Management’s Discussion and Analysis Earnings simulation and EVE are both modeling analyses, which change quarterly and consist of hypothetical estimates  based upon numerous assumptions, including the interest rate levels, shape of the yield curve, prepayments on loans and  securities, rates on loans and deposits, reinvestments of paydowns and maturities of loans, investments and deposits, and  others. While assumptions are developed based on the current economic and market conditions, management cannot make  any assurances as to the predictive nature of these assumptions, including how these estimates may be affected by customer  preferences, competitors, or competitive conditions. In addition, each of the preceding analyses may not, on its own, be an accurate indicator of how our net interest income  will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest- bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of  changes in interest rates may have a significant impact on net interest income. For example, although certain assets and  liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market  interest rates, and other economic and market factors. Interest rates on certain types of assets and liabilities fluctuate in  advance of changes in general market rates, while interest rates on other types may lag behind changes in general market  rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate  caps and floors”) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate  significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service  their debts also may decrease during periods of rising interest rates or economic stress, which may differ across industries and  economic sectors. Depositor and borrower behaviors also affect those relationships and results. ALCO reviews each of the  above interest rate sensitivity analyses along with several different interest rate scenarios in seeking satisfactory, consistent  levels of profitability within the framework of the Company’s established liquidity, loan, investment, borrowing, and capital  policies.  The Company may also use derivative financial instruments to improve the balance between interest-sensitive assets  and interest-sensitive liabilities and as one tool to manage interest rate sensitivity while continuing to meet the credit and  deposit needs of our customers. From time to time, the Company may enter into interest rate swaps (“swaps”) to facilitate  customer transactions and meet their financing needs. These swaps qualify as derivatives, but are not designated as hedging  instruments. At December 31, 2011 and 2010, the Company had no derivative contracts to assist in managing interest rate  sensitivity.  Liquidity is the Company's ability to convert assets into cash equivalents in order to meet daily cash flow requirements,  primarily for deposit withdrawals, loan demand and maturing obligations. Without proper management of its liquidity, the  Company could experience higher costs of obtaining funds due to insufficient liquidity, while excessive liquidity can lead to  a decline in earnings due to the opportunity cost of foregoing alternative higher-yielding investment opportunities. Liquidity is managed at two levels: at the Company and at the Bank. The management of liquidity at both levels is  essential, because the Company and the Bank have different funding needs and sources, are separate legal entities, and each  are subject to regulatory guidelines and requirements. The primary source of funding and the primary source of liquidity for the Company includes dividends received from  the Bank, and secondarily proceeds from the issuance of common stock or other securities. Primary uses of funds for the  Company include dividends paid to shareholders, stock repurchases, and interest payments on junior subordinated debentures  issued by the Company in connection with trust preferred securities. The junior subordinated debentures are presented as  long-term debt in the Consolidated Balance Sheets and the related trust preferred securities are includible in Tier 1 Capital for  regulatory capital purposes. Primary sources of funding for the Bank include customer deposits, other borrowings, repayment and maturity of  securities, and sale and repayment of loans. The Bank has access to federal funds lines from various banks and borrowings  from the Federal Reserve discount window. In addition to these sources, the Bank has participated in the FHLB's advance  program to obtain funding for its growth. Advances include both fixed and variable terms and are taken out with varying  maturities. As of December 31, 2011, the Bank had an available line of credit with the FHLB totaling $229.6 million, with  $63.1 million outstanding. As of December 31, 2011, the Bank also had $40.0 million of federal funds lines, with none  outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio. page 19 Liquidity Risk Management