First Community 10QSB 2006 Q1 Quarterly report (small business)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-QSB

þ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-25972

FIRST COMMUNITY CORPORATION

(Exact Name of Small Business Issuer as Specified in its Charter)

Tennessee	62-1562541
(State of Incorporation)	(I.R.S. Employer Identification No.)
809 West Main Street
Rogersville, Tennessee	37857
(Address of Principal Executive Offices)	(Zip Code)

(423) 272-5800

(Issuer’s Telephone Number, Including Area Code)

N/A

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ      Noo

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

Yeso       Noþ

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

1,918,527

(Outstanding shares of the issuer’s no par value common stock as of May 5, 2006)

Transitional Small Business Disclosure Format (check one):

Yeso     Noþ

FIRST COMMUNITY CORPORATION

INDEX

Number		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets March 31, 2006 (Unaudited) and December 31, 2005		3
	Consolidated Statements of Income and Comprehensive Income Three months ended March 31, 2006 and 2005 (Unaudited)		4
	Consolidated Statements of Cash Flows Three months ended March 31, 2006 and 2005 (Unaudited)		5
	Notes to Consolidated Financial Statements (Unaudited)		6
Item 2.	Management’s Discussion and Analysis or Plan of Operation		8
Item 3.	Controls and Procedures		14
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		15
Item 1a.	Risk Factors		15
Item 2.	Unregistered Sales of Equity Securities and/Use of Proceeds		15
Item 3.	Default Upon Senior Securities		15
Item 4.	Submission of Matters to a Vote of Security Holders		15
Item 5.	Other Information		15
Item 6.	Exhibits		15
SIGNATURES			16
CERTIFICATIONS			17
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO
Ex-32.2 Section 906 Certification of the CFO

2

FIRST COMMUNITY CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

($ amounts in thousands )

	(Unaudited)
��	March 31,			December 31,
	2006			2005
Assets
Cash and due from banks	$	5,679			5,602
Federal funds sold		4,968			—
Cash and cash equivalents		10,647			5,602
Investment securities		18,071			16,454
Total loans		182,515			183,217
Less loan loss allowance		(1,939	)		(1,917	)
Loans, net		180,576			181,300
Bank premises and equipment		7,096			7,193
Accrued income receivable		1,022			1,123
Restricted equity securities		1,752			1,729
Cash surrender value of life insurance		3,789			3,787
Computer software, net of amortization		376			405
Other assets		1,873			1,805
TOTAL ASSETS	$	225,202			219,398
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	20,541			19,145
Interest-bearing		162,908			159,360
Total deposits		183,449			178,505
Securities sold under agreements to repurchase		3,534			2,288
Advances from FHLB		13,296			14,300
Subordinated debentures		7,217			7,217
Accrued interest payable		999			1,036
Dividend payable		134			134
Other liabilities		2,147			2,021
Total liabilities		210,776			205,501
Shareholders’ equity:
Common stock, no par value. Authorized 10,000,000 shares; issued and outstanding 1,917,027 in 2006 and 1,915,387 in 2005		7,444			7,431
Accumulated other comprehensive loss, net		(270	)		(256	)
Retained earnings		7,252			6,722
Total shareholders’ equity		14,426			13,897
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	225,202			219,398

3

FIRST COMMUNITY CORPORATION AND SUBSIDIARY

Consolidated Statements of Income and Comprehensive Income
(Unaudited)

($ amounts in thousands except earnings per share)

	Three Months Ended March 31,
	2006			2005
Interest income:
Loans	$	3,137			2,682
Securities:
Taxable		111			117
Tax exempt		43			16
Federal funds sold		69			11
Total interest income		3,360			2,826
Interest expense:
Interest on deposits		1,290			905
Interest on other borrowed funds		321			255
Total interest expense		1,611			1,160
Net interest income		1,749			1,666
Provision for loan losses		21			35
Interest income after provision for loan losses		1,728			1,631
Other income:
Loan fees		306			127
Service charge on deposit accounts		234			271
Other operating income		220			163
Total other income		760			561
Other expenses:
Salaries, directors’ fees and employee benefits		795			714
Premises and equipment expense		256			248
Other operating expenses		413			397	��
Total other expenses		1,464			1,359
Income before income taxes		1,024			833
Income taxes		360			284
Net income	$	664			549
Other comprehensive income:
Unrealized gains/(losses) on securities, net		(14	)		(123	)
Comprehensive income	$	650			426
Basic earnings per share	$	0.35			0.29
Basic average shares outstanding		1,915,669			1,911,779
Diluted earnings per share	$	0.35			0.28
Diluted average shares outstanding		1,908,251			1,966,322

4

FIRST COMMUNITY CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows
(Unaudited)

($ amounts in thousands except earnings per share)

	Three Months Ended March 31,
Increase (decrease) in cash and due from banks	2006			2005
Cash flows from operating activities:
Net income	$	664			549
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		169			158
Provision for loan losses		21			35
Decrease in accrued income receivable		101			42
Other, net		(4	)		(97	)
Net cash from operating activities		951			687
Cash flows from investing activities:
Maturities and redemptions of securities available for sale		363			741
Purchases of securities available-for-sale		(2,000	)		—
Increase in loans		703			(6,787	)
Purchases of premises and equipment		(35	)		(59	)
Net cash from investing activities		(969	)		(6,105	)
Cash flows from financing activities:
Cash dividends paid		(134	)		(133	)
Issuance of common stock		13			11
Repayments of borrowings from FHLB		(1,004	)		(7,010	)
Increase in securities sold under agreements to repurchase		1,245			777
Increase in deposits		4,943			14,667
Net cash from financing activities		5,063			8,312
Net increase (decrease) in cash		5,045			2,894
Cash and due from banks at beginning of period		5,602			5,163
Cash and due from banks at end of period	$	10,647			8,057
Cash payments for interest	$	1,649			1,080
Cash payments for income taxes	$	206			128

5

FIRST COMMUNITY CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

GENERAL

First Community Corporation (the “Company”), through its subsidiary, First Community Bank (the “Bank”), provides banking services to individuals and businesses from its six banking offices in Rogersville, Church Hill, and Kingsport, Tennessee. Its primary deposit products are demand, savings and certificates of deposit, and its primary lending products are commercial, real estate mortgage and installment loans. The significant policies are summarized as follows:

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2006, are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.

USE OF ESTIMATES

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

STATEMENTS OF CASH FLOWS

Cash and cash equivalents includes cash, deposits with other financial institutions with maturities under 90 days, and federal funds sold.

CASH AND DUE FROM BANKS

Included in cash and due from banks are legal reserve requirements which must be maintained on an average basis in the form of cash and balances due from the Federal Reserve and other banks.

SECURITIES

Securities are classified into three categories: held to maturity, available for sale, and trading. Securities classified as held to maturity, which are those the Company has the positive intent and ability to hold to maturity, are reported at amortized cost. Securities classified as available for sale may be sold in response to changes in interest rates, liquidity needs, and for other purposes. These securities are reported at fair value and include securities not classified as held to maturity or trading. Trading securities are those held principally for the purpose of selling in the near future and are carried at fair value. The Company currently has no held to maturity or trading securities.

Unrealized holding gains and losses for available for sale securities are reported in other comprehensive income. Realized gains (losses) on securities available for sale are included in other income (expense) and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains and losses on sales of securities are determined on the specific-identification method.

LOANS

Loans which management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balance. Interest on loans is computed daily based on the principal amount outstanding.

A loan is considered impaired when it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement. Impaired loans are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company recognizes an impairment by creating or adjusting a valuation allowance with a corresponding charge or credit to the provision for loan losses.

The Company considers all loans on non-accrual status to be impaired. Interest accrual on loans is discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected, or generally, when collection of principal or interest becomes 90 days or more past due. Management may make exceptions to this policy

6

when the estimated net realizable value of the collateral is sufficient to recover the principal and interest balance. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established by charges to operations based on management’s evaluation of the assets, economic conditions and other factors considered necessary to maintain the allowance at an adequate level. In evaluating the adequacy of the allowance, management makes certain estimates and assumptions that are susceptible to change in the near term. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Uncollectible loans are charged to the allowance account in the period such determination is made. Recoveries on loans previously charged off are credited to the allowance account in the period received. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows, as discussed above.

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed principally on the straight-line method over the estimated useful lives of the assets, which range as follows: building- 40 years, equipment- 5 to 7 years.

OTHER REAL ESTATE

Other real estate, which consists of properties acquired through foreclosure, is recorded at the lower of the outstanding loan amount or fair value of collateral, determined by appraisal, at the date of foreclosure. Declines in value resulting from reappraisals, as well as losses resulting from disposition are charged to operations.

STOCK-BASED COMPENSATION

Prior to 2006, the Bank accounted for this plan under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost was reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company adopted FASB Statement No. 123(R),Accounting for Stock-Based Compensationas of January 1, 2006. No stock based compensation is included in net income for the three months ended March 31, 2006 as all options outstanding were fully vested as of December 31, 2005 and no new options were granted during this quarter. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123(R) to stock-based employee compensation for the period ended March 31, 2005:

	For the three months ended March 31,
	2006		2005
Net Income as reported	$	664	$	549
Deduct: Stock-based compensation expense
Determined under fair value based method, net of tax		n/a		36
Pro forma net income	$	664	$	513
Basic Earnings per share as reported	$	.35	$	.29
Pro forma basic earnings per share	$	.35	$	.27
Diluted earnings per share as reported	$	.35	$	.28
Pro forma diluted earning per share	$	.35	$	.26

7

An analysis of the outstanding stock options is furnished in the following table for the period indicated:

	Period ended
	March 31, 2006
Balance at beginning of period		184,358
Add: Options granted 2006		—
Less: Options exercised 2006		(1,640	)
Balance at end of period		182,718

PER SHARE AMOUNTS

Earnings per share (EPS) is calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, issued in February 1997. The statement requires the dual presentation of basic and diluted EPS on the income statement. Basic EPS excludes dilution, and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or contracts to issue common stock were exercised or converted into common stock that then shared in the earnings of the entity.

INCOME TAXES

The Company files a consolidated tax return with its subsidiary. Income taxes are allocated to members of the consolidated group on a separate return basis. Income taxes have been provided using the liability method as prescribed by SFAS No. 109, “Accounting for Income Taxes”.

EMPLOYEE BENEFITS

The Bank maintains a 401(k) profit-sharing plan, which covers substantially all employees.

IMPACT OF NEW ACCOUNTING STANDARDS

Share-Based Payment

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS Statement No. 95, “Statement of Cash Flows.” Generally, the approach to accounting for share-based payments in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, which means that pro forma disclosure is no longer an alternative to financial statement recognition. SFAS No. 123(R) is effective for the Bank beginning January 1, 2006. The effect of this pronouncement on the Company’s financial statements will depend on whether or not the Company grants more stock options in future periods.

Item 2. Management Discussion and Analysis or Plan of Operation.

CRITICAL ACCOUNTING POLICIES

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses (ALL), have been critical to the determination of our financial position, results of operations and cash flows.

8

Our management assesses the adequacy of the ALL prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The ALL consists of two portions: (1) an amount representative of specifically identified credit exposure and exposures; and (2) an amount representative of incurred loss which is based in part on the consideration of historic loss histories which management believes is representative of the probable loss. Even though the allowance for loan losses is composed of two components, the entire allowance is available to absorb any credit losses.

We establish the amount separately for two different risk groups: (1) unique loans (commercial loans, including those loans considered impaired); and (2) homogeneous loans (generally consumer loans). We base the amount for unique loans primarily on risk rating grades assigned to each of these loans as a result of our loan management and review processes. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, primarily based on past loan loss experience, the nature and volume of the portfolio, economic and other factors.

FINANCIAL CONDITION

First Community Corporation (the “Company”) is a registered bank holding company that was incorporated under Tennessee law in 1994. The Company’s activities are conducted through its wholly owned subsidiary, First Community Bank of East Tennessee (the “Bank”), which was acquired by the Company in 1994. The Bank, a state bank chartered under the laws of Tennessee, was organized in late 1992 shortly after the last locally owned bank in Hawkins County was acquired by a regional bank holding company. Since its opening in April 1993 through March 31, 2006, the Bank has grown to total assets of approximately $225 million.

Operating as a full service commercial bank, the Bank provides a range of financial services that include checking accounts, NOW accounts, money market and savings accounts, certificates of deposit, individual retirement accounts, money transfers, and safe deposit facilities. Lending services include loans for business, agriculture, real estate, personal use, home improvements, and automobiles. The Bank is not authorized to provide trust services.

The Bank is subject to the regulatory authority of both the Department of Financial Institutions of the State of Tennessee and the Federal Deposit Insurance Corporation (the “FDIC”). The FDIC currently insures the depositors of each member bank to a maximum of $100,000 per depositor. For this protection, the Bank pays a quarterly statutory assessment and is subject to the rules and regulations of the FDIC.

The Bank considers its primary market for loans and deposits to be individuals, small-to-medium size businesses and professionals in Hawkins County and Sullivan County, Tennessee. The Bank is actively soliciting business in this target market and considers the potential growth opportunities to be favorable. No material portion of the Bank’s deposits has been obtained from any single person or group of persons, with the exception of an $18 million certificate of deposit and a checking account with an average outstanding balance of $ 4.6 million from a local government entity. In the event the Bank is not able to retain these deposits, management has various sources of liquidity available including cash and amounts due from depository institutions and investment securities, which are available for sale. In addition, the Bank has borrowing authority from the Federal Home Loan Bank of approximately $33.6 million of which $14.3 million is available and federal fund lines of credit of $14.7 million, all of which is available.

The results of operation of the Bank and the Company are affected by credit policies of monetary authorities, particularly the Federal Reserve Board. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, as well as the effects of actions by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the effect of such matters on the business and earnings of the Company.

Federal Funds Sold increased $5.0 as a result of deposit growth exceeding loan growth during the first quarter of 2006.

Loans have decreased $.7 million or 0.4% during the first three months of 2006. Since 1999, the mix of loans in the Bank’s portfolio has reflected an increasing level of commercial real estate loans with a flat or declining proportion of loans in the residential mortgage or consumer loan areas, respectively. The Bank competes generally with insurance companies, credit unions and other financial institutions that have expanded into the quasi-financial market. Some of these competitors are much larger than the Bank and have greater resources by which to offer lower rates on consumer lending.

9

The following table presents various categories of loans contained in the Bank’s loan portfolio as of March 31, 2006 and December 31, 2005:

	2006			2005
	($ in thousands)
Domestic:
Commercial, financial and agricultural	$	24,647		$	23,906
Real estate — construction		36,242			34,555
Real estate – 1 to 4 family residential		40,037			42,061
Real estate — other		77,853			78,528
Consumer loans		3,736			4,167
Total loans	$	182,515		$	183,217
Allowance for loan losses		(1,939	)		(1,917	)
Total (net of allowance)	$	180,576		$	181,300

The Bank continually reviews its loan portfolio to determine deficiencies and the corrective actions to be taken. The review process is outsourced and is independent of internal loan origination responsibilities. A minimum of 30% of total loans is reviewed annually along with 100% of the Bank’s borrowers with aggregate indebtedness in excess of $500,000. Past due loans are reviewed by an internal loan officer committee, and a summary report of those loans is reviewed monthly by the Board of Directors. A report of loan review findings is presented quarterly to the Bank’s Board of Directors.

Deposits have increased $4.9 million or 2.7% as of March 31, 2006 from December 31, 2005. The additional increase was attributable to deposit promotions and sales efforts at all Bank locations.

NONPERFORMING ASSETS AND RISK ELEMENTS

Nonperforming assets consist of (1) nonaccrual loans for which the recognition of interest was discontinued, (2) loans which have been restructured to provide for a reduction or deferral of interest or principal because the borrower’s financial condition deteriorated, and (3) foreclosed and repossessed assets. Nonperforming assets at March 31, 2006 amounted to $149,000 or 0.08 % of total loans, a slight increase from $142,000 or 0.08 % of total loans at December 31, 2005.

Past due loans are loans contractually past due 90 days or more as to interest or principal payments, but have not yet been placed on nonaccrual status. These loans totaled $ 877,000 or .48% of total loans at March 31, 2006, as compared to $1,340,000 or .73% of total loans at December 31, 2005.

A substantial percentage of the Bank’s total loans is secured by commercial real estate, most of which property is located in Sullivan County, Tennessee. Accordingly, the Company has a significant concentration of credit that is dependent, under certain circumstances, on the continuing strength of the local real estate market.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is adequate with cash and due from banks of $10.6 million. In addition, loans and securities repricing or maturing within one year or less exceed $67.7 million at March 31, 2006. The Bank has approximately $30.9 million in loan commitments that are expected to be funded within the next twelve months and other commitments, primarily standby letters of credit, of approximately $2,197,000 at March 31, 2006. In addition to the Federal Home Loan Bank membership from which the Bank has unused borrowing capacity of $14.3 million, the Bank has established federal funds lines of credit with three correspondent banks totaling $14.7 million to meet unexpected liquidity demands. With the exception of unfunded loan commitments, there are no known trends or any known commitments or uncertainties that will result in the Bank’s liquidity increasing or decreasing in a material way. In addition, the Company is not aware of any recommendations or requirements by any regulatory authorities that would have a material effect on the Company’s liquidity, capital resources or results of operations.

10

Total equity capital of the Bank at March 31, 2006, is $20.7 million or approximately 9.2% of total assets. The Bank’s capital position is adequate to meet the minimum capital requirements for all regulatory agencies. The Bank’s capital ratios as of March 31, 2006, are as follows:

Tier 1 leverage	9.53	%
Tier 1 risk-based	10.05	%
Total risk-based	10.97	%

Capital adequacy in the banking industry is evaluated primarily by the use of ratios measuring capital against assets that are weighted based on risk characteristics. The Bank was classified as “well capitalized” for regulatory purposes as of March 31, 2006.

OFF-BALANCE SHEET ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off-balance-sheet risk was as follows at quarter end.

	March 31, 2006				December 31, 2005
	Fixed		Variable		Fixed		Variable
	Rate		Rate		Rate		Rate
Commitments to make loans	$	5,826,000	$	25,068,000	$	4,726,000	$	17,876,000
Unused letters of credit		—		2,196,816		—		2,479,580

Our unfunded loan commitments have increased $8.3 million during the first quarter of the year. Commitments to make loans are generally made for periods of 1 year or less. The fixed rate loan commitments have interest rates ranging from 5.05% to 21.00% and maturities ranging from 1 year to 5 years.

RESULTS OF OPERATIONS

YEAR TO DATE

The Company’s net income increased 21.0% to $664,000 for the three months ending March 31, 2006, compared to $549,000 for the same period last year.

Distribution, Rate and Yield Analysis of Net Income

The following table presents the Company’s average balances of earning assets and interest-bearing liabilities, the amount of interest income and interest expense, the average yield or rate for each category of interest-earning assets and interest-bearing liabilities, and the net interest income and the net interest margin for the periods indicated:

11

FIRST COMMUNITY CORPORATION
Consolidated Average Balance Sheets, Net Interest Revenue and
Changes in Interest Income and Interest Expense

The following table shows the consolidated average monthly balances of each principal category of assets,
liabilities and stockholders’ equity of the Company, and an analysis of net interest revenue, and the change
in interest income and interest expense segregated into amounts attributable to changes in volume and
changes in rates. The table is presented on a taxable equivalent basis.

	In Thousands of dollars
	March 31, 2006								March 31, 2005								2006/2005 Change
	Average			Interest			Revenue/		Average			Interest			Revenue/		Due to			Due to
	Balance			Rate			Expense		Balance			Rate			Expense		Volume			Rate			Total
Gross loans	$	178,529			7.03	%		3,137		170,036			6.31	%		2,682		134			321			455
Investment securities		16,486			3.74	%		154		15,421			3.45	%		133		9			12			21
Federal funds sold and other		6,236			4.43	%		69		1,609			2.73	%		11		32			26			58
Total interest-earning assets		201,251			6.68	%		3,360		187,066			6.04	%		2,826		175			359			534
Cash and due from banks		5,865								5,898
Other assets		17,561								14,799
Allowance for loan losses		(1,917	)							(1,883	)
Total assets	$	222,760								205,880
Deposits:
NOW and money market investments	$	35,134			1.84	%		162		30,348			1.21	%		92		15			56			70
Savings		15,147			0.98	%		37		16,269			0.98	%		40		(3	)		(0	)		(3	)
Time depositis $100,000 and over		51,494			4.17	%		537		43,815			2.98	%		326		57			154			211
Other time deposits		59,119			3.75	%		554		62,294			2.87	%		447		(23	)		130			107
Total interest-bearing deposits		160,894			3.21	%		1,290		152,726			2.37	%		905		46			339			385
Other borrowings		23,586			5.44	%		321		22,291			4.58	%		255		15			51			66
Total interest-bearing liabilities		184,480			3.49	%		1,611		175,017			2.65	%		1,160		61			390			451
Non interest-bearing liabilities		23,971			—			—		18,393			—			—		—			—			—
Total liabilities		208,451								193,410
Shareholders’ equity		14,309								12,470
Total liabilities and shareholders’ equity	$	222,760								205,880
Net interest income							$	1,749							$	1,666		114			(31	)		83
Net interest margin					3.48	%							3.56	%

Between March 31, 2005 and March 31, 2006, average earning assets grew approximately $14.2 million or 7.6% while the average yield on the assets increased from 6.04% at March 31, 2005 to 6.68% at March 31, 2006. During this same time period average interest bearing liabilities grew approximately $9.5 million or 5.4% while the cost of these funds increased from 2.65% at March 31, 2005 to 3.49% at March 31, 2006. The volume of interest bearing assets increased more than the volume of interest bearing liabilities. In addition, the cost of funds increased by 84 basis points, while the yield on earning assets increased by only 64 basis points. Both of these factors combined to reduce the net interest margin from 3.56% at March 31, 2005 to 3.48% at March 31, 2006. Nonetheless, because the growth in deposits funded an expansion of the loan portfolio, total interest income still increased from 2,826,000 on March 31, 2005 to $3,360,000 on March 31, 2006, an increase of $534,000.

Noninterest income for the three months ending March 31, 2006 was $760,000 compared to $561,000 for the same period in 2005, reflecting an increase of $199,000 or 35.5%. Noninterest income consists mainly of loan fees, service charges on deposit accounts, credit life insurance commissions, bank owned life insurance income and secondary mortgage processing fees. Loan and late fee income during the first quarter of 2006 was $306,000, an increase of $179,000 or 140% over first quarter 2005 loan fees of $127,000. A portion of this increase was due to an accounting treatment change which enabled the bank to forego the deferral of loan fees in excess of origination costs at the date of

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origination, thus increasing loan fees taken into income during 2006 as compared to 2005. Service charges on deposit accounts for the three months ending March 31, 2006 were $234,000 compared with $271,000 for the same period in 2005, reflecting a decrease of $37,000 or 13.7%.

The provision for loan losses was $21,000 during the three months ending March 31, 2006 compared with $35,000 for the same period in 2005. Loans decreased $.7 million and increased $6.8 million during the three months ending March 31, 2006 and March 31, 2005, respectively. Management’s determination of the appropriate level of the provision for loan losses and the adequacy of the allowance for loan losses is based, in part, on an evaluation of specific loans, as well as the consideration of the Bank’s historical loss experience. Other factors considered by management include the composition of the loan portfolio, current and anticipated economic conditions, and the creditworthiness of the Bank’s borrowers and other related factors. The allowance for loan losses of $1,939,000 at March 31, 2006 (approximately 1.06% of loans) is considered by management to be adequate to cover losses inherent in the loan portfolio. Management evaluates the adequacy of the allowance for loan losses monthly and makes provisions for loan losses based on this evaluation.

An analysis of the Bank’s loan loss experience is furnished in the following table for the periods indicated:

	($ In Thousands)
	Periods ended
	March 31,			March 31,
	2006			2005
Balance at beginning of period	$	1,917		$	1,879
Charge-offs		(16	)		(1	)
Recoveries		17			1
Additions charged to operations		21			35
Balance at end of period	$	1,939		$	1,914

Non-interest expense for the three months ending March 31, 2006 was $1,464,000 compared to $1,359,000 for the same period in 2005, reflecting an increase of $ 105,000 or 7.7%. This change is primarily due to an increase in personnel and employee related expenses during the quarter totaling $81,000.

The Company records a provision for income taxes currently payable and for taxes payable in the future because of differences in the timing of recognition of certain items for financial statement and income tax purposes. The major difference between the effective tax rate applied to the Company’s financial statement income and the federal statutory rate is caused by non-taxable interest and dividends. The Company’s effective tax rate is 35.2% for the three months ended March 31, 2006, compared to 34.1% for the same period in 2005.

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Item 3. Controls And Procedures.

      An evaluation was performed under the supervision and with the participation of the Company’s management, including Mark A. Gamble, the principal executive officer, and Tyler K. Clinch, the principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s management, including the principal executive officer and principal financial officer, concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report. The Company has also evaluated its internal control over financial reporting (as defined in Rule 13a-15(e) under the Exchange Act), and there have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II
OTHER INFORMATION

Item 1. Legal Proceedings.

     From time to time the Company and the Bank is each a party to claims and legal proceedings arising from normal and ordinary business operations. After taking into consideration the factors underlying these claims and the information provided by legal counsel regarding the current status of such claims or proceedings, in the opinion of management, the ultimate aggregate liability represented thereby will not have a material adverse effect on the Bank’s or the Company’s financial condition or results of operations.

Item 1a. Risks Factors

      There have been no material changes from the risk factors as previously disclosed in the Company’s 2005 Annual Report on Form 10-KSB.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     None

Item 3. Default Upon Senior Securities

     None

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

     None

Item 5. Other Information

      None

Item 6. Exhibits

     The following exhibits are filed herewith:

Exhibit Number	Description
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     There are no other matters required to be reported under this item.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST COMMUNITY CORPORATION
(Registrant)

May 15, 2006	/s/ Mark A. Gamble
(Date)	Mark A. Gamble, President & Principal Executive Officer
May 15, 2006	/s/ Tyler K. Clinch
(Date)	Tyler K. Clinch, Treasurer & Principal Financial Officer

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