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FIRST COMMUNITY CORP /SC/ - Annual Report: 2006 (Form 10-K)

form10-k.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
Form 10-K
(Mark One)
o
Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006
Or
o
Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from             to            
 
Commission file number: 000-28344
 
First Community Corporation
(Exact name of registrant as specified in its charter)
 
South Carolina
 
57-1010751
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5455 Sunset Blvd.,
Lexington, South Carolina
 
29072
(Address of principal executive offices)
 
(Zip Code)
 
803-951-2265
Registrant’s telephone number, including area code

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o    No x

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes x    No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes o    No x

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

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

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

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

Documents Incorporated by Reference

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


 
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CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

This Report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those projected in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,”  “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties include, but are not limited to those described below under Item 1A- Risk Factors and the following:

 
·
the businesses of First Community and DeKalb Bankshares may not be integrated successfully or such integration may take longer to accomplish than expected;
 
·
the expected cost savings and any revenue synergies from the merger may not be fully realized within the expected timeframes;
 
·
success and timing of other business strategies;
 
·
significant increases in competitive pressure in the banking and financial services industries;
 
·
changes in the interest rate environment which could reduce anticipated or actual margins;
 
·
changes in political conditions or the legislative or regulatory environment;
 
·
general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality;
 
·
changes occurring in business conditions and inflation;
 
·
changes in technology;
 
·
changes in monetary and tax policies;
 
·
the level of allowance for loan loss;
 
·
the rate of delinquencies and amounts of charge-offs;
 
·
the rates of loan growth;
 
·
adverse changes in asset quality and resulting credit risk-related losses and expenses;
 
·
loss of consumer confidence and economic disruptions resulting from terrorist activities;
 
·
changes in the securities markets; and
 
·
other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

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

PART I
Item 1. Business

General

First Community Corporation, a bank holding company registered under the Bank Holding Company Act of 1956, was incorporated under the laws of South Carolina in 1994 primarily to own and control all of the capital stock of First Community Bank, N.A., which commenced operations in August 1995.  On October 1, 2004, we consummated our acquisition of DutchFork Bancshares, Inc. and its wholly-owned subsidiary, Newberry Federal Savings Bank.  During the second quarter of 2006, we completed our acquisition of DeKalb Bankshares, Inc., the holding company for The Bank of Camden. We engage in a commercial banking business from our main office in Lexington, South Carolina and our 12 full-service offices are located in Lexington (two), Forest Acres, Irmo, Cayce-West Columbia, Gilbert, Chapin, Northeast Columbia, Prosperity, Newberry (two) and Camden. We offer a wide-range of traditional banking products and services for professionals and small- to medium-sized businesses, including consumer and commercial, mortgage, brokerage and investment, and insurance services.  We also offer online banking to our customers.  Our stock trades on The NASDAQ Capital Market under the symbol FCCO.
 
As of December 31, 2004, the company no longer met the requirements to qualify as a small business issuer as defined in Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”). All reports of the company, beginning with the Form 10-Q for the quarter ended March 31, 2005, are presented in accordance with Regulation S-K.  The company, however, is not an accelerated filer as defined in Rule 12b-2 of the Exchange Act.  As a result,
 

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

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

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

The principal components of the economy within our market area are service industries, government, and wholesale and retail trade.  The largest employers in the area, each of which employs in excess of 3,000 people, include Fort Jackson Army Base, the University of South Carolina, Palmetto Health Alliance, Blue Cross Blue Shield and SCANA Corporation.  The area has experienced steady growth over the past 10 years and we expect that the area, as well as the service industry needed to support it, will to continue to grow.  For 2003, Richland, Lexington, Kershaw and Newberry Counties had estimated median household incomes of $39,737, $45,677, $40,288 and $33,137, respectively, compared to $38,003 for South Carolina as a whole.
 
Banking Services
 
We offer a full range of deposit services that are typically available in most banks and thrift institutions, including checking accounts, NOW accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit.  The transaction accounts and time certificates are tailored to our principal market area at rates competitive to those offered in the area.  In addition, we offer certain retirement account services, such as Individual Retirement Accounts (IRAs).  All deposit accounts are insured by the FDIC up to the maximum amount allowed by law (generally, $100,000 or $250,000 in the case of IRA accounts per depositor subject to aggregation rules).  We solicit these accounts from individuals, businesses, associations and organizations, and governmental authorities.
 
We also offer a full range of commercial and personal loans.  Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery.  Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education, and personal investments.  We also make real estate construction and acquisition loans.  We originate fixed and variable rate mortgage loans substantially all of which are closed in the name of a third party which, are sold into the secondary market.  Our lending activities are subject to a variety of lending limits imposed by federal law.  While differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower’s relationship to the bank), in general we are subject to a loans-to-one-borrower limit of an amount equal to 15% of the bank’s unimpaired capital and surplus, or 25% of the unimpaired capital and surplus if the excess over 15% is approved by the board of directors of the bank and is fully secured by readily marketable collateral.  We may not make any loans to any director, officer, employee, or 10% shareholder of the company or the bank unless the loan is approved by our board of directors and is made on terms not more favorable to such person than would be available to a person not affiliated with the bank.
 
Other bank services include internet banking, cash management services, safe deposit boxes, travelers checks, direct deposit of payroll and social security checks, and automatic drafts for various accounts.  We offer non-deposit investment products and other investment brokerage services through a registered representative with an affiliation through GAA Securities, Inc.  We are associated with Jeannie, Star, and Plus networks of automated teller machines and Mastermoney debit cards that may be used by our customers throughout South Carolina and other regions.  We also offer VISA and MasterCard credit card services through a correspondent bank as our agent.
 
We currently do not exercise trust powers, but can begin to do so with the prior approval of the OCC.


Competition
 
The banking business is highly competitive.  We compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions and money market mutual funds operating in Richland, Lexington, Kershaw and Newberry Counties and elsewhere.  As of June 30, 2006, there were 24 financial institutions operating approximately 198 offices in Lexington, Richland, Kershaw and Newberry Counties.  The competition among the various financial institutions is based upon a variety of factors, including interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits.  Size gives larger banks certain advantages in competing for business from large corporations.  These advantages include higher lending limits and the ability to offers services in other areas of South Carolina.  As a result, we do not generally attempt to compete for the banking relationships of large corporations, but concentrate our efforts on small-to-medium sized businesses and individuals.  We believe we have competed effectively in this market by offering quality and personal service.
 
Employees
 
As of December 31, 2006, we had 137 full-time employees. We believe that our relations with our employees are good.
 
SUPERVISION AND REGULATION


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

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

First Community Corporation

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

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

 
banking or managing or controlling banks;
 
 
furnishing services to or performing services for our subsidiaries; and
 
 
any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

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


 
factoring accounts receivable;
 
 
making, acquiring, brokering or servicing loans and usual related activities;
 
 
leasing personal or real property;
 
 
operating a non-bank depository institution, such as a savings association;
 
 
trust company functions;
 
 
financial and investment advisory activities;
 
 
conducting discount securities brokerage activities;
 
 
underwriting and dealing in government obligations and money market instruments;
 
 
providing specified management consulting and counseling activities;
 
 
performing selected data processing services and support services;
 
 
acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
 
 
performing selected insurance underwriting activities.

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

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

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

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


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

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

First Community Bank, N.A.

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

 
security devices and procedures;
 
 
adequacy of capitalization and loss reserves;
 
 
loans;
 
 
investments;
 
 
borrowings;
 
 
deposits;
 
 
mergers;
 
 
issuances of securities;
 
 
payment of dividends;
 
 
interest rates payable on deposits;
 
 
interest rates or fees chargeable on loans;
 
 
establishment of branches;
 
 
corporate reorganizations;
 
 
maintenance of books and records; and
 
 
adequacy of staff training to carry on safe lending and deposit gathering practices.

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


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

 
internal controls;
 
 
information systems and audit systems;
 
 
loan documentation;
 
 
credit underwriting;
 
 
interest rate risk exposure; and
 
 
asset quality.

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

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

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

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

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

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

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


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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

The deposit operations of the bank also are subject to:

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

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

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

USA PATRIOT Act.  The USA PATRIOT Act became effective on October 26, 2001, amended, in part, the Bank Secrecy Act and provides, in part, for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: (i) requiring standards for verifying customer identification at account opening; (ii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iii) reports by nonfinancial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (iv) filing suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S. laws and regulations and requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons.
 
Under the USA PATRIOT Act, the Federal Bureau of Investigation (“FBI”) can send our banking regulatory agencies lists of the names of persons suspected of involvement in terrorist activities. The bank can be requested, to search its records for any relationships or transactions with persons on those lists. If the bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.


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

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

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

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

 
allowing check truncation without making it mandatory;

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

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

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

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

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

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

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


Item 1A. Risk Factors

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

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

 
 the duration of the credit;
 
 credit risks of a particular customer;
 
changes in economic and industry conditions; and
 
in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio.  We periodically determine the amount of the allowance based on consideration of several factors, including:
 
 
 an ongoing review of the quality, mix, and size of our overall loan portfolio;
 
 our historical loan loss experience;
 
 evaluation of economic conditions;
 
 regular reviews of loan delinquencies and loan portfolio quality; and
 
 the amount and quality of collateral, including guarantees, securing the loans.
 
There is no precise method of predicting credit losses; therefore, we face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required.  Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital.

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

Due to the rapid growth of our bank over the past several years, a material portion of the loans in our loan portfolio and of our lending relationships are of relatively recent origin.  In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio.  In addition, we acquired a substantial portion of the loans in our loan portfolio and of our lending relationships through our acquisitions of DutchFork Bancshares, Inc. and DeKalb Bankshares, Inc. Because these loans and lending relationships are new to us, we may have more difficulty in assessing the risk of credit defaults from these relationships.  Because of both our internal loan growth and our acquisitions, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels.  If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition.

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

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


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

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

We are dependent on key individuals, and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects.
 
Michael C. Crapps, our president and chief executive officer, has extensive and long-standing ties within our primary market area and substantial experience with our operations, and he has contributed significantly to our growth.  If we lose the services of Mr. Crapps, he would be difficult to replace and our business and development could be materially and adversely affected.

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

We are subject to extensive regulation that could limit or restrict our activities.
 
We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies.  Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices.  We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth.
 
The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability.  Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.
 
The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission that are now applicable to us, have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices.  To comply with the Sarbanes-Oxley Act, we have previously hired outside consultant to assist with our internal audit and internal control functions. We have experienced, and we expect to continue to experience, greater compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act.

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


remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. While we currently anticipate that we will be able to fully implement the requirements relating to internal controls and all other aspects of Section 404 in a timely manner, as required by Section 404 and the SEC's related regulations, we could identify deficiencies that we may not be able to remediate in time to meet this deadline. If we are not able to implement or maintain the requirements of Section 404 in a timely manner or with adequate compliance, we could be subject to scrutiny by regulatory authorities and the trading price of our stock could decline.  Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors and regulators could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.   We currently anticipate that we will fully implement the requirements relating to internal controls and all other aspects of Section 404 within the required time frames.
 
Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.
 
We are required by regulatory authorities to maintain adequate levels of capital to support our operations.  To support our continued growth, we may need to raise additional capital.  Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control.  Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us.  If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.  In addition, if we decide to raise additional equity capital, your interest could be diluted.

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

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

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

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

 
the potential inaccuracy of the estimates and judgments used to evaluate credit, operations, management, and market risks with respect to a target institution;
 
 the time and costs of evaluating new markets, hiring or retaining experienced local management, and opening new offices and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;
 
the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse effects on our results of operations; and
 
 the risk of loss of key employees and customers.


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

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

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

A significant portion of our loan portfolio is secured by real estate. As of December 31, 2006, approximately 88.1% of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A weakening of the real estate market in our primary market area could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected. Acts of nature, including hurricanes, tornados, earthquakes, fires and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.
 
Item 1B. Unresolved Staff Comments
 
We have no unresolved staff comments with the SEC regarding our periodic or currect reports under the Exchange Act.
 
Item 2. Description of Property.  
 
Lexington Property. The principal place of business of both the company and our main office is located at 5455 Sunset Boulevard, Lexington, South Carolina 29072.  The site of the bank’s main office branch is a 2.29 acre plot of land.  This site was purchased for $576,000 and the building cost were approximately $1.0 million.  The branch operates in an 8,500 square foot facility located on this site. 

In October 2000, the bank acquired an additional 2.0 acres adjacent to the existing facility for approximately $300,000.  This site was designed to allow for 24,000 to 48,000 square foot facility at some future date. The bank completed construction and occupied the 28,000 square foot administrative center in July 2006. The total construction cost for the building is approximately $3.4 million. The Lexington property is owned by the bank.
 
Forest Acres Property. We operate a branch office facility at 4404 Forest Drive, Columbia, South Carolina 29206.  The Forest Acres site is .71 acres.  The banking facility is approximately 4,000 square feet with a total cost of land and facility approximately $920,000. This property is owned by the bank.
 
Irmo Property. We operate a branch office facility at 1030 Lake Murray Boulevard, Irmo, South Carolina 29063.  The Irmo site is approximately 1.00 acre.  The banking facility is approximately 3,200 square feet with a total cost of land and facility of approximately $1.1 million. This property is owned by the bank.
 
Cayce/West Columbia Property. We operate a branch office facility at 506 Meeting Street, West Columbia, South Carolina, 29169.  The Cayce/West Columbia site is approximately 1.25 acres.  The banking facility is approximately 3,800 square feet with a total cost of land and facility of approximately $935,000. This property is owned by the bank.
 
Gilbert Property. We operate a branch office at 4325 Augusta Highway Gilbert, South Carolina 29054.  The facility is an approximate 3000 square foot facility located on an approximate one acre lot.  The total cost of the land and facility was approximately $768,000. This property is owned by the bank.

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


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

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

Prosperity Property.  We operate a branch office at 101 N. Wheeler Avenue, Prosperity, South Carolina 29127.  This office was acquired in connection with the DutchFork merger.  The banking facility is approximately 1,300 square feet and is located on a .31 acre lot.  The total cost of the facility and land was approximately $175,000. This property is owned by the bank.
 
Wilson Road.  We operate a branch office at 1735 Wilson Road, Newberry, South Carolina 29108.  The banking office was acquired in connection with the DutchFork merger.  This banking facility is approximately 12,000 square feet and is located on a 1.56 acre lot.  Adjacent to the branch facility is a 13,000 square foot facility which was formerly utilized as the DutchFork operations center.  The total cost of the facility and land was approximately $3.3 million. This property is owned by the bank.

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

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

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


Item 3. Legal Proceedings.
 
Neither the company nor the bank is a party to, nor is any of their property the subject of, any material pending legal proceedings related to the business of the company or the bank.
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
 
As of March 1, 2007, there were approximately 1,545 shareholders of record of our common stock. On January 15, 2003, our stock began trading on The NASDAQ Capital Market under the trading symbol of “FCCO.”  Prior to January 15, 2003, our stock was quoted on the OTC Bulletin Board under the trading symbol “FCCO.OB.”  The following table sets forth the high and low sales price information as reported by NASDAQ in 2006 and 2005, and the dividends per share declared on our common stock in each such quarter.  All information has been adjusted for any stock splits and stock dividends effected during the periods presented.
 
 
 
High
 
Low
 
Dividends
 
 
 
 
 
 
 
 
 
2006
 
 
 
 
 
 
 
Quarter ended March 31, 2006
 
$
19.63
 
$
17.75
 
$
0.05
 
Quarter ended June 30, 2006
 
$
18.79
 
$
17.11
 
$
0.06
 
Quarter ended September 30, 2006
 
$
18.32
 
$
16.62
 
$
0.06
 
Quarter ended December 31, 2006
 
$
18.75
 
$
16.50
 
$
0.06
 
2005
             
Quarter ended March 31, 2005
 
$
22.42
 
$
18.80
 
$
0.05
 
Quarter ended June 30, 2005
 
$
20.49
 
$
16.73
 
$
0.05
 
Quarter ended September 30, 2005
 
$
20.45
 
$
18.50
 
$
0.05
 
Quarter ended December 31, 2005
 
$
20.50
 
$
18.35
 
$
0.05
 
 
We expect comparable dividends to be paid to the shareholders for the foreseeable future.  Notwithstanding the foregoing, the future dividend policy of the company is subject to the discretion of the board of directors and will depend upon a number of factors, including future earnings, financial condition, cash requirements, and general business conditions. Our ability to pay dividends is generally limited by the ability of our subsidiary bank to pay dividends to us. As a national bank, our bank may only pay dividends out of its net profits then on hand, after deducting expenses, including losses and bad debts.  In addition, the bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of the bank’s net profits of the preceding two consecutive half-year periods (in the case of an annual dividend).  The approval of the OCC will be required if the total of all dividends declared in any calendar year by the bank exceeds the bank’s net profits to date, as defined, for that year combined with its retained net profits for the preceding two years less any required transfers to surplus.  At December 31, 2006, the bank had $8.2 million free of these restrictions.  The OCC also has the authority under federal law to enjoin a national bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances.

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

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



FIVE YEAR CUMULATIVE TOTAL RETURNS
COMPARISON OF FIRST COMMUNITY CORPORATION,
NASDAQ STOCK MARKET (U.S.) INDEX,
AND NASDAQ BANK INDEX


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

Item 6. Selected Financial Data
 

 
First Community Corporation
Selected Financial Data

(Amounts in thousands, except per share data)
 
                       
   
2006
 
2005
 
2004
 
2003
 
2002
 
                       
Operations Statement Data:
                               
Net interest income
 
$
14,323
 
$
12,994
 
$
9,596
 
$
7,648
 
$
7,044
 
Provision for loan losses
   
528
   
329
   
245
   
167
   
677
 
Non-interest income
   
4,401
   
3,298
   
1,774
   
1,440
   
1,232
 
Non-interest expense
   
13,243
   
11,838
   
7,977
   
6,158
   
5,377
 
Income taxes
   
1,452
   
1,032
   
963
   
965
   
758
 
Net income
 
$
3,501
 
$
3,093
 
$
2,185
 
$
1,797
 
$
1,464
 
Per Share Data:
                               
Net income diluted (1)
 
$
1.10
 
$
1.04
 
$
1.09
 
$
1.08
 
$
0.90
 
Cash dividends
   
.23
   
.20
   
0.20
   
0.19
   
0.12
 
Book value at period end (1)
   
19.36
   
17.82
   
18.09
   
12.21
   
11.61
 
Tangible book value at period end (1)
   
10.05
   
8.34
   
8.19
   
11.74
   
11.02
 
Balance Sheet Data:
                               
Total assets
 
$
548,056
 
$
467,455
 
$
455,706
 
$
215,029
 
$
195,201
 
Loans
   
275,189
   
221,668
   
186,771
   
121,008
   
99,991
 
Securities
   
176,523
   
176,372
   
196,026
   
58,954
   
69,785
 
Deposits
   
414,941
   
349,604
   
337,064
   
185,259
   
168,062
 
Shareholders' equity
   
63,208
   
50,767
   
50,463
   
19,509
   
18,439
 
Average shares outstanding (1)
   
3,097
   
2,847
   
1,903
   
1,590
   
1,588
 
Performance Ratios:
                               
Return on average assets
   
0.68
%
 
0.67
%
 
0.76
%
 
0.88
%
 
0.82
%
Return on average equity
   
6.12
%
 
6.12
%
 
8.00
%
 
9.49
%
 
8.35
%
Return on average tangible equity
   
12.69
%
 
13.33
%
 
10.39
%
 
9.94
%
 
8.87
%
Net interest margin
   
3.27
%
 
3.30
%
 
3.72
%
 
4.02
%
 
4.26
%
Dividend payout ratio
   
20.35
%
 
18.35
%
 
17.39
%
 
16.81
%
 
13.04
%
Asset Quality Ratios:
                               
Allowance for loan losses to period
                               
End total loans
   
1.17
%
 
1.22
%
 
1.48
%
 
1.41
%
 
1.53
%
Allowance for loan losses to
                               
Non-performing assets
   
716.04
%
 
487.48
%
 
2,291.34
%
 
2,131.25
%
 
1,059.03
%
Non-performing assets to total assets
   
.09
%
 
.12
%
 
.03
%
 
.04
%
 
.07
%
Net charge-offs (recoveries) to average loans
   
.13
%
 
.19
%
 
.13
%
 
(.01
%)
 
.16
%
Capital and Liquidity Ratios:
                               
Tier 1 risk-based capital
   
13.48
%
 
13.24
%
 
12.91
%
 
13.21
%
 
14.03
%
Total risk-based capital
   
14.40
%
 
14.12
%
 
13.86
%
 
14.42
%
 
15.28
%
Leverage ratio
   
9.29
%
 
9.29
%
 
8.51
%
 
8.87
%
 
8.77
%
Equity to assets ratio
   
11.53
%
 
10.86
%
 
9.60
%
 
9.07
%
 
9.45
%
Average loans to average deposits
   
64.83
%
 
59.81
%
 
61.00
%
 
63.33
%
 
60.71
%
 
(1) Adjusted for the February 28, 2002 5-for-4 stock split.


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

Overview

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

During 2006, we continued to implement our strategy to continue leveraging the DutchFork acquisition as well as integrate the operations of DeKalb into our systems. We experienced organic loan growth (growth excluding the DeKalb merger) of 9.7%, or $21.5 million. Organic deposit growth was 6.4% or $22.3 million. We added approximately $26.6 million in loans and $27.3 million in deposits through our acquisition of DeKalb. This continued growth in our loan portfolio is consistent with our strategy to leverage the deposit base in Newberry County that we acquired in the DutchFork acquisition. Our loan to deposit ratio at December 31, 2006 was 66.3% as compared to 63.4% at December 31, 2005. The continued growth in core deposits as well as cash flow provided from our investment portfolio provided the needed cash flow to fund loan growth. Total assets grew to $548.1 million, loans to $275.2 million and deposits to $414.9 million at December 31, 2006. Our net income increased $409,000 in 2006, or 13.2%, over the year ended December 31, 2005. The increase was primarily attributable to the continued growth in the level of earning assets. Net income was $3.5 million, or $1.10 diluted earnings per share in 2006, compared to $3.1 million, or $1.04 diluted earnings per share in 2005.
 
The following discussion describes our results of operations for 2006 as compared to 2005 (and 2005 compared to 2004 and also analyzes our financial condition as of December 31, 2006 as compared to December 31, 2005. Like most community banks, we derive most of our income from interest we receive on our loans and investments. A primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these  interest-earning assets and the rate we pay on our interest-bearing liabilities.

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

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

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion. The discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report. 


Mergers

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

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

Results of Operations

Our net income was $3.5 million, or $1.10 diluted earnings per share, for the year ended December 31, 2006, as compared to net income of $3.1 million, or $1.04 diluted earnings per share, for the year ended December 31, 2005, and $2.2 million, or $1.09 diluted earnings per share, for the year ended December 31, 2004. The increase in net income for 2006 as compared to 2005 resulted primarily from an increase in the level of average earning assets of $44.0 million. The effect of the increase in earning assets was offset by a 3 basis point decrease in the net interest margin from 3.30% during 2005 to 3.27% during 2006. On a tax equivalent basis, the net interest margin was 3.36% and 3.44% for the years ended December 31, 2006 and 2005, respectively. Net interest spread, the difference between the yield on earning assets and the rate paid on interest-bearing liabilities, was 2.88% in 2006 as compared to 3.05% in 2005 and 3.72% in 2004. See below under "Net Interest Income" and “Market Risk and Interest Rate Sensitivity” for a further discussion about the effect of this decrease in the net interest spread and in our net interest margin. Net interest income increased to $14.3 million for the year ended December 31, 2006 from $13.0 million in 2005. The provision for loan losses was $528,000 in 2006 as compared to $329,000 in 2005. Non-interest income increased to $4.4 million in 2006 from $3.3 million in 2005 due primarily to increased deposit service charges resulting from higher average deposit account balances as well as the introduction of an overdraft protection program in the fourth quarter of 2005. Non-interest expense increased to $13.2 million in 2006 as compared to $11.8 million in 2005. This increase is attributable to increases in all expense categories required to support the continued growth of the bank.
 
The increase in net income from 2004 to 2005 resulted primarily from an increase in the level of average earning assets of $136.0 million, which was partially offset by a decrease in the net interest margin from 3.72% in 2004 compared to 3.30% in 2005. Earning assets averaged $393.9 million in 2005 as compared to $257.9 million in 2004. Non-interest income increased from $1.8 million in 2004 to $3.3 million in 2005 due to increased deposit service charges and increases in ATM/debit card fees and ATM surcharge fees. In addition, in 2005 we had gains on the sale of securities of $188,000 and gains on the early extinguishment of debt of $124,000. This compares to gains on sale of securities of $11,000 in 2004. Non-interest expense increased to $11.8 million in 2005 as compared to $8.0 million in 2004. This increase is attributable to increases in all expense categories required to support the continued growth of the bank. In addition, expenses related to the operations of the branches acquired in the DutchFork acquisition on October 1, 2004 are included in the 2005 results for the entire year whereas in 2004 they were only included for the three months subsequent to the consummation of the merger.


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

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

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

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


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

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

Market Risk and Interest Rate Sensitivity

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

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


The following table illustrates our interest rate sensitivity at December 31, 2006.
 
Interest Sensitivity Analysis
(In thousands)
   
Within
One Year
 
One to
Three Years
 
Three to
Five Years
 
Over
Five Years
 
Total
 
Assets
                     
Earning assets
                               
Loans (1)
 
$
140,072
 
$
67,537
 
$
58,162
 
$
8,971
 
$
274,742
 
Securities (2)
   
48,891
   
73,267
   
17,396
   
39,703
   
179,257
 
Federal funds sold, securities purchased under agreements to resell and other earning assets
   
17,793
   
-
   
-
   
-
   
17,793
 
Total earning assets
   
206,756
   
140,804
   
75,558
   
48,674
   
471,792
 
                                 
Liabilities
                               
Interest bearing liabilities
                               
Interest bearing deposits
                           
NOW accounts
   
16,011
   
28,820
   
9,606
   
9,606
   
64,043
 
Money market accounts
   
40,393
   
10,406
   
-
   
-
   
50,799
 
Savings deposits
   
7,997
   
10,976
   
3,658
   
3,504
   
26,135
 
Time deposits
   
168,874
   
19,566
   
11,847
   
1
   
200,288
 
Total interest-bearing deposits
   
233,275
   
69,768
   
25,111
   
13,111
   
341,265
 
Other borrowings
   
35,617
   
2,020
   
26,919
   
288
   
64,844
 
Total interest-bearing liabilities
   
268,892
   
71,788
   
52,030
   
13,399
   
406,109
 
                                 
Period gap
 
$
(62,136
)
$
69,016
 
$
23,528
 
$
35,275
 
$
65,683
 
Cumulative gap
 
$
(62,136
)
$
6,880
 
$
30,408
 
$
65,683
 
$
65,683
 
Ratio of cumulative gap to total earning assets
   
(13.17
%)
 
1.46
%
 
6.45
%
 
13.92
%
 
13.92
%
_________________________
 
(1)
Loans classified as non-accrual as of December 31, 2006 are not included in the balances.
 
(2)
Securities based on amortized cost.

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


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

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

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

Provision and Allowance for Loan Losses

At December 31, 2006, the allowance for loan losses amounted to $3.2 million, or 1.17% of total loans, as compared to $2.7 million, or 1.22% of total loans, at December 31, 2005. Our provision for loan loss was $528,000 for the year ended December 31, 2006 as compared to $329,000 and $245,000 for the years ended December 31, 2005 and 2004, respectively. The provision is made based on our assessment of general loan loss risk and asset quality. The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectibility of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight and concentrations of credit. While net charge-offs declined during 2006 the charge-offs for installment and other credit card loans increased 186.1% from $72,000 in 2005 to $206,000 in 2006. This primarily results from the introduction of the overdraft protection program in the fourth quarter of 2005. Overdrafts are included in loans on the balance sheet and charge-off of the overdraft amount, excluding fees, is charged to the allowance for loan losses. In evaluating this overdraft protection program it was anticipated that these consumer charge-offs would increase. Periodically, we adjust the amount of the allowance based on changing circumstances. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses.

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


loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses.

There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.

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

Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans. We identified six loans in the amount of $769,000 which are current as to principal and interest and not included in non-performing assets but that could be potential problem loans.
 
Allowance for Loan Losses
(Dollars in thousands)
 
2006
 
2005
 
2004
 
2003
 
2002
 
Average loans outstanding
 
$
249,209
 
$
202,143
 
$
141,793
 
$
111,928
 
$
93,992
 
Loans outstanding at period end
 
$
275,189
 
$
221,668
 
$
186,771
 
$
121,009
 
$
99,991
 
Total nonaccrual loans
 
$
449
 
$
101
   
-
 
$
80
 
$
144
 
Loans past due 90 days and still accruing
 
$
22
 
$
34
 
$
80
 
$
109
 
$
24
 
                                 
Beginning balance of allowance
 
$
2,701
 
$
2,764
 
$
1,705
 
$
1,525
 
$
1,000
 
Loans charged-off:
                               
1-4 family residential mortgage
   
97
   
119
   
5
   
27
   
-
 
Home equity
   
-
   
274
   
-
   
-
   
-
 
Commercial
   
142
   
56
   
196
   
157
   
156
 
Installment & credit card
   
206
   
72
   
93
   
51
   
16
 
Total loans charged-off
   
445
   
521
   
294
   
235
   
172
 
Recoveries:
                               
1-4 family residential mortgage
   
2
   
-
   
-
   
-
   
-
 
Home equity
   
-
   
-
   
-
   
-
   
19
 
Commercial
   
59
   
99
   
90
   
247
   
1
 
Installment & credit card
   
50
   
30
   
23
   
1
   
-
 
Total recoveries
   
111
   
129
   
113
   
248
   
20
 
Net loans charged off (recovered)
   
334
   
392
   
181
   
( 13
)
 
152
 
Provision for loan losses
   
528
   
329
   
245
   
167
   
677
 
Purchased in acquisition
   
320
   
-
   
995
   
-
   
-
 
Balance at period end
 
$
3,215
 
$
2,701
 
$
2,764
 
$
1,705
 
$
1,525
 
Net charge -offs to average loans
   
0.13
%
 
0.19
%
 
0.13
%
 
(0.01
%)
 
0.16
%
Allowance as percent of total loans
   
1.17
%
 
1.22
%
 
1.48
%
 
1.41
%
 
1.53
%
Non-performing loans as % of total loans
   
.16
%
 
.05
%
 
-
   
0.07
%
 
0.14
%
Allowance as % of non-performing loans
   
716.04
%
 
2674.26
%
 
-
   
2131.25
%
 
1059.03
%
 

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

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

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


Noninterest Income and Expense

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

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

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


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

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


The following table sets forth for the periods indicated the primary components of non-interest expense:
(In thousands)
             
   
Year ended December 31,
 
   
2006
 
2005
 
2004
 
Salary and employee benefits
 
$
6,887
 
$
6,292
 
$
4,263
 
Occupancy
   
946
   
807
   
489
 
Equipment
   
1,241
   
1,246
   
992
 
Marketing and public relations
   
329
   
337
   
325
 
Data processing
   
265
   
199
   
127
 
Supplies
   
271
   
262
   
191
 
Telephone
   
381
   
291
   
206
 
Correspondent services
   
169
   
167
   
140
 
Insurance
   
255
   
246
   
149
 
Professional fees
   
833
   
415
   
190
 
Postage
   
168
   
164
   
111
 
Amortization of intangibles
   
637
   
595
   
280
 
Other
   
861
   
817
   
514
 
   
$
13,243
 
$
11,838
 
$
7,977
 
 
Income Tax Expense
 
Income tax expenses for the year ended December 31, 2006 were $1.5 million, or 29.3% of income before taxes, as compared to $1.0 million, or 25.0% of income before taxes, for the year ended December 31, 2005. Income taxes for 2004 were $963,000, or 30.6% of income before taxes. We recognize deferred tax assets for future deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities and operating loss carry forwards. A valuation allowance is then established to reduce the deferred tax asset to the level that it is more likely than not that the tax benefit will be realized. There are no valuation allowances established for deferred taxes as of December 31, 2006 and 2005. The increase in the effective tax rate in 2006 over the prior year is primarily a result of the decrease in the amount of dividends received (eligible for a 70% dividend received deduction) in 2006 versus 2005 on preferred stock held in the available-for-sale portfolio ($614,000 in 2006 and $920,000 in 2005). These investments were owned by DutchFork at the date of the merger. Subsequent to the merger and as a result of restructuring certain holdings within the portfolio, a significant portion of the preferred stock holdings were sold in the fourth quarter of 2004 and first quarter of 2005. As of December 31, 2006, we hold preferred stock with a fair value of $14.0 million in the available for sale portfolio and bank owned life insurance with a book value of $9.6 million. These holdings will continue to reduce the company’s effective tax rate in future periods. The decrease in the effective tax rate in 2005 as compared to 2004 was also a primarily a result of these assets being held only during the fourth quarter of 2004. 

Financial Position
 
Total assets at December 31, 2006 were $548.1 million as compared to $467.5 million at December 31, 2005. Average earning assets increased to $437.9 million during 2006 from $393.9 million during 2005. Asset growth included organic growth in loans of $26.9 million during 2006. Loans at December 31, 2006 were $275.2 as compared to $221.7 million at December 31, 2005. The increase includes $26.6 million in loans acquired in the merger with DeKalb. Investment securities were $176.5 at December 31, 2006 as compared to $176.4 million at December 31, 2005. The organic $34.6 million growth in assets was funded by an organic increase in deposit account balances of $38.0 million. Deposits and borrowings acquired in the merger with DeKalb amounted to $27.3 million and $7.9 million respectively. Securities sold under agreements to repurchase increased by $5.7 million at December 31, 2006 as compared to December 31, 2005. Federal Home Loan Bank Advances decreased by $4.7 million as of December 31, 2006 compared to December 31, 2005. Shareholders’ equity totaled $63.2 million at December 31, 2006 as compared to $50.8 million at December 31, 2005. The increase was a result of retained earnings of $2.8 million, proceeds from issuance of stock under stock option plans and the dividend reinvestment plan of $1.1 million and stock issued in the DeKalb merger valued at $7.6 million. There was also a partial recovery of the net of tax unrealized loss on available-for-sale securities of $1.9 million during 2006.


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

   
December 31,
 
(In thousands)
 
2006
 
2005
 
2004
 
2003
 
2002
 
   
 
                 
Commercial, financial & agricultural
 
$
23,595
 
$
22,091
 
$
19,001
 
$
11,518
 
$
10,688
 
Real estate:
                               
Construction
   
31,474
   
19,955
   
8,066
   
7,782
   
7,533
 
Mortgage - residential
   
47,950
   
37,251
   
35,438
   
11,804
   
11,055
 
Mortgage - commercial
   
138,886
   
112,915
   
96,811
   
72,668
   
55,290
 
Consumer
   
33,284
   
29,456
   
27,455
   
17,237
   
15,425
 
Total gross loans
   
275,189
   
221,668
   
186,771
   
121,009
   
99,991
 
Allowance for loan losses
   
(3,215
)
 
(2,701
)
 
(2,764
)
 
(1,705
)
 
(1,525
)
Total net loans
 
$
271,974
 
$
218,967
 
$
184,007
 
$
119,304
 
$
98,466
 
 
In the context of this discussion, a real estate mortgage loan is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. We follow the common practice of financial institutions in the company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan components. Generally we limit the loan-to-value ratio to 80%. The principal components of our loan portfolio, at year-end 2006 and 2005, were commercial mortgage loans in the amount of $138.9 million and $112.9 million, representing 50.5% and 50.9% of the portfolio, respectively. Significant portions of these commercial mortgage loans are made to finance owner-occupied real estate. We continue to maintain a conservative philosophy regarding our underwriting guidelines, and believe it will reduce the risk elements of the loan portfolio through strategies that diversify the lending mix.
 
The repayment of loans in the loan portfolio as they mature is a source of liquidity. The following table sets forth the loans maturing within specified intervals at December 31, 2006.
 
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
 
(In thousands)
 
December 31, 2006
 
   
One Year
or Less
 
Over One
Year Through
Five Years
 
Over
Five Years
 
Total
 
Commercial, financial & agricultural
 
$
8,383
 
$
14,449
 
$
763
 
$
23,595
 
Real estate - construction
   
27,919
   
3,500
   
55
   
31,474
 
All other loan
   
37,988
   
121,643
   
60,489
   
220,120
 
   
$
74,290
 
$
139,592
 
$
61,307
 
$
275,189
 
                           
Loans maturing after one year with:
                         
Fixed interest rates
                   
$
143,700
 
Floating interest rates
                     
57,199
 
                     
$
200,899
 
 
The information presented in the above table is based on the contractual maturities of the individual loans, including loans, which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity.


Investment Securities

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

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


The following table shows the investment portfolio composition.
(In thousands)

   
December 31,
 
   
2006
 
2005
 
2004
 
Securities available-for-sale at fair value:
             
U.S. Treasury
 
$
1,004
 
$
992
 
$
997
 
U.S. Government sponsored enterprises
   
56,660
   
57,479
   
63,755
 
Mortgage-backed securities
   
79,426
   
69,794
   
71,056
 
State and local government
   
4,481
   
253
   
-
 
FHLMC preferred stock
   
14,005
   
28,214
   
42,128
 
Corporate bonds
   
8,792
   
8,607
   
7,754
 
Other
   
5,666
   
5,319
   
4,320
 
     
170,034
   
170,658
   
190,010
 
Securities held-to-maturity (amortized cost):
                   
State and local government
   
6,429
   
5,654
   
6,006
 
Other
   
60
   
60
   
10
 
     
6,489
   
5,714
   
6,016
 
Total
 
$
176,523
 
$
176,372
 
$
196,026
 
 
Investment Securities Maturity Distribution and Yields
 
The following table shows, at carrying value, the scheduled maturities and average yields of securities held at December 31, 2006.
 
(In thousands)                  
   
Within One Year
 
After One But
Within Five Years
 
After Five But
Within Ten Years
 
After Ten Years
 
Held-to-maturity:
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
State and local government
 
$
430
   
4.60
%
$
4,236
   
3.91
%
$
1,763
   
3.83
%
$
-
     
Other
   
-
   
 
   
10
   
5.85
%
 
50
   
4.05
%
 
 
   
 
 
Total investment securities held-to-Maturity
   
430
   
4.60
%
 
4,246
   
3.92
%
 
1,813
   
3.84
%
 
-
   
 
 
                                                   
Available-for-sale:
                                                 
U.S. treasury
   
1,004
   
5.11
%
 
-
         
-
       
-
       
Government sponsored enterprises
   
25,889
   
4.30
%
 
25,343
   
4.20
%
 
5,354
   
4.85
%
 
74
   
3.64
%
Mortgage-backed securities
   
2,087
   
3.50
%
 
45,698
   
4.85
%
 
16,443
   
5.78
%
 
15,199
   
5.92
%
State and local government
   
-
         
-
         
1,969
   
4.04
%
 
2,513
   
4.20
%
FHLMC preferred stock
   
-
         
-
                     
14,005
   
4.41
%
Corporate
   
551
   
5.09
%
 
1,718
   
0.30
%
 
4,062
   
3.93
%
 
2,460
   
4.59
%
Other
   
-
         
-
         
-
         
5,665
   
4.49
%
Total investment securities available-for-sale
   
29,531
   
4.29
%
 
72,759
   
4.51
%
 
27,828
   
5.30
%
 
39,916
   
4.99
%
Total investment securities
 
$
29,961
   
4.29
%
$
77,005
   
4.48
%
$
29,641
   
5.21
%
$
39,916
   
4.99
%

Short-Term Investments

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


Deposits. Average deposits were $384.4 million during 2006, compared to $338.0 million during 2005. Average interest-bearing deposits were $321.3 million in 2006, as compared to $285.0 million in 2005.
 
The following table sets forth the deposits by category:
(In thousands)
 
December 31,
 
 
 
2006
 
2005
 
2004
 
   
Amount
 
% of
Deposits
 
Amount
 
% of
Deposits
 
Amount
 
% of
Deposits
 
                           
Demand deposit accounts
 
$
73,676
   
17.8
%
$
57,327
   
16.4
%
$
49,520
   
14.7
%
NOW accounts
   
64,043
   
15.4
%
 
60,756
   
17.4
%
 
59,723
   
17.7
%
Money market accounts
   
50,799
   
12.2
%
 
45,582
   
13.0
%
 
39,124
   
11.6
%
Savings accounts
   
26,135
   
6.3
%
 
29,819
   
8.5
%
 
35,370
   
10.5
%
Time deposits less than $100,000
   
119,083
   
28.7
%
 
100,612
   
28.8
%
 
100,629
   
29.9
%
Time deposits more than $100,000
   
81,205
   
19.6
%
 
55,508
   
15.9
%
 
52,698
   
15.6
%
   
$
414,941
   
100.0
%
$
349,604
   
100.0
%
$
337,064
   
100.0
%
 
Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for the loan portfolio and other earning assets. Core deposits were $334.7 million and $294.1 million at December 31, 2006 and 2005, respectively. A stable base of deposits is expected to continue be the primary source of funding to meet both our short-term and long-term liquidity needs in the future. The maturity distribution of time deposits is shown in the following table.
 
Maturities of Certificates of Deposit and Other Time Deposit of $100,000 or more
 
(In thousands)
 
December 31, 2006
 
   
Within Three
Months
 
After Three
Through
Six Months
 
After Six
Through
Twelve Months
 
After
Twelve
Months
 
Total
 
                       
Certificates of deposit of $100,000 or more
 
$
23,599
 
$
20,932
 
$
24,864
 
$
11,810
 
$
81,205
 
 
There were no other time deposits of $100,000 or more at December 31, 2006.
 
Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Some financial institutions partially fund their balance sheets using large certificates of deposits obtained through brokers. These brokered deposits can be unreliable as long-term funding sources. Accordingly, we do not currently accept brokered deposits.

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


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

   
December 31,
 
(In thousands)
 
2006
 
2005
 
Maturing
 
Amount
 
Rate
 
Amount
 
Rate
 
2006
 
$
-
   
-
 
$
1,500
   
2.83
%
2008
   
1,954
   
3.79
%
 
5,251
   
3.42
%
2010
   
26,853
   
3.64
%
 
27,306
   
3.64
%
2011
   
500
   
5.35
%
 
467
   
1.00
%
After five years
   
450
   
1.00
%
           
     
29,758
   
3.64
%
 
34,524
   
3.54
%
 
Purchase premiums included in advances acquired in the merger with DutchFork reflected in the advances maturing in 2010 amount to $1.9 million and $2.3 million at December 31, 2006 and 2005, respectively. The coupon rate on these advances is 5.76%. In addition to the above borrowings, we issued $15.0 million in trust preferred securities on September 16, 2004. The securities accrue and pay distributions quarterly at a rate of LIBOR plus 257 basis points. The debt may be redeemed in full anytime after September 16, 2009 with notice and matures on September 16, 2034.

Capital
 
Total shareholders’ equity as of December 31, 2006 was $63.2 million as compared to $50.8 million as of December 31, 2005. This increase was attributable to retained net income for the year ended December 31, 2006 of $2.8 million, a recovery in the net unrealized loss of $1.9 million net of tax effect in the market value of investment securities available-for sale, the issuance of shares in the dividend reinvestment plan and upon the exercise of stock options valued at $1.1 million, and the issuance of 364,034 shares of common stock valued at $7.6 million in conjunction with the acquisition of DeKalb. Offsetting these increases was the repurchase of 70,100 shares at a total price of $1.3 million pursuant to a stock repurchase program we instituted during the third quarter of 2006 authorizing the repurchase of up to 150,000 shares of our common stock. During the first quarter of 2006 we paid a quarterly dividend of $0.05 per share. For the last three quarters of 2006 our dividend was $0.06 per share. In 2005 and 2004, we paid quarterly cash dividends of $.05 per share. A dividend reinvestment plan was implemented in the third quarter of 2003. The plan allows existing shareholders the option of reinvesting cash dividends as well as making optional purchases of up to $5,000 in the purchase of common stock per quarter.
 
Under the capital guidelines of the Federal Reserve and the OCC, the company and the bank are currently required to maintain a minimum risk-based total capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of common shareholders’ equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less goodwill. In addition, the bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total assets) of at least 4%, but this minimum ratio is increased by 100 to 200 basis points for other than the highest-rated institutions. The trust preferred securities in the amount of $15.0 million that were issued on September 16, 2004 qualify as tier 1 capital under the regulatory guidelines and are included in the amounts reflected below.


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

Analysis of Capital
                         
(In thousands)
 
Required
Amount
 
 %
 
Actual
Amount
 
 %
 
Excess
Amount
 
%
 
The Bank:
                                     
December 31, 2006
                                     
Risk Based Capital
                                     
Tier 1
 
$
14,009
   
4.0
%
$
43,039
   
12.3
%
 
29,031
   
8.3
%
Total Capital
   
28,018
   
8.0
%
 
46,254
   
13.2
%
 
18,236
   
5.2
%
Tier 1 Leverage
   
20,266
   
4.0
%
 
43,039
   
8.5
%
 
22,773
   
4.5
%
                                       
December 31, 2005
                                     
Risk Based Capital
                                     
Tier 1
 
$
12,320
   
4.0
%
$
36,179
   
11.8
%
$
23,859
   
7.8
%
Total Capital
   
24,640
   
8.0
%
 
38,880
   
12.6
%
 
14,240
   
4.6
%
Tier 1 Leverage
   
17,740
   
4.0
%
 
36,179
   
8.2
%
 
18,439
   
4.2
%
                                       
The Company:
                                     
December 31, 2006
                                     
Risk Based Capital
                                     
Tier 1
 
$
14,030
   
4.0
%
$
47,238
   
13.5
%
$
33,208
   
9.5
%
Total Capital
   
28,060
   
8.0
%
 
50,453
   
14.4
%
 
22,393
   
6.4
%
Tier 1 Leverage
   
20,343
   
4.0
%
 
47,238
   
9.3
%
 
26,895
   
5.3
%
                                       
December 31, 2005
                                     
Risk Based Capital
                                     
Tier 1
 
$
12,354
   
4.0
%
$
40,898
   
13.2
%
$
28,544
   
8.2
%
Total Capital
   
24,709
   
8.0
%
 
43,599
   
14.1
%
 
18,890
   
6.1
%
Tier 1 Leverage
   
17,616
   
4.0
%
 
40,898
   
9.3
%
 
23,282
   
5.3
%
 
Liquidity Management
 
Liquidity management involves monitoring sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents our ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in our market area. In addition, liability liquidity is provided through the ability to borrow against approved lines of credit (federal funds purchased) from correspondent banks and to borrow on a secured basis through securities sold under agreements to repurchase. The bank is a member of the FHLB Atlanta and has the ability to obtain advances for various periods of time. These advances are secured by securities pledged by the bank or assignment of loans within the bank’s portfolio.
 
With the successful completion of the common stock offering in 1995, the secondary offering completed in 1998, the trust preferred offering completed in September 2004, the acquisition of DutchFork in October 2004 and the acquisition of DeKalb in June 2006, the company has maintained a high level of liquidity and adequate capital, along with continued retained earnings, sufficient to fund the operations of the bank for at least the next 12 months. The company’s management anticipates that the bank will remain a well capitalized institution for at least the next 12 months. Shareholders’ equity was 11.5% of total assets at December 31, 2006 and 10.9% at December 31, 2005. Funds sold and short-term interest bearing deposits are our primary source of liquidity and averaged $13.5 million and $7.7 million during the year ended December 31, 2006 and 2005, respectively. The bank maintains federal funds purchased lines, in the amount of $10.0 million with several financial institutions, although these were not utilized in 2006. The FHLB Atlanta has approved a line of credit of up to 15% of the bank assets, which would be collateralized


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

CONTRACTUAL OBLIGATIONS

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

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

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by the company for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers' requests for funding. Please refer to Note 13 of the company’s financial statements for a discussion of our off-balance sheet arrangements.
 
Impact of Inflation
 
Unlike most industrial companies, the assets and liabilities of financial institutions such as the company and the bank are primarily monetary in nature. Therefore, interest rates have a more significant effect on our performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, we continually seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

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

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

Item 8. Financial Statements and Supplementary Data.

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


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 


The Board of Directors
First Community Corporation
Lexington, South Carolina


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

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

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


/s/ Elliott Davis, LLC

Elliott Davis, LLC
Columbia, South Carolina
March 19, 2007


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors
First Community Corporation
Lexington, South Carolina


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

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

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


/s/ Clifton D. Bodiford

Clifton D. Bodiford
Certified Public Accountant
Columbia, South Carolina
January 13, 2006


FIRST COMMUNITY CORPORATION
Consolidated Balance Sheets

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

See Notes to Consolidated Financial Statements


FIRST COMMUNITY CORPORATION
Consolidated Statements of Income

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


FIRST COMMUNITY CORPORATION
Consolidated Statement of Changes in Shareholder's Equity and Comprehensive Income (loss)

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

See Notes to Consolidated Financial Statements


FIRST COMMUNITY CORPORATION
Consolidated Statements of Cash Flows

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

See Notes to Consolidated Financial Statements


FIRST COMMUNITY CORPORATION
Notes to Consolidated Financial Statements
 
Note 1 - ORGANIZATION AND BASIS OF PRESENTATION
 
The consolidated financial statements include the accounts of First Community Corporation (the company) and its wholly owned subsidiary First Community Bank, N.A (the bank). The Company owns all of the common stock of FCC Capital Trust I. All material intercompany transactions are eliminated in consolidation. The Company was organized on November 2, 1994, as a South Carolina corporation, and was formed to become a bank holding company. The bank opened for business on August 17, 1995. FCC Capital Trust I is a special purpose subsidiary organized for the sole purpose of issuing trust preferred securities.
 
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Use of Estimates
The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
Material estimates that are particularly susceptible to significant change relate to the determination of the reserve for loan losses. The estimation process includes management’s judgment as to future losses on existing loans based on an internal review of the loan portfolio, including an analysis of the borrower’s current financial position, the consideration of current and anticipated economic conditions and the effect on specific borrowers. In determining the collectibility of loans management also considers the fair value of underlying collateral. Various regulatory agencies, as an integral part of their examination process, review the Company’s allowance for loan losses. Such agencies may require the company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors it is possible that the allowance for loan losses could change materially.
 
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, due from banks, federal funds sold and securities purchased under agreements to resell. Generally federal funds are sold for a one-day period and securities purchased under agreements to resell mature in less than 90 days.

Investment Securities
Investment securities are classified as either held-to-maturity or available-for-sale. In determining such classification, securities that the company has the positive intent and ability to hold to maturity are classified as held-to maturity and are carried at amortized cost. All other securities are classified as available-for-sale and carried at estimated fair values with unrealized gains and losses included in shareholders’ equity on an after tax basis.
 
Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are judged to be other than temporary are written down to fair value and charged to income in the Consolidated Statement of Income.
 
Premiums and discounts are recognized in interest income using the interest method over the period to maturity.
 
Loans and Allowance for Loan Losses
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest is recognized over the term of the loan based on the loan balance outstanding. Fees charged for originating loans, if any, are deferred and offset by the deferral of certain direct expenses associated with loans originated. The net deferred fees are recognized as yield adjustments by applying the interest method.
 
The allowance for loan losses is maintained at a level believed to be adequate by management to absorb potential losses in the loan portfolio. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loss experience, economic conditions and volume, growth and composition of the portfolio.


Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

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

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

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

Mortgage Origination Fees
Mortgage origination fees relate to activities comprised of accepting residential mortgage applications, qualifying borrowers to standards established by investors and selling the mortgage loans to the investors under pre-existing commitments. The loans are funded by the investor at closing and the related fees received by the Company for these services are recognized at the time the loan is closed.
 
Advertising Expense
Advertising and public relations costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expensed in the period in which the direct mailings are sent.
 
Income Taxes
A deferred income tax liability or asset is recognized for the estimated future effects attributable to differences in the tax bases of assets or liabilities and their reported amounts in the financial statements as well as operating loss and tax credit carry forwards. The deferred tax asset or liability is measured using the enacted tax rate expected to apply to taxable income in the period in which the deferred tax asset or liability is expected to be realized.


Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

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

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

The following summarizes required pro-forma data in accordance with SFAS 123 prior to the company’s adoption of SFAS 123R effective January 1, 2006. The pro-forma data includes the effects of the acceleration for the year ended December 31, 2005:
 
   
December 31,
 
 
 
2005
 
2004
 
 
 
 
 
 
 
Net income, pro-forma
 
$
2,792,578
 
$
2,179,236
 
Basic earnings/loss per common share, pro-forma
 
$
0.99
 
$
1.15
 
Diluted earnings loss per common share, pro-forma
 
$
0.94
 
$
1.09
 
 
The fair value of each grant is estimated on the date of grant using the Black-Sholes option pricing model.  The weighted average fair value of options granted, excluding those issued in the Dutch Fork and DeKalb acquisitions, during 2005 and 2004 was $6.87, and $7.15.  Those granted in conjunction with the acquisition in the 2004 acquisition of DutchFork had an average fair value of $14.32. The options granted in conjunction with the 2006 acquisition of DeKalb had an average fair value of $8.21. In calculating the pro-forma disclosures, the fair value of options granted is estimated as of the date of grant using the Black-Sholes option pricing model with the following weighted-average assumptions:
 
 
 
2005
 
2004
 
Dividend yield
   
1.0
%
 
1.0
%
Expected volatility
   
24.3
%
 
24.8
%
Risk-free interest rate
   
4.3
%
 
4.3
%
Expected life
   
8 Years
   
7 Years
 


Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

Segment Information
Statement of Financial Accounting Standards (SFAS) No. 131 “Disclosures about Segments of an Enterprise and Related Information” requires selected segment information of operating segments based on a management approach. The company operates as one business segment.
 
Recently Issued Accounting Standards
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company. In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” FAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest only-strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not believe that the adoption of SFAS No. 155 will have a material impact on its financial position, results of operations and cash flows.

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

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


Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

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

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

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


Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

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

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

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


Note 3 - BUSINESS COMBINATION
 
On June 9, 2006, the Company acquired 100% of the outstanding shares of DeKalb Bancshares, Inc (DeKalb), the parent company of The Bank of Camden. In addition, The Bank of Camden was merged with and into the Company's wholly owned banking subsidiary, First Community Bank, NA, and the Camden office is now operated as a branch of First Community Bank. The merger enabled First Community to increase its market share in the Midlands of South Carolina in a community contiguous to its existing markets. The aggregate acquisition cost was $10,223,000, including $2,369,000 of cash, 364,034 shares of the Company’s common stock valued at $7,577,000, stock options valued at $585,000 and direct acquisition costs of $277,000. The value of the 364,034 shares of common stock issued at $19.22 per share was determined based on the average closing price of the Company’s common shares over the two-day period before and after December 8, 2005, the date the terms were agreed to and announced.
 
The primary intangible assets acquired in conjunction with the purchase of DeKalb are core deposit intangible assets with an estimated useful life of approximately seven years and goodwill. The transaction was a tax-free reorganization for federal income tax purposes and intangible assets are not deductible in determining taxable income.
 
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed June 9, 2006. We obtained third party evaluations of certain intangible assets.
 
(Dollars in thousands)
     
 
     
Cash and cash equivalents
 
$
1,015
 
Federal funds sold
   
402
 
Investment securities
   
10,152
 
Loans, net of allowance
   
26,315
 
Premises and equipment
   
2,613
 
Core deposit intangible asset
   
522
 
Goodwill
   
4,903
 
Other assets
   
524
 
Total assets acquired
   
46,446
 
 
       
Deposits
   
27,302
 
Advances from the Federal Home Loan Bank
   
4,939
 
Other borrowed money
   
2,977
 
Other liabilities
   
1,005
 
Total liabilities assumed
   
36,223
 
Net assets acquired
 
$
10,223
 

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


Note 3 - BUSINESS COMBINATION - Continued
 
The following unaudited presentation reflects selected information from the "Consolidated Income Statements" on a Pro Forma basis as if the purchase transaction had been completed as of the beginning of the years presented:
 
   
 For Year Ending December 31,
 
   
 2006
 
2005
 
Total revenues
 
$
31,645,855
 
$
27,470,457
 
Income before cumulative effect of change in accounting principle
 
$
3,584,026
 
$
3,198,382
 
Net Income
 
$
3,584,026
 
$
3,198,382
 
Basic EPS
 
$
1.10
 
$
1.00
 
Diluted EPS
 
$
1.08
 
$
0.96
 

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

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

Note 4 - INVESTMENT SECURITIES

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

HELD-TO-MATURITY:
 
   
Amortized
Cost
 
 Gross
Unrealized
Gains
 
 Gross
Unrealized
Losses
 
 Fair Value
 
December 31, 2006:
                         
State and local government
 
$
6,428,796
 
$
39,449
 
$
19,097
 
$
6,449,148
 
Other
   
60,000
   
   
   
60,000
 
 
 
$
6,488,796
 
$
39,449
 
$
19,097
 
$
6,509,148
 
 
December 31, 2005:
                 
State and local government
 
$
5,653,830
 
$
58,316
 
$
25,698
 
$
5,686,448
 
Other
   
60,000
   
   
   
60,000
 
   
$
5,713,830
 
$
58,316
 
$
25,698
 
$
5,746,448
 


Note 4 - INVESTMENT SECURITIES - Continued

AVAILABLE-FOR-SALE:
 
  
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
December 31, 2006:
                 
US Treasury securities
 
$
994,534
 
$
10,306
 
$
 
$
1,004,840
 
Government sponsored enterprises
   
57,420,136
   
50,285
   
810,126
   
56,660,295
 
Mortgage-backed securities
   
80,234,695
   
247,650
   
1,056,242
   
79,426,103
 
State and local government
   
4,438,933
   
44,820
   
2,644
   
4,481,109
 
Equity and other securities
   
29,679,914
   
12,046
   
1,229,829
   
28,462,131
 
 
 
$
172,768,212
 
$
365,107
 
$
3,098,841
 
$
170,034,478
 
 
December 31, 2005:
                 
US Treasury securities
 
$
999,848
 
$
 
$
7,973
 
$
991,875
 
Government sponsored enterprises
   
58,674,004
   
671
   
1,195,657
   
57,479,018
 
Mortgage-backed securities
   
70,967,405
   
61,117
   
1,234,803
   
69,793,719
 
State and local government
   
249,359
   
3,881
   
---
   
253,240
 
Equity and other securities
   
45,419,667
   
19,519
   
3,299,268
   
42,139,918
 
 
 
$
176,310,283
 
$
85,188
 
$
5,737,701
 
$
170,657,770
 
 
At December 31, 2006, equity and other investment securities available for sale included the following recorded at fair value: Federal Home Loan Mortgage Corporation preferred stock of $14,005,100, corporate bonds of $8,791,583, Federal Home Loan Bank Stock of $2,349,600, Federal Reserve Bank Stock of $1,858,194, mutual funds of $838,846, community bank stocks of $509,288 and other common stock at $109,520. At December 31, 2005, equity and other investments in securities available for sale included the following recorded at fair value: Federal Home Loan Mortgage Corporation preferred stock of $16,125,200, Federal National Mortgage Association preferred stock of $12,088,560, corporate bonds of $8,607,057, Federal Home Loan Bank Stock of $2,351,200, Federal Reserve Bank Stock of $1,624,500, mutual funds of $1,233,452 and community bank stocks of $110,000. Federal Home Loan Bank and Federal Reserve Bank Stock are carried at cost since there is no ready market.

For the year ended December 31, 2006, proceeds from the sales of securities available-for-sale amounted to $21,241,484. Gross realized gains amounted to $58,505 and gross realized losses amounted to $127,467 in 2006. For the year ended December 31, 2005, proceeds from the sale of securities available-for-sale amounted to $39,071,729. Gross realized gain amounted to $294,661 and gross realized losses amounted to $106,243 in 2005  For the year ended December 31, 2004, proceeds from the sale of securities available-for-sale amounted to $56,586,668. Gross realized gain amounted to $16,119 and gross realized losses amounted to $4,738 in 2004. The tax provision (benefit) applicable to the net realized gain (loss) was approximately ($20,200), $65,000 and $3,400 for 2006, 2005 and 2004, respectively.
 
The amortized cost and fair value of investment securities at December 31, 2006, by contractual maturity, follow. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties.
 
 
 
Held-to-maturity
 
Available-for-sale
 
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
430,395
 
$
430,779
 
$
28,770,603
 
$
28,526,327
 
Due after one year through five years
   
4,246,252
   
4,259,417
   
75,163,715
   
73,761,597
 
Due after five years through ten years
   
1,812,149
   
1,818,952
   
28,515,992
   
27,829,215
 
Due after ten years
   
---
   
---
   
40,317,902
   
39,917,339
 
   
$
6,488,796
 
$
6,509,148
 
$
172,768,212
 
$
170,034,478
 
 

Note 4 - INVESTMENT SECURITIES - Continued

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

The following table shows gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2006 and 2005.
 
December 31, 2006
 
Less than 12 months
 
12 months or more
 
Total
 
 
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
US Treasury and Government sponsored enterprises
 
$
7,523,200
 
$
49,994
 
$
41,658,875
 
$
760,132
 
$
49,182,075
 
$
810,126
 
Federal agency mortgage-backed securities
   
2,246,558
   
13,318
   
26,276,885
   
688,067
   
28,523,443
   
701,385
 
Non-agency mortgage-backed securities
   
4,421,937
   
41,658
   
17,480,973
   
313,199
   
21,902,910
   
354,857
 
FHLMC preferred stock
   
---
   
---
   
14,005,100
   
244,275
   
14,005,100
   
244,275
 
Corporate bonds
   
3,949,171
   
861,344
   
1,402,698
   
92,823
   
5,351,869
   
954,167
 
State and local government
   
462,355
   
2,644
   
---
   
---
   
462,355
   
2,644
 
Other
   
---
   
---
   
910,966
   
31,387
   
1,410,719
   
34,031
 
 
   
18,603,221
   
968,958
   
101,735,497
   
2,129,883
   
120,338,718
   
3,098,841
 
Held-to-maturity securities:
                         
State and local government
   
630,319
   
4,358
   
1,244,491
   
14,739
   
1,874,810
   
19,097
 
Total
 
$
19,233,540
 
$
973,316
   
102,979,988
 
$
2,144,622
 
$
120,213,528
 
$
3,117,938
 
 
 
December 31, 2005
 
Less than 12 months
 
12 months or more
 
Total
 
 
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
US Treasury and US Government agency securities
 
$
4,531,185
 
$
73,959
 
$
50,689,215
 
$
1,129,671
 
$
55,220,400
 
$
1,203,630
 
Federal agency mortgage-backed securities
   
12,631,631
   
272,280
   
20,596,312
   
562,265
   
33,227,943
   
834,545
 
Non-agency mortgage-backed securities
   
11,748,240
   
160,835
   
10,332,955
   
239,423
   
22,081,195
   
400,258
 
FNMA and FHLMC preferred stock
   
---
   
---
   
28,213,718
   
3,140,111
   
28,213,718
   
3,140,111
 
Corporate bonds
   
499,500
   
19
   
1,872,218
   
123,314
   
2,371,718
   
123,333
 
Other
   
1,233,452
   
35,824
   
---
   
---
   
1,233,452
   
35,824
 
 
   
30,644,008
   
542,917
   
111,704,418
   
5,194,784
   
142,348,426
   
5,737,701
 
Held-to-maturity securities:
                         
State and local government
   
495,600
   
4,400
   
1,382,203
   
21,298
   
1,877,803
   
25,698
 
Total
 
$
31,139,608
 
$
547,317
 
$
113,086,621
 
$
5,216,082
 
$
144,226,229
 
$
5,763,399
 
 
U.S. Treasury and Government Sponsored Enterprises: The unrealized losses on the Company’s investments in U.S. Treasury obligations and Government sponsored enterprises were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2006.


Note 4 - INVESTMENT SECURITIES - Continued

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

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

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

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

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

Note 5 - LOANS
  
Loans summarized by category are as follows:
 
  
 
December 31,
 
 
 
2006
 
2005
 
Commercial, financial and agricultural
 
$
23,595,321
 
$
22,090,454
 
Real estate - construction
   
31,473,364
   
19,955,124
 
Real estate - mortgage
         
Commercial
   
138,885,778
   
112,914,726
 
Residential
   
47,949,770
   
37,251,173
 
Consumer
   
33,284,334
   
29,456,155
 
 
 
$
275,188,567
 
$
221,667,632
 
 
Activity in the allowance for loan losses was as follows:

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


Note 5 - LOANS - Continued

At December 31, 2006, the bank had $449,000 loans in a non accrual status.  Loans classified impaired at December 31, 2006 and 2005 totaled $449,000 and $101,000.  These loans were recorded at or below fair value.  The average recorded investment in loans classified as impaired for the years ended December 31, 2006 and 2005 amounted to approximately $205,000 and $316,000, respectively.
 
Loans outstanding to bank directors, executive officers and their related business interests amounted to $8,105,209 and $4,182,129 at December 31, 2006 and 2005, respectively.  Repayments on these loans during the year ended December 31, 2006 were $3,676,438 and loans made amounted to $6,958,901. Loans acquired in the DeKalb acquisition amounted to $640,617. Repayments on these loans during the year ended December 31, 2005 were $332,642 and loans made amounted to $2,195,918. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than the normal risk of collectibility.
 
Note 6 - PROPERTY AND EQUIPMENT
 
Property and equipment consisted of the following:
 
  
 
December 31,
 
 
 
2006
 
2005
 
 
 
 
 
 
 
Land
 
$
5,775,465
 
$
5,146,966
 
Premises
   
14,133,715
   
7,862,983
 
Equipment
   
5,944,366
   
4,734,620
 
Construction in progress
   
   
2,227,941
 
 
   
25,853,546
   
19,972,510
 
Accumulated depreciation
   
4,893,214
   
3,990,481
 
 
 
$
20,960,332
 
$
15,982,029
 
 
Provision for depreciation included in operating expenses for the years ended December 31, 2006, 2005 and 2004 amounted to $1,000,804, $926,776 and $761,277, respectively.

Note 7 - GOODWILL, CORE DEPOSIT INTANGIBLE AND OTHER ASSETS
 
Intangible assets (excluding goodwill) consisted of the following:
 
 
 
December 31,
 
 
 
2006
 
2005
 
Core deposit premiums, gross carrying amount
 
$
4,650,658
 
$
4,148,273
 
Accumulated amortization
   
(1,997,741
)
 
(1,381,199
)
Net
 
$
2,652,917
 
$
2,767,074
 
 
Amortization of the core deposit intangibles amounted to $636,542, $594,741 and $276,685 for the years ended December 31, 2006, 2005 and 2004, respectively. Amortization of the intangibles is scheduled to be as follows:

2007
 
$
669,637
 
2008
   
506,822
 
2009
   
491,524
 
2010
   
491,524
 
2011
   
387,306
 
Thereafter
   
106,104
 
 
 
$
2,652,917
 


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

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

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

Note 8 - DEPOSITS
 
At December 31, 2006, the scheduled maturities of Certificates of Deposits are as follows:

2007
 
$
168,714,477
 
2008
   
5,520,480
 
2009
   
14,048,103
 
2010
   
7,444,290
 
2011
   
4,560,426
 
 
 
$
200,287,776
 

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

Securities sold under agreements to repurchase generally mature within one to four days from the transaction date.  The weighted average interest rate at December 31, 2006 and 2005, was 3.90% and 3.38%, respectively. The maximum month-end balance during 2006 and 2005 was $27,699,000 and $14,858,500 respectively. Securities sold under agreements to repurchase are collateralized by securities with a fair market value of 100% of the agreement.
 
Other borrowed money at December 31, 2006 and 2005 consisted of $148,886 and $169,233, respectively which was due under the treasury tax and loan note program.

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


Note 10 - ADVANCES FROM FEDERAL HOME LOAN BANK AND LONG-TERM DEBT
 
Advances from the Federal Home Loan Bank of Atlanta at December 31, 2006 consisted of the following:
 
 
 
2006
 
2005
 
Maturing
 
Weighted
Average Rate
 
Amount
 
Weighted
Average Rate
 
Amount
 
2006
   
 
$
   
2.83
%
$
1,500,000
 
2008
   
3.79
%
 
1,954,408
   
3.42
%
 
5,251,345
 
2010
   
3.64
%
 
26,852,972
   
3.64
%
 
27,305,787
 
2011
   
5.35
%
 
500,000
         
 
More than five years
   
1.00
%
 
450,165
         
467,277
 
     
3.64
%
$
29,757,545
   
3.54
%
$
34,524,409
 
 
As collateral for its advances, the Company has pledged in the form of blanket liens, eligible single-family loans, in the amount of $33,732,000 at December 31, 2006.  In addition, securities with a fair value of $6,126,136 have been pledged as collateral for advances as of December 31, 2006.  At December 31, 2005 loans in the amount of $70,397,000 and securities with a fair value of $8,050,723 were pledged as collateral for advances.  In addition, the Company’s investment in Federal Home Loan Bank stock is pledged for advances.  Advances are subject to prepayment penalties.  The average advances during 2006 and 2005 were $31,073,406 and $41,290,862, respectively.  The average interest rate for 2006 and 2005 was 3.61% and 3.49%, respectively. The maximum outstanding amount at any month end was $43,347,349 and $46,613,103 for 2006 and 2005.
 
Purchase premiums included in advances acquired in the acquisition of DutchFork reflected in the advances maturing in 2010 amount to $1,852,972 at December 31, 2006. At December 31, 2005 the premium on the advances were $251,345 for 2008 maturities and $2,305,787 for the 2010 maturity.  The coupon rate on the $25,000,000 advance maturing in 2010 is 5.76%. Advances of $2,000,000 acquired in the DeKalb merger maturing in 2008 reflect a discount of $45,592 at December 31, 2006. The coupon rate on this advance is 3.79%.
 
Note 11 - JUNIOR SUBORDINATED DEBENTURES

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

Note 12 - INCOME TAXES
 
Income tax expense for the years ended December 31, 2006, 2005 and 2004 consists of the following:
 
 
 
Year ended December 31
 
 
 
2006
 
2005
 
2004
 
Current
 
 
 
 
 
 
 
Federal
 
$
1,301,617
 
$
137,642
 
$
651,304
 
State
   
213,102
   
83,545
   
104,072
 
 
   
1,514,719
   
221,187
   
722,376
 
Deferred
             
Federal
   
(62,494
)
 
737,272
   
197,474
 
State
   
   
74,145
   
10,000
 
 
   
(62,494
)
 
811,413
   
207,474
 
Income tax expense
 
$
1,452,225
 
$
1,032,600
 
$
962,850
 


Note 12 - INCOME TAXES - Continued

Reconciliation from expected federal tax expense to effective income tax expense for the periods indicated are as follows:
 
 
 
Year ended December 31
 
 
 
2006
 
2005
 
2004
 
Expected federal income tax expense
 
$
1,684,160
 
$
1,402,592
 
$
1,101,742
 
 
             
State income tax net of federal benefit
   
140,647
   
104,075
   
37,584
 
Tax exempt interest
   
(99,764
)
 
(73,999
)
 
(64,126
)
Nontaxable dividends
   
(146,347
)
 
(321,912
)
 
(101,821
 
Increase in cash surrender value life insurance
   
(112,416
)
 
(87,883
)
 
(18500
 
Other
   
(14,055
)
 
9,727
   
7,971
 
 
 
$
1,452,225
 
$
1,032,600
 
$
962,850
 

The following is a summary of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities:
 
 
 
December 31,
 
 
 
2006
 
2005
 
Assets:
 
 
 
 
 
Allowance for loan losses
 
$
1,092,972
 
$
971,980
 
Excess tax basis of deductible intangible assets
   
188,328
   
165,998
 
Premium on purchased FHLB Advances
   
630,010
   
920,329
 
Net operating loss carry forward
   
3,626,451
   
4,353,842
 
Excess tax basis of assets acquired
   
1,030,356
   
488,534
 
Unrealized loss on available-for sale-securities
   
983,611
   
2,046,309
 
Compensation expense deferred for tax purposes
   
132,290
   
144,915
 
Other
   
168,987
   
676,360
 
Total deferred tax asset
   
7,853,005
   
9,768,267
 
Liabilities:
         
Tax depreciation in excess of book depreciation
   
103,752
   
149,713
 
Excess tax basis of non-deductible intangible assets
   
836,232
   
862,174
 
Excess financial reporting basis of assets acquired
   
1,305,574
   
948,074
 
Income tax bad debt reserve recapture adjustment
   
   
1,196,952
 
Other
   
63,243
   
66,946
 
Total deferred tax liabilities
   
2,308,801
   
3,223,859
 
Net deferred tax asset recognized
 
$
5,544,204
 
$
6,544,408
 
 
At December 31, 2006, the Company has net operating loss carry forwards acquired in the acquisitions of DutchFork and DeKalb for federal income tax purposes of approximately $10,666,033 available to offset future taxable income through 2025. There was no valuation allowance for deferred tax assets at either December 31, 2006 or 2005.  No valuation allowance has been established as it is management’s belief that realization of the deferred tax asset is more likely than not.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible.  Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies in making this assessment.  The amount of these deferred tax assets considered to be realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.  The net deferred asset is included in other assets on the consolidated balance sheets.

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


Note 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Statement of Financial Accounting Standards No. 107, “Disclosure about Fair Value of Financial Instruments” (SFAS 107), requires the Company to disclose estimated fair values for its financial instruments.  Fair value estimates, methods, and assumptions are set forth below.
 
Cash and short term investments - The carrying amount of these financial instruments (cash and due from banks, federal funds sold and securities purchased under agreements to resell) approximates fair value.  All mature within 90 days and do not present unanticipated credit concerns.
 
Investment Securities - Fair values are based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
 
Loans - The fair value of loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  As discount rates are based on current loan rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale.
 
Accrued Interest Receivable - The fair value approximates the carrying value.

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

Deposits - The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date.  The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.
 
Federal Home Loan Bank Advances - Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms.
 
Short Term Borrowings - The carrying value of short term borrowings (securities sold under agreements to repurchase and demand notes to the U.S. Treasury) approximates fair value.
 
Junior Subordinated Debentures - The fair values of junior subordinated debentures is estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments.
 
Accrued Interest Payable - The fair value approximates the carrying value.
 
Commitments to Extend Credit - The fair value of these commitments is immaterial because their underlying interest rates approximate market.


Note 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

The carrying amount and estimated fair value of the Company’s financial instruments are as follows:
 
 
 
December 31, 2006
 
December 31, 2005
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and short term investments
 
$
10,069,567
 
$
10,069,567
 
$
12,864,146
 
$
12,864,146
 
Held-to-maturity securities
   
6,488,796
   
6,509,148
   
5,713,830
   
5,746,448
 
Available-for-sale securities
   
170,034,478
   
170,034,478
   
170,657,770
   
170,657,770
 
Loans receivable
   
275,188,567
   
271,352,722
   
221,667,632
   
218,651,290
 
Allowance for loan losses
   
3,214,624
   
   
2,700,647
   
 
Net loans
   
271,973,943
   
271,352,722
   
218,966,985
   
218,651,290
 
Accrued interest
   
2,545,560
   
2,545,560
   
2,001,957
   
2,001,957
 
Interest rate cap/floor
   
371,632
   
371,632
   
192,898
   
192,898
 
                           
Financial liabilities:
                 
Non-interest bearing demand
 
$
73,676,415
 
$
73,676,415
 
$
57,326,637
 
$
57,326,637
 
NOW and money market accounts
   
114,842,382
   
114,842,382
   
106,337,887
   
106,337,887
 
Savings
   
26,134,834
   
26,134,834
   
29,818,705
   
29,818,705
 
Certificates of deposit
   
200,287,776
   
201,341,483
   
156,120,922
   
156,541,947
 
Total deposits
   
414,941,407
   
415,995,114
   
349,604,151
   
350,025,176
 
Federal Home Loan Bank Advances
   
29,757,545
   
28,238,223
   
34,524,409
   
32,590,242
 
Short term borrowings
   
19,621,466
   
19,621,466
   
13,975,633
   
13,975,633
 
Junior subordinated debentures
   
15,464,000
   
15,464,000
   
15,464,000
   
15,464,000
 
Accrued interest payable
   
3,726,963
   
3,726,963
   
2,053,833
   
2,053,833
 
 
Note 14 - COMMITMENTS, CONCENTRATIONS OF CREDIT RISK AND CONTINGENCIES
 
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit.  These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments as for on-balance sheet instruments.  At December 31, 2006 and 2005, the Bank had commitments to extend credit including unused lines of credit of $56,643,000 and $38,700,000 respectively.
  
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee.  Since commitments may expire without being drawn upon, the total commitments do not necessarily represent future cash requirements.  The Bank evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the party.  Collateral held varies but may include inventory, property and equipment, residential real estate and income producing commercial properties.
 
The primary market area served by the Bank is Lexington, Richland, Newberry and Kershaw Counties within the Midlands of South Carolina.  Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. The Company considers concentrations of credit risk to exist when pursuant to regulatory guidelines, the amounts loaned to multiple borrowers engaged in similar business activities represent 25% or more of the bank’s risk based capital, or approximately $11.6 million. Based on this criteria, the Bank had three such concentrations at December 31, 2006, including $32.9 million (12.0% of total loans) to lessors of residential properties, $35.5 million (12.9% of total loans) of lessors of non-residential properties and $13.3 million (4.8% of total loans) to religious organizations.   Although the Bank’s loan portfolio, as well as existing commitments, reflect the diversity of its primary market area, a substantial portion of its debtor’s ability to honor their contracts is dependent upon the economic stability of the area.


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

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

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

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

The fair value of the cap contract at December 31, 2005 was $192,898. These agreements were entered into to protect assets and liabilities from the negative effects of volatility in interest rates. The agreements provide for a payment to the Bank of the difference between the cap/floor rate of interest and the market rate of interest. The Bank’s exposure to credit risk is limited to the ability of the counterparty to make potential future payments required pursuant to the agreement. The Bank’s exposure to market risk of loss is limited to the market value of the cap and floor. Any gain or loss on the value of this contract is recognized in earnings on a current basis. The Bank has received payments under the terms of the cap contract in the amount $49,248 during the year ended December 31, 2006. No payments were received under the terms of the cap contract in 2005 and no payments have been received under the terms of the floor contract in 2006. The Bank recognized $18,409 and $37,897 in other income to reflect the increase in the value of the contracts for the years ended December 31, 2006 and 2005, respectively.
 
Note 15 - OTHER EXPENSES
 
A summary of the components of other non-interest expense is as follows:

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


Note 16 - STOCK OPTIONS
 
The Company has adopted a Stock Option Plan whereby shares have been reserved for issuance by the Company upon the grant of stock options or restricted stock awards. At December 31, 2006 the Company has 160,542 shares reserved for future grants. The plan provides for the grant of options to key employees and Directors as determined by a Stock Option Committee made up of at least two members of the Board of Directors. Options are exercisable for a period of ten years from date of grant.

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

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

Range of Exercise Prices
Low/High
Number of Option Shares
Outstanding
and Exercisable
Weighted Average
Remaining Contractual
Life (Years)
Weighted
Average Exercise
Price
$  9.23 / $ 13.63
145,186
4.14
$  9.96
$14.00 / $ 16.70
 70,585
4.85
  14.14
$19.00 / $ 22.50
 64,500
8.02
  20.24
 
280,271
5.21
$ 13.38

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

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


Note 17 - EMPLOYEE BENEFIT PLAN
 
The Company maintains a 401 (k) plan, which covers substantially all employees.  Participants may contribute up to the maximum allowed by the regulations.  During the year ended December 31, 2006, 2005 and 2004 the plan expense amounted to $110,830, $102,130 and $137,177, respectively. The Company matches 50% of an employee’s contribution up to a 6.00% participant contribution.
 
The Company acquired various single premium life insurance policies from DutchFork that are funding fringe benefits to certain employees and officers. A Salary Continuation Plan was established payable to two key individuals upon attainment of age 63. The plan provides for monthly benefits of $2,500 each for seventeen years. Other plans acquired were supplemental life insurance covering certain key employees. No expense is accrued relative to these benefits, as the life insurance covers the anticipated payout with the Company receiving the remainder, thereby recovering its investment in the policies. In 2006, the Company established a salary continuation plan which covers six additional key officers. The plan provides for monthly benefits upon normal retirement age of varying amounts for a period of fifteen years. Additional single premium life insurance policies were purchased in 2006 in the amount of $3,500,000 designed to offset the funding of these additional fringe benefits. The cash surrender value at December 31, 2006 of all bank owned life insurance was $9,606,657. Expenses accrued for the anticipated benefits under the Salary Continuation Plans for the year ended December 31, 2006, 2005 and 2004 amounted to $186,440, $95,427, 9,360, respectively. .

Note 18 - EARNINGS PER SHARE
 
The following reconciles the numerator and denominator of the basic and diluted earnings per share computation:
 
 
 
Year ended December 31,
 
 
 
2006
 
2005
 
2004
 
Numerator (Included in basic and diluted earnings per share)
 
$
3,501,199
 
$
3,092,671
 
$
2,184,985
 
 
             
Denominator
             
Weighted average common shares outstanding for:
             
Basic earnings per share
   
3,096,866
   
2,834,404
   
1,903,209
 
Dilutive securities:
             
Stock options - Treasury stock method
   
77,319
   
134,104
   
102,536
 
Diluted earnings per share
   
3,174,185
   
2,968,508
   
2,005,745
 
 
The average market price used in calculating the assumed number of shares issued for the years ended December 31, 2006, 2005 and 2004 was $17.92, $19.15 and $21.67, respectively.

Note 19 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
 
The Company and Bank are subject to various federal and state regulatory requirements, including regulatory capital requirements.  Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions that, if undertaken, could have a direct material effect on the Company’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors.  The Company and Bank are required to maintain minimum Tier 1 capital, total risked based capital and Tier 1 leverage ratios of 4%, 8% and 3%, respectively.

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


Note 19 - CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS - Continued

The actual capital amounts and ratios as well as minimum amounts for each regulatory defined category for the Bank and the Company are as follows:
 
 
 
Actual
 
Required to be Categorized
Adequately Capitalized
 
Required to be
Categorized
Well Capitalized
 
 
 
Amount
 
Ratio
 
Amount
 
Ratio
         
December 31, 2006
                         
First Community Corporation
                         
Tier 1 Capital
 
$
47,238,000
   
13.48
%
$
14,030,000
   
4.00
%
 
N/A
   
N/A
 
Total Risked Based Capital
   
50,453,000
   
14.40
%
 
28,060,000
   
8.00
%
 
N/A
   
N/A
 
Tier 1 Leverage
   
47,238,000
   
9.29
%
 
20,343,000
   
4.00
%
 
N/A
   
N/A
 
First Community Bank, NA
                         
Tier 1 Capital
 
$
43,039,000
   
12.30
%
$
14,009,000
   
4.00
%
$
21,014,000
   
6.00
%
Total Risked Based Capital
   
46,254,000
   
13.22
%
 
28,018,000
   
8.00
%
 
35,023,000
   
10.00
%
Tier 1 Leverage
   
43,039,000
   
8.49
%
 
20,267,000
   
4.00
%
 
25,334,000
   
5.00
%
 
                         
December 31, 2005
                         
First Community Corporation
                         
Tier 1 Capital
 
$
40,898,000
   
13.24
%
$
12,354,000
   
4.00
%
 
N/A
   
N/A
 
Total Risked Based Capital
   
43,599,000
   
14.12
%
 
24,709,000
   
8.00
%
 
N/A
   
N/A
 
Tier 1 Leverage
   
40,898,000
   
9.29
%
 
17,616,000
   
4.00
%
 
N/A
   
N/A
 
First Community Bank, NA
                         
Tier 1 Capital
 
$
36,179,000
   
11.75
%
$
12,320,000
   
4.00
%
$
18,479,000
   
6.00
%
Total Risked Based Capital
   
38,880,000
   
12.62
%
 
24,640,000
   
8.00
%
 
30,799,000
   
10.00
%
Tier 1 Leverage
   
36,179,000
   
8.16
%
 
17,740,000
   
4.00
%
 
22,176,000
   
5.00
%
 
Under applicable federal law, the Comptroller of the Currency restricts a national bank’s total dividend payments in any calendar year to net profits of that year combined with retained net profits for the two preceding years At December 31, 2006 there was $8,212,000 of retained net profits free of such restriction.

Note 20 - PARENT COMPANY FINANCIAL INFORMATION
 
The balance sheets, statements of operations and cash flows for First Community Corporation (Parent Only) follow:
 
Condensed Balance Sheets
 
 
At December 31,
 
 
 
2006
 
2005
 
Assets:
 
 
 
 
 
Cash on deposit
 
$
2,713,340
 
$
3,511,344,
 
Securities purchased under agreement to resell
   
122,144
   
66,842
 
Investment securities available-for-sale
   
1,221,675
   
1,360,000
 
Investment in bank subsidiary
   
74,037,238
   
61,048,462
 
Other
   
846,291
   
494,154
 
Total assets
 
$
78,940,688
 
$
66,480,802
 
Liabilities:
         
Junior subordinated debentures
 
$
15,464,000
 
$
15,464,000
 
Other
   
269,037
   
250,017
 
Total liabilities
   
15,733,037
   
15,714,017
 
 
         
Shareholders’ equity
   
63,207,651
   
50,766,785
 
Total liabilities and shareholders’ equity
 
$
78,940,688
 
$
66,480,802
 


Note 20 - PARENT COMPANY FINANCIAL INFORMATION - Continued

Condensed Statements of Operations
  
 
Year ended December 31,
 
 
 
2006
 
2005
 
2004
 
Income:
             
Interest income
 
$
54,994
 
$
51,323
 
$
72,795
 
Dividend income from bank subsidiary
   
1,314,000
   
1,327,125
   
366,000
 
Equity in undistributed earnings of subsidiary
   
3,421,593
   
2,715,875
   
2,073,865
 
Total income
   
4,790,587
   
4,094,323
   
2,512,660
 
Expenses:
             
Interest expense
   
1,160,895
   
885,344
   
214,813
 
Other
   
128,493
   
116,308
   
112,862
 
Total expense
   
1,289,388
   
1,001,652
   
327,675
 
Income before taxes
   
3,501,199
   
3,092,671
   
2,184,985
 
Income taxes
   
   
   
 
Net Income
 
$
3,501,199
 
$
3,092,671
 
$
2,184,985
 
 
Condensed Statements of Cash Flows
 
 
Year ended December 31,
 
 
 
2006
 
2005
 
2004
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net Income
 
$
3,501,199
 
$
3,092,671
 
$
2,184,985
 
Adjustments to reconcile net income to net cash provided by operating activities
             
Increase in equity in undistributed earnings of subsidiary
   
(3,421,593
)
 
(2,715,875
)
 
(2,073,865
)
Other-net
   
(3,493
)
 
120,200
   
84,600
)
Net cash provided by operating activities
   
56,113
   
496,996
   
195,720
 
                     
Cash flows from investing activities:
             
Purchase of investment security available-for-sale
   
   
   
(110,000
)
Maturity of investment security available-for-sale
   
   
   
 
Investment in bank subsidiary
   
   
   
(2,897,905
)
Net cash received (disbursed) in business combination
   
26,893
   
   
(11,131,142
)
Net cash provided (used) by investing activities
   
26,893
   
   
(14,139,047
)
                     
Cash flows from financing activities:
             
Dividends paid
   
(708,222
)
 
(565,432
)
 
(381,878
)
Proceeds from issuance of junior subordinated debentures
   
   
   
15,000,000
 
Purchase of common stock
   
(1,254,090
)
 
   
 
Proceeds from issuance of common stock
   
1,136,604
   
579,840
   
315,430
 
Net cash used in financing activities
   
(825,708
)
 
14,408
   
14,933,552
 
Increase (decrease) in cash and cash equivalents
   
(742,702
)
 
511,404
   
990,225
 
Cash and cash equivalents, beginning of period
   
3,578,186
   
3,066,782
   
2,076,557
 
Cash and cash equivalents, end of period
 
$
2,835,484
 
$
3,578,186
 
$
3,066,782
 


Note 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)

The following provides quarterly financial data for 2006 and 2005.

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



Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
On May 16, 2006, we dismissed Clifton D. Bodiford, CPA as our independent registered public accounting firm and engaged Elliott Davis, LLC as our independent registered public accounting firm.
 
The reports of Clifton D. Bodiford, CPA on our financial statements for the fiscal years ended December 31, 2005 and 2004 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles, nor was there any event of the type requiring disclosure under Item 304(a)(1)(v) of Regulation S-K. In connection with its audits for the fiscal years ended December 31, 2005 and 2004 and during the subsequent interim period preceding our dismissal of Clifton D. Bodiford, CPA , there were no disagreements with Clifton D. Bodiford, CPA on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure that, if not resolved to the satisfaction of Clifton D. Bodiford, CPA, would have caused Clifton D. Bodiford, CPA to make reference to the subject matter of the disagreement(s) in connection with its report.
 
Item 9A.  Controls and Procedures
 
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of December 31, 2006.  There have been no significant changes in our internal controls over financial reporting during the fourth fiscal quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.  There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Item 9B.  Other Information

None.
 
PART III
 
Item 10.  Directors, Executive Officers, and Corporate Governance.
 
The information required by Item 10 is hereby incorporated by reference from our proxy statement for our 2007 annual meeting of shareholders to be held on May 16, 2007.
 
We have adopted a Code of Ethics that applies to our directors, executive officers (including our principal executive officer and principal financial officer) and employees in accordance with the Sarbanes-Oxley Corporate Responsibility Act of 2002. The Code of Ethics is available on our web site at: www.firstcommunitysc.com.

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


Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
The following table sets forth equity compensation plan information at December 31, 2006.  All information has been adjusted for any stock splits and stock dividends effected during the periods presented.

 
 
Equity Compensation Plan Information
 
Plan Category
 
Number of securities
to be issued
upon exercise of
outstanding options,
warrants and rights
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
Number of securities
remaining available for
future issuance under
equity compensation
plans (c)
(excluding securities
reflected in column(a))
 
 
 
(a)
 
(b)
 
 
 
 
 
 
 
 
 
 
 
Equity compensation plans approved by security holders(1)
   
100,281
 
$
18.04
   
156,500
 
 
             
Total(2)
   
100,281
 
$
18.04
   
156,500
 
 
_________________________
(1)
The number of shares of common stock available for issuance under the 1999 Stock Incentive Plan automatically increases on the first trading day each calendar year beginning January 1, 2000, by an amount equal to 3% of the shares of common stock outstanding.

(2)
The total does not include 111,191 shares with a weighted average exercise price of $9.23 issuable under the First Community Corporation / DutchFork Bancshares, Inc. Stock Incentive Plan.  The total does not include 68,799 shares with a weighted average exercise price of $13.32 issuable under the First Community Corporation / DeKalb Bankshares, Inc. Stock Incentive Plan. These plans, and the outstanding awards, were assumed by us in connection with the merger with DutchFork Bancshares, Inc. and DeKalb Bankshares, Inc. We are not authorized to make any additional awards under these plans.
 
The additional information required by this Item 12 is set forth under “Security Ownership of Certain Beneficial Owners and Management” and hereby incorporated by reference from our proxy statement for our 2007 annual meeting of shareholders to be held on May 16, 2007.
 
Item 13.  Certain Relationships and Related Transactions, and Director Independence.
 
The information required by Item 13 is hereby incorporated by reference from our proxy statement for our 2007 annual meeting of shareholders to be held on May 16, 2007.

Item 14. Principal Accounting Fees and Services

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

Item 15.  Exhibits, Financial Statement Schedules

(a)(1) Financial Statements

The following consolidated financial statements are located in Item 8 of this report.
 
·
Report of Independent Registered Public Accounting Firm
 
·
Consolidated Balance Sheets as of December 31, 2006 and 2005
 
·
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004
 
·
Consolidated Statements of Changes in shareholders’ Equity and Comprehensive Income for the years ended December 31, 2006, 2005 and 2004
 
·
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
 
·
Notes to the Consolidated Financial Statements

(2)
Financial Statement Schedules

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


(3)
Exhibits

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

2.1
Agreement and Plan of Merger between First Community Corporation and DeKalb Bankshares, Inc. dated January 19, 2006 (incorporated by reference to Exhibit 2.1 of the company’s Form 8-K filed on January 20, 2006).
   
3.1
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the company’s Registration Statement No. 33-86258 on Form S-1).
 
 
3.2
Bylaws (incorporated by reference to Exhibit 3.2 to the company’s Registration Statement No. 33-86258 on Form S-1).
 
 
4.1
Provisions in the company’s Articles of Incorporation and Bylaws defining the rights of holders of    the company’s Common Stock (incorporated by reference to Exhibit 4.1 to the company’s Registration Statement No. 33-86258 on Form S-1).
 
 
10.1
Employment Agreement dated January 16, 2007, by and between Michael C. Crapps and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 19, 2007).*
   
10.2
Employment Agreement dated June 1, 1994, by and between James C. Leventis and the Company (incorporated by reference to Exhibit 10.2 to the company’s Registration Statement No. 33-86258 on Form S-1).*
 
 
10.3
1996 Stock Option Plan and Form of Option Agreement (incorporated by reference to Exhibit 10.6 to the company’s annual report for fiscal year ended December 31, 1995 on Form 10-KSB).*
 
 
10.4
First Community Corporation 1999 Stock Incentive Plan and Form of Option Agreement (Incorporated by reference to the Company’s 1998 Annual Report and Form 10-KSB).*
 
 
10.5
Employment Agreement dated September 2, 2002 by and between David K. Proctor and the Company (incorporated by reference to Exhibit 10.4 to the company’s 2002 annual report and Form 10-KSB).*
 
 
10.6
Employment Agreement dated June 12, 2002 by and between Joseph G. Sawyer and the Company (incorporated by reference to Exhibit 10.5 to the company’s 2002 annual report and Form 10-KSB).*
 
 
10.7
First Amendment to the First Community Corporation 1999 Stock Incentive Plan (incorporated by reference to the company's Form 10-K for the period ended December 31, 2005).*
 
 
10.8
Agreement between First Community Bank and Summerfield Associates, Inc. dated June 28, 2005 (incorporated by reference to Exhibit 10.1 of the company’s Form 8-K filed on August 15, 2005).
 
 
10.9
Divided Reinvestment Plan dated July 7, 2003 (incorporated by reference to Form S-3/D filed with the SEC on July 14, 2003, File No. 333-107009).*
 
 
10.10
Employment, Consulting, and Noncompete Agreement between First Community Bank, N.A., Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and Steve P. Sligh dated April 12, 2004 (incorporated by reference to Exhibit 10.6 to the company’s Registration Statement No. 333-116242 on Form S-4).
 
 
10.11
Employment, Consulting, and Noncompete Agreement between First Community Bank, N.A., Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and J. Thomas Johnson dated April 12, 2004 (incorporated by reference to Exhibit 10.7 to the company’s Registration Statement No. 333-116242 on Form S-4).
 
 
10.12
Amendment No. 1 to the Employment, Consulting, and Noncompete Agreement between First Community Bank N.A., and Steve P. Sligh dated September 14, 2005 (incorporated by reference to Exhibit 10.1 to the company’s Form 8-K filed on September 15, 2005).
 
 
10.13
Form of Salary Continuation Agreement dated August 2, 2006 (incorporated by reference to Exhibit 10.1 to the company's Form 8-K filed on August 3, 2006).
 
 
10.14
Form of Non-Employee Director Deferred Compensation Plan approved September 30, 2006 (incorporated by reference to the company's Form 8-K filed October 4, 2006).
 
 
16
Letter to SEC from Clifton D. Bodiford, CPA (incorporated by reference as Exhibit 16 to the company's Form 8-K as filed May 19, 2006).
 
 
21.1
Subsidiaries of the company.
 
 
23.1
Consent of Independent Registered Public Accounting Firm - Clifton D. Bodiford, CPA
 
 
23.2
Consent of Independent Registered Public Accounting Firm - Elliott Davis, LLC.
 
 
24.1
Power of Attorney (contained on the signature page hereto).
 
 
31.1
Rule 13a-14(a) Certification of the Chief Executive Officer.
 
 
31.2
Rule 13a-14(a) Certification of the Chief Financial Officer.
 
 
32
Section 1350 Certifications.
_________________________
*
Management contract of compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K.


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: March 20, 2007
FIRST COMMUNITY CORPORATION
     
     
 
By:
/s/ Michael C. Crapps
 
 
Michael C. Crapps
 
 
President and Chief Executive Officer
 
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael C. Crapps, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Richard K. Bogan
 
Director
 
March 20, 2007
Richard K. Bogan
 
 
 
 
 
 
 
 
 
/s/ Thomas C. Brown
 
 
Director
 
March 20, 2007
Thomas C. Brown
 
 
 
 
 
 
 
 
 
/s/ Chimin J. Chao
 
 
Director
 
March 20, 2007
Chimin J. Chao
 
 
 
 
 
 
 
 
 
/s/ Michael C. Crapps
 
 
Director, President,
 
March 20, 2007
Michael C. Crapps
 
& Chief Executive Officer
 
 
 
 
 
 
 
/s/ Hinton G. Davis
   
Director
 
March 20, 2007
Hinton G. Davis
         
           
/s/ Anita B. Easter
 
 
Director
 
March 20, 2007
Anita B. Easter
 
 
 
 
 
 
 
 
 
/s/ O. A. Ethridge
 
 
Director
 
March 20, 2007
O. A. Ethridge
 
 
 
 
 
 
 
 
 
/s/ George H. Fann, Jr.
 
 
Director
 
March 20, 2007
George H. Fann, Jr.
 
 
 
 
         
/s/ J. Thomas Johnson
 
Director, Vice Chairman of the Board,
 
March 20, 2007
J. Thomas Johnson
 
& Executive Vice President
   
 
 
 
 
 
/s/ W. James Kitchens, Jr.
 
 
Director
 
March 20, 2007
W. James Kitchens, Jr.
 
 
 
 
 
 
 
 
 
/s/ James C. Leventis
 
 
Director, Chairman of the
 
March 20, 2007
James C. Leventis
 
Board, & Secretary
 
 
 
 
/s/Alexander Snipes, Jr.
   
Director
 
March 20, 2007
Alexander Snipes, Jr.
         
           
/s/Richard M. Todd, Jr.
   
Director
 
March 20, 2007
Richard M. Todd, Jr.
         
           
/s/ Loretta R. Whitehead
   
Director
 
March 20, 2007
Loretta R. Whitehead
         
           
/s/ Mitchell M. Willoughby
   
Director
 
March 20, 2007
Mitchell M. Willoughby
         
           
/s/ Joseph G. Sawyer
   
Chief Financial Officer
 
March 20, 2007
Joseph G. Sawyer
   
and Principal Accounting Officer
 
 
 
 
Exhibit List

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

2.1
Agreement and Plan of Merger between First Community Corporation and DeKalb Bankshares, Inc. dated January 19, 2006 (incorporated by reference to Exhibit 2.1 of the company’s Form 8-K filed on January 20, 2006).
   
3.1
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the company’s Registration Statement No. 33-86258 on Form S-1).
 
 
3.2
Bylaws (incorporated by reference to Exhibit 3.2 to the company’s Registration Statement No. 33-86258 on Form S-1).
 
 
4.1
Provisions in the company’s Articles of Incorporation and Bylaws defining the rights of holders of    the company’s Common Stock (incorporated by reference to Exhibit 4.1 to the company’s Registration Statement No. 33-86258 on Form S-1).
 
 
10.1
Employment Agreement dated January 16, 2007, by and between Michael C. Crapps and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 19, 2007).*
   
10.2
Employment Agreement dated June 1, 1994, by and between James C. Leventis and the Company (incorporated by reference to Exhibit 10.2 to the company’s Registration Statement No. 33-86258 on Form S-1).*
 
 
10.3
1996 Stock Option Plan and Form of Option Agreement (incorporated by reference to Exhibit 10.6 to the company’s annual report for fiscal year ended December 31, 1995 on Form 10-KSB).*
 
 
10.4
First Community Corporation 1999 Stock Incentive Plan and Form of Option Agreement (Incorporated by reference to the Company’s 1998 Annual Report and Form 10-KSB).*
 
 
10.5
Employment Agreement dated September 2, 2002 by and between David K. Proctor and the Company (incorporated by reference to Exhibit 10.4 to the company’s 2002 annual report and Form 10-KSB).*
 
 
10.6
Employment Agreement dated June 12, 2002 by and between Joseph G. Sawyer and the Company (incorporated by reference to Exhibit 10.5 to the company’s 2002 annual report and Form 10-KSB).*
   
10.7
First Amendment to the First Community Corporation 1999 Stock Incentive Plan (incorporated by reference to the company's Form 10-K for the period ended December 31, 2005).*
   
10.8
Agreement between First Community Bank and Summerfield Associates, Inc. dated June 28, 2005 (incorporated by reference to Exhibit 10.1 of the company’s Form 8-K filed on August 15, 2005).
   
10.9
Divided Reinvestment Plan dated July 7, 2003 (incorporated by reference to Form S-3/D filed with the SEC on July 14, 2003, File No. 333-107009).*
   
10.10
Employment, Consulting, and Noncompete Agreement between First Community Bank, N.A., Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and Steve P. Sligh dated April 12, 2004 (incorporated by reference to Exhibit 10.6 to the company’s Registration Statement No. 333-116242 on Form S-4).
 
 
10.11
Employment, Consulting, and Noncompete Agreement between First Community Bank, N.A., Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and J. Thomas Johnson dated April 12, 2004 (incorporated by reference to Exhibit 10.7 to the company’s Registration Statement No. 333-116242 on Form S-4).
 
 
10.12
Amendment No. 1 to the Employment, Consulting, and Noncompete Agreement between First Community Bank N.A., and Steve P. Sligh dated September 14, 2005 (incorporated by reference to Exhibit 10.1 to the company’s Form 8-K filed on September 15, 2005).
   
10.13
Form of Salary Continuation Agreement dated August 2, 2006 (incorporated by reference to Exhibit 10.1 to the company's Form 8-K filed on August 3, 2006).
   
10.14
Form of Non-Employee Director Deferred Compensation Plan approved September 30, 2006 (incorporated by reference to the company's Form 8-K filed October 4, 2006).
 
 
16
Letter to SEC from Clifton D. Bodiford, CPA (incorporated by reference as Exhibit 16 to the company's Form 8-K as filed May 19, 2006).
   
21.1
Subsidiaries of the company.
 
 
23.1
Consent of Independent Registered Public Accounting Firm - Clifton D. Bodiford, CPA
   
23.2
Consent of Independent Registered Public Accounting Firm - Elliott Davis, LLC.
   
24.1
Power of Attorney (contained on the signature page hereto).
 
 
31.1
Rule 13a-14(a) Certification of the Chief Executive Officer.
 
 
31.2
Rule 13a-14(a) Certification of the Chief Financial Officer.
 
 
32
Section 1350 Certifications.
 
_________________________
*
Management contract of compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K.