              March
                  15, 2006Alexander
                  Snipes, Jr./s/
                  Loretta R. Whitehead
              
              Director
              
              March
                  15, 2006Loretta
                  R. Whitehead/s/
                  Mitchell M. Willoughby
              
              Director
              
              March
                    15, 2006Mitchell
                  M. Willoughby/s/
                  Joseph G. Sawyer
              
              Chief
                  Financial Officer
              
              March
                    15, 2006Joseph
                  G. Sawyer
              
              and
                  Principal Accounting Officer




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 63




Exhibit
      List




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 June 1, 1994, by and between Michael C. Crapps and the
      Company (incorporated by reference to Exhibit 10.1 to the company’s
      Registration Statement No. 33-86258 on Form S-1).*





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.*





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).





21.1  Subsidiaries
      of the company.




23  Consent
      of Independent Registered Public Accounting Firm





24.1  Power
      of
      Attorney (contained on the signature page hereto).




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


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 64


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




32  Section
      1350 Certifications.














65


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