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

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period

Commission file number 000-28344

FIRST COMMUNITY CORPORATION
(Exact name of registrant as specified in its charter)

5455 Sunset Boulevard, Lexington, South Carolina 29072
(Address of Principal Executive Offices)

(803) 951-2265
(Registrant's Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
                                   Large accelerated filer                           Accelerated filer                      Non-accelerated filer   

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

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: On July 31, 2006, 3,279,376 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.

    TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
    Item 1. Financial Statements.
                  Consolidated Balance Sheets
                  Consolidated Statements of Income
                  Consolidated Statements of Shareholders’ Equity and Comprehensive Income (loss)
                  Consolidated Statements of Cash Flows
                  Notes to Consolidated Financial Statements

   Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Item 4. Controls and Procedures

PART II – OTHER INFORMATION
   Item 1. Legal Proceedings
   Item 1A. Risk Factors
   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Item 3. Defaults Upon Senior Securities
   Item 4. Submission of Matters to a Vote of Security Holders
   Item 5.  Other Information
   Item 6. Exhibits

INDEX TO EXHIBITS
SIGNATURES
EX-31.1 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
EX-31.2 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
EX-32 SECTION 1350 CERTIFICATIONS

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PART I
FINANCIAL INFORMATION

Item 1.   Financial Statements

FIRST COMMUNITY CORPORATION
CONSOLIDATED BALANCE SHEETS

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FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

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FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

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FIRST COMMUNITY CORPORATION
Consolidated Statement of Changes in Shareholder’s Equity and Comprehensive Income
Six Months ended June 30, 2006 and June 30, 2005

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FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

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Notes to Consolidated Financial Statements
June 30, 2006

Note 1 – Basis of Presentation

Note 2 – Earnings per share

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

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Note 3 – Stock Based Compensation

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, 2005, the Company had a stock-based payment plan for directors, officers and other key employees, which is described below. Prior to December 31, 2005, 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.

Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R) which requires expensing employee stock-based compensation using the fair value method prospectively for all awards granted, modified, or settled on or after January 1, 2006. The fair value at date of grant of the stock option is estimated using the Black-Scholes option-pricing model based on assumptions noted in a table below. The dividend yield is based on estimated future dividend yields. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are based on historical volatilities. The expected term of share options granted is generally derived from historical experience.

As of June 30, 2006 there was no unrecognized compensation cost related to non-vested share based compensation arrangements granted under the plan. There was no compensation cost recognized during the three and six month periods ended June 30, 2006 as all options had vested prior to January 1, 2006.

The Company’s stock option plan (“the Plan”), which was approved by shareholders, provides for stock options to be granted primarily to directors, officers and other key employees. Options granted under the stock option plan may be incentive stock options or non-incentive stock options. Share option awards have previously all been granted with an exercise price equal to the market price of the Company’s shares at the date of grant. The shares reserved under the option plan at June 30, 2006 amounted to approximately 190,000 shares.

Effective December 31, 2005, the vesting period for approximately 67,000 options awarded during 2003, 2004 and 2005 that would otherwise vest at various times through fiscal 2010 was accelerated, as more fully described in note 15 of the 2005 Annual Report to Shareholders. All other terms and conditions of the accelerated options remained unchanged as a result of the acceleration.

There were no options granted under the option plan during the six months ended June 30, 2006. There were 63,500 options granted to officers and employees during the six months ended June 30, 2005. The assumptions used in estimating the weighted average fair value for these options (using the Black-Sholes pricing model)included dividend yield of 1.0%, volatility of 24.3%, risk free interest rate of 4.3% and an expected life of 8 years.

At December 31, 2005 there were 328,092 options outstanding and exercisable with a weighted average exercise price of $11.87. During the six months ended June 30, 2006 42,629, options were exercised at an average exercise price of $7.62. At June 30, 2006 there were 285,463 options outstanding and exercisable with a weighted average exercise price of $12.50 (excluding options issued in connection with consummation of the merger with DeKalb Bancshares, Inc. on June 9, 2006). Cash received during the six months ended June 30, 2006 from share option exercises amounted to $325,000.

In connection with the merger with DeKalb Bancshares, Inc. (“DeKalb”) the company assumed the equivalent of 71,227 fully vested options issued to employees of DeKalb at an average exercise price of $13.33.

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Prior to adoption of SFAS 123R the company used the intrinsic value method to account for stock options in accordance with Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees”. The following summarizes pro-forma data in accordance with Statement of Financial Accounting Standards No. 123 “Accounting for Stock Based Compensation” for the six and three months ended June 30, 2005.

Note 4 – Acquisition

On June 9, 2006, we acquired 100 percent of the outstanding shares of DeKalb Bancshares, Inc., the parent company of The Bank of Camden. The Bank of Camden became a branch of First Community Bank, NA, and our wholly owned banking subsidiary. The aggregate acquisition cost was $10,223,000 including $2,369,000 of cash, 364,064 shares of our common stock valued at $7,577,000, stock options valued at $585,000 and direct acquisition costs of $277,000. The value of the 364,064 shares of common stock issued at $19.22 per share was determined based on the average closing price of our 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 Bancshares, Inc. 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.

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Note 5 – Recently Issued Accounting Pronouncements

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 FASB issued 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.” 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.

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.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

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:

Overview

        The following discussion describes the our results of operations for the three and six month periods ended June 30, 2006, as compared to the three and six month periods ended June 30, 2005, and also analyzes our financial condition as of June 30, 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. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities. Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section we have included a detailed discussion of this process. In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this non-interest income, as well as our non-interest expense, in the following discussion.

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

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Critical Accounting Policies

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

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

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

Merger Completed on June 9, 2006

On June 9, 2006 we consummated the merger with DeKalb Bancshares, Inc. (“DeKalb”). Pursuant to the merger we issued 364,064 shares of common stock valued at $7.6 million and paid $2.4 million in cash to shareholders of DeKalb. Other cost related to the merger included stock options valued at $585,000 and direct acquisition cost of $277,000. Periods prior to June 9, 2006 do not include the effect of the merger and, as a result, the six and three months ended June 30, 2005 does not reflect any results from the former DeKalb.

Comparison of Results of Operations for Six Months Ended June 30, 2006 to the Six Months Ended June 30, 2005:

Net Income

Our net income for the six months ended June 30, 2006 was $1.7 million, or $.57 diluted earnings per share, as compared to $1.5 million, or $.50 diluted earnings per share, for the six months ended June 30, 2005. The increase in net income is due to an increase in net interest income due to additional earning assets as well as an increase in non-interest income. These increases were somewhat offset by an increase in non-interest expense during the two periods. Average earning assets were $419.0 million during the six months ended June 30, 2006 as compared to $387.2 million during the six months ended June 30, 2005. The increase in average earning assets resulted in an increase in net interest income of $368,000 in the first six months of 2006 as compared to the first six months of 2005. Non-interest income increased $909,000 in the first six months of 2006 as compared to the first six months of 2005. Non-interest expense increased $698,000 in the first six months of 2006 as compared to the first six months of 2005.

The table on page 21 shows yield and rate data for interest-bearing balance sheet components during the six month periods ended June 30, 2006 and 2005, along with average balances and the related interest income and interest expense amounts.

Net interest income was $6.8 million for the six months ended June 30, 2006 as compared to $6.4 million for the six months ended June 30, 2005. This again was primarily due to increase in the level of earning assets. The yield on earning assets increased by 73 basis points due to the continued increasing rate environment throughout 2005 and the first six months of 2006. In addition, we continue to make progress in changing the mix of the earning asset portfolios. The investment portfolio and short term investments represented 44.7% of the average interest earning assets in the six months ended June 30, 2006 as compared to 50.3% during the comparable period in 2005. Since the consummation of the merger with DutchFork Bankshares in October 2004 our objective has been to increase the percentage of earning assets in the loan portfolio as compared to other earning assets. This began by restructuring the investment portfolio in late 2004 and early 2005 in order to shorten the maturity and

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purchase investments that provided ongoing cash flow. Yields on loans are typically higher then yields on 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.

The yield on earning assets for the six months ended June 30, 2006 and 2005 was 6.00% and 5.27%, respectively. The cost of interest-bearing liabilities during the first six months of 2006 was 3.10% as compared to 2.12% in the same period of 2005. The increase in the cost of interest-bearing liabilities was a result of increasing interest rates throughout 2005 and the first six months of 2006. The net interest margin was 3.27% for the six months ended June 30, 2006 and 3.35% for the six months ended June 30, 2005. On a fully taxable equivalent basis the net interest margin was 3.36% and 3.50% for the six months ended June 30, 2006 and 2005, respectively.

Provision and Allowance for Loan Losses

At June 30, 2006 the allowance for loan losses amounted to $3.1 million, or 1.19% of total loans, as compared to $2.7 million, or 1.22% of total loans, at December 31, 2005. In the merger with DeKalb, we acquired an allowance for loan losses of $320,000. In December 2003, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position No. 03-3 (SOP No. 03-3), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP No. 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer or business combination if those differences are attributable, at least in part, to credit quality. SOP No. 03-3 prohibits the carry over or creation of valuation allowances in the initial accounting of all loans acquired that are within the scope of the SOP. SOP No. 03-3 was effective for loans acquired in years beginning after December 15, 2004. At the date of our acquisition of DeKalb the acquired loan portfolio had no loans that were impaired and none that were delinquent greater than 30 days. Therefore, there were no loans acquired that were deemed to be within the scope of SOP No. 03-3.

Our provision for loan loss was $248,000 for the six months ended June 30, 2006, as compared to $138,000 for the six months ended June 30, 2005. The provision is made based on our assessment of general loan loss risk and asset quality. The allowance for loan losses represent an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectibility of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit. 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 consists 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 June 30, 2006 we had no loans delinquent more than 90 days and still accruing interest, and loans totaling $2.4 million that were delinquent 30 days to 89 days. We had two loans in a nonaccrual status in the amount of $23,000 at June 30, 2006. Our management continuously monitors non-performing, classified and past due loans, to identify deterioration regarding the condition of these loans. We identified 9 loans in the amount of $201,000 that are current as to principal and interest and not included in non-performing assets that could be a potential problem loan.

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Allowance for Loan Losses

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The following allocation of the allowance to specific components is not necessarily indicative of future losses or future allocations. The entire allowance is available to absorb losses in the portfolio.

Composition of the Allowance for Loan Losses

Accrual of interest is discontinued on loans when management believes, 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.

Non-interest Income and Non-interest Expense

Non-interest income during the first six months of 2006 was $2.3 million as compared to $1.4 million during the same period in 2005. The growth in non-interest income consisted of increases in deposit service charges of $536,000, mortgage origination fees of $76,000, commissions on the sale of non-deposit investment products of $143,000 and an increase in ATM debit card fees transaction and surcharge fees of $58,000. The increase in deposit service charges as well as ATM transaction and surcharge fees resulted from an increase in deposit balances and number of accounts between the two periods. 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 the first quarter of 2006 as compared to the same period in 2005. Mortgage origination fees increased due to the continued relatively low mortgage loan rate environment as well as continued emphasis on this source of revenue. The increase in commissions on the sale of non-deposit investment products also resulted from a continued emphasis on this source of revenue. During the first six months of 2005 the company realized gains on the sale of securities in the amount of $188,000 as compared to a loss of $69,000 during the same period of 2006. The proceeds from the sale of securities in the first quarter of 2006 were used to pay down approximately $5.0 million in a Federal Home Loan Bank advance, which resulted in a gain on the early extinguishment of debt of $159,000. These advances were acquired in the DutchFork merger. Other non-interest income also increased by approximately $129,000 in the first six months of 2006 as a result of recognizing the increase in the market value of the interest rate cap agreement acquired in the third quarter of 2005, discussed further in the “Market Risk Management” section.

Total non-interest expense increased by $698,000 during the first six months of 2006 as compared to the same period of 2005. Salaries and employee benefits increased $350,000 in the six months ended June 30, 2006 as compared to the same period in 2005. There was a $404,000 increase in other expenses in the first six months of 2006 as compared to the same period in 2005. This increase primarily results from an increase of $170,000 in consulting and professional fees and an increase of $54,000 in telephone and data communication expenses as a result of upgrading our network system. Expenses related to ATM/debit card processing increased by $36,000 as a result of increased usage volume and number of outstanding cards.

The following is a summary of the components of other non-interest expense:

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Income Tax Expense

Our effective tax rate was to 29.8% in the first six months of 2006 as compared to 25.9% during the same period of 2005. The increase in the effective tax rate is primarily a result of the sale of certain available-for-sale investments, during the first quarter of 2006. The investments paid dividends, a portion of which were non-taxable for federal tax purposes. Our effective tax rate is currently expected to remain 30.0% to 32.0% throughout the remainder of 2006.

Comparison of Results of Operations for Three Months Ended June 30, 2006 to the Three Months Ended June 30, 2005:

Net Income

Net income for the second quarter of 2006 was $901,000, or $0.29 per diluted share, as compared to $707,000, $0.24 per diluted share during the comparable period in 2005. Net interest income increased by $210,000 for the three months ended June 30, 2006 from $3.3 million in 2005 to $3.5 million in 2006. The increase in net interest income is primarily due to an increase in the level of average earning assets. Average earning assets were $432.5 million during the second quarter of 2006 as compared to $388.3 million during the second quarter of 2005. The table on page 22 shows yield and rate data for interest-bearing balance sheet components during the three month periods ended June 30, 2006 and 2005, along with average balances and the related interest income and interest expense amounts. The yield on average earning assets increased to 6.06% in the second quarter of 2006 as compared to 5.42% in the second quarter of 2005. The cost of interest bearing liabilities also increased to 3.25% in second quarter of 2006 as compared to 2.27% in the second quarter of 2005. The net interest margin was 3.22% for the three months ended June 30, 2006 and 3.37% for the three months ended June 30, 2005. On a fully taxable equivalent basis the net interest margin was 3.30% and 3.51% for the three months ended June 30, 2006 and 2005, respectively.

Non-interest Income and Non-interest Expense

Non-interest income increased by $497,000 from $631,000 for the three months ended June 30, 2005 to $1.1 million in the same period of 2006. Deposit service charges increased by $274,000, mortgage loan fees increased by $40,000, commissions on the sale of non-deposit investment products increased by $70,000 and other income increased $121,000 in the three months ended June 30, 2006 as compared to the same period in 2005. Included in this increase in other income for the three month ended June 30, 2006 is an increase in the market value of an interest rate cap of $64,000.

Total non-interest expense increased by $315,000 in the second quarter of 2006 as compared to the same quarter of 2005. This increase was primarily due to a $165,000 increase in salary and benefits expense and an increase of $167,000 in other expenses. The increase in other expenses primarily relates to increased fees for professional and consulting services in the second quarter of 2006 for establishing the overdraft privilege program and consulting services related to the investment portfolio. This increase in the consulting and professional fees will continue throughout the balance of 2006 in relation to comparable periods in 2005.

Financial Position

Assets totaled $538.1 million at June 30, 2006 as compared to $467.5 million at December 31, 2005, an increase of $70.6 million, or 15.1%. The merger with DeKalb, which was consummated on June 9, 2006, accounted for approximately $46.4 million of this increase. Short-term investments (Federal funds sold and securities purchased under agreements to resell and

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interest-bearing bank balances) grew $15.8 million during the first six months of 2006 from $1.2 million at December 31, 2005 to $17.0 million at June 30, 2006. Loans grew by $40.4 million during the six months ended June 30, 2006 from $221.7 million at December 31, 2005 to $262.1 million at June 30, 2006. Organic growth (increases excluding the impact of the DeKalb merger) accounted for approximately $13.8 million (12.5% annualized) of this increase in loans. At June 30, 2006, loans accounted for 56.8% of earning assets, as compared to 55.5% at December 31, 2005. The loan to deposit ratio at June 30, 2006 was 64.1% as compared to 63.4% at December 31, 2005. Investment securities increased from $176.4 million at December 31, 2005 to $182.1 million at June 30, 2006. We acquired approximately $10.2 million in investment securities as a result of the DeKalb merger. Throughout 2006, we will continue to focus on investing more of our assets in the higher earning loan portfolio as compared to the investment portfolio. 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. The increase in earning assets was primarily funded by a $31.9 million (18.2% annualized) organic deposit growth from December 31, 2005 to June 30, 2006. In addition, we acquired approximately $27.3 million in deposit accounts in the DeKalb merger. We currently do not accept brokered deposits and therefore our balance sheet continues to be primarily funded from deposit relationships within the markets we serve.

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