Total deposits were $619.6 million and $607.1 million at December 31, 2011 and 2010, respectively. The increase in total deposits of $12.4 million reflects changes in customer preferences for short-term instruments in a low interest rate environment. In addition, the growth in deposits during 2011 allowed the Company to reduce wholesale funding sources, including brokered certificates of deposit. 

The average rates paid on total interest-bearing deposits were 1.54% in 2011 and 1.94% in 2010. Noninterest bearing deposits were 17% and 14% of total deposits as of December 31, 2011 and 2010, respectively. 

## Other Borrowings 

Other borrowings consist of short-term borrowings and long-term debt. Short-term borrowings consist of federal funds purchased, securities sold under agreements to repurchase with an original maturity of one year or less, and other short-term borrowings. The Bank had available federal fund lines totaling $40.0 million with none outstanding at December 31, 2011, compared to $34.0 million with none outstanding at December 31, 2010. The Company has reviewed all available sources of liquidity and believes the current level of available federal funds lines is sufficient. Securities sold under agreements to repurchase totaled $2.8 million at December 31, 2011, compared to $2.7 million at December 31, 2010. 

The average rates paid on short-term borrowings were 0.50% in 2011 and 0.65% in 2010. Information concerning the average balances, weighted average rates, and maximum amounts outstanding for short-term borrowings during the three- year period ended December 31, 2011 is included in “Note 10 to the Consolidated Financial Statements.” 

Long-term debt included FHLB advances with an original maturity greater than one year, securities sold under agreements to repurchase with an original maturity greater than one year, and subordinated debentures related to trust preferred securities. The Bank had $63.1 million and $71.1 million in long-term FHLB advances at December 31, 2011 and 2010, respectively. The Bank had $15.0 million in securities sold under agreements to repurchase with an original maturity greater than one year December 31, 2011 and 2010. The Company had $7.2 million in junior subordinated debentures related to trust preferred securities outstanding at December 31, 2011 and 2010. 

The average rates paid on long-term debt were 3.91% in 2011 and 4.02% in 2010. 

## CAPITAL ADEQUACY 

The Company's consolidated stockholders' equity was $65.4 million and $56.4 million as of December 31, 2011 and 2010, respectively. The increase in 2011 was primarily due to net earnings of $5.5 million and other comprehensive income due to the change in unrealized gains (losses) on securities available-for-sale, net of $6.4 million, which was reduced by cash dividends paid of $2.9 million. 

The Company’s Tier 1 leverage ratio was 8.82%, Tier 1 risk-based capital ratio was 15.40% and Total risk-based capital ratio was 16.66% at December 31, 2011. These ratios exceed the minimum regulatory capital percentages of 4.0% for Tier 1 leverage ratio, 4.0% for Tier 1 risk-based capital ratio and 8.0% for Total risk-based capital ratio. Based on current regulatory standards, the Company is classified as “well capitalized.” 

## MARKET AND LIQUIDITY RISK MANAGEMENT 

Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. The Bank’s Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to ensure acceptable composition of asset/liability mix. Two critical areas of focus for ALCO are interest rate risk and liquidity risk management. 

## Interest Rate Risk Management 

In the normal course of business, the Company is exposed to market risk arising from fluctuations in interest rates. The Company is subject to interest rate risk because assets and liabilities may mature or reprice at different times. For example, if liabilities reprice faster than assets, and interest rates are generally rising, earnings will initially decline. In addition, assets and liabilities may reprice at the same time but by different amounts. For example, when the general level of interest rates is rising, the Company may increase rates paid on interest bearing demand deposit accounts and savings deposit accounts by an amount that is less than the general increase in market interest rates. Also, short-term and long-term market interest rates may change by different amounts. For example, a flattening yield curve may reduce the interest spread between new loan yields and funding costs. Further, the remaining maturity of various assets and liabilities may shorten or lengthen as interest 

