Henry Ford
Huron Community Financial Services, Inc.
2011 Annual Report
Henry Ford
_Coming together is a beginning.Keeping together is progress. Working together is success.
Coming together is a beginning.Keeping together is progress. ”Working together is success.”
Huron Community Financial Services, Inc.2011 Annual Report
LETTER TO SHAREHOLDERS ......................................................................... 1
DIRECTORS AND OFFICERS .......................................................................... 4
INDEPENDENT AUDITOR’S REPORT .......................................................... 5
CONSOLIDATED BALANCE SHEET ............................................................ 6
CONSOLIDATED STATEMENT OF INCOME ............................................ 7
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY ......... 8
CONSOLIDATED STATEMENT OF CASH FLOWS .................................. 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...................10
HCFSI/HCB FINANCIAL HIGHLIGHTS .....................................................41
1
April 2012
Dear Shareholders, Friends, Ladies and Gentlemen, It is our pleasure to present to you the financial perfor-manceofyourholdingcompany,HuronCommunityFinancialSer-vices,Inc.(HCFSI),andyourbank,HuronCommunityBank(HCB),fortheyearendingDecember31,2011.
Huron Community Financial Services, Inc. (HCFSI) Incomefor2011was$1,657,000whichisbasicallylevelwiththeprecedingyearof2010at$1,694,000.Returnonaverageassetswas0.89%withreturnonaverageequityof7.29%com-paredto0.89%and7.69%respectively in2011.Ourbasicearningspersharewas$2.81withdilutedearningspershareof$2.78comparedto$2.84and$2.81respectivelyin2011.Thebookvalueofyourstockincreasedto$39.34persharefrom$37.93persharein2010.Weareparticu-larlypleasedtoreportthattheannualindependentvaluationofyourstockcompletedbyAustinAssociates,LLChasresultedinthevaluationbeingincreasedfrom$46.00pershareto$47.00pershare(thisrepresentsthevalueatwhichwebuyandsellourstock.)Dividendspaidfor2011were$1.07pershareor2.32%(firstquarterdividendin2012wasincreasedto$0.50persharefrom$0.40persharein2011).TotalconsolidatedassetsofHCFSIatDecember31,2011were$181,370,000withstockholderequityof$23,420,000.
Huron Community Bank (HCB) NetincomeforHCBwas$1,711,000whichiscommensuratewiththeincomelevelof2010 at$1,750,000.Returnonaverageassetswas0.92%withreturnonaverageequityof8.0%comparedto0.91%and8.59%respectivelyfortheyearendingDecember31,2010.Totalassetswere$180,855,000,withloansat$132,473,000,depositsat$145,106,000andequitycapitalof$21,942,000.Ifyouwillrecalloneofourprioritiesduring2011wastotemporarilyreducethebalancesheettoapproximately$180,000,000.WeweresuccessfulinthisstrategywhichenabledustopaydownFHLBBorrowings,whilesimultaneouslyreducingexcessdepositstherebyeasinginterestmarginpressureswhilemaintainingourearningscapacity.
Financial Performance in ReviewWhencomparedtopeergroupbanksnationallyandMichiganpeergroupbanksspecifically,HCBoutperformedbothgroupsfromareturnonassetsperspective.HCBachievedanaveragereturnonassetsof0.92%whilepeergroupbanksnationallyrealized0.90%andMichiganpeergroupbankswereat0.50%.Additionally,ofsignificance,itappearsthatearningsfor2010and2011arerelativelythesame.Inactuality,werealizedanaftertaxgainonsecuritiessaleofapproximately$356,000in2010.Whentakingthisextraordinarygainintoconsideration,youcanrecognizethatwehadameaningfulimprovementinearningsduring2011.Thefundingofourloanlossreserveincreasedto$880,000in2011andwechargedoff$443,300inloanlossesnetoftheloanlossprovision. Despitethecostsassociatedwithtroubled loans,HCB’searningsweresolidwhichspeakswellforthecorefinancialstrengthofyourbank.
2
2011 in Review Theyearof2011wasnotwithoutchallengeandnotjustintheareaoffinancialperfor-mance.PassageoftheDodd-FrankLegislation(A.K.A.theConsumerFinancialProtectionBill)inmid2010begantotakeconsequenceonthefinancialservicesindustryin2011.Farreachingandsignificantlymorerestrictiveregulatoryguidanceandgovernmentruleshavebeguntoimpacthowourindustrydoesbusiness.Weareoperating inwhatseemstobeacontinuingstateofchange–whichhasplacedsignificantlymorepressureuponthecomplianceandauditfunctionsofthebank,aswellastheentirestaffofthebankinkeepingupwiththeonslaughtofregulatorychanges. During2011inanefforttoeffectivelymanageourchangingregulatoryenvironment,managementbegantoupgradeandenhanceourtechnologycapabilitiestodiminishtheimpactofexpandingworkloaduponthebankandourpersonnel.Asaresult,ourabilitytocomplyandmonitorsuchareasasriskmanagement,capitallevels,liquiditylevels,interestratesensitivityandfinancialstresstestinghavebeengreatlyenhanced.Intheconsumerloanarea,webegantofo-cusonanexpeditedapplicationprocess,amorerapidapprovalprocess,evenmorecompetitivepricingandextendedloantermstomeetourcustomer’sneedduringthesedifficulttimes.Inthemortgageandbusinessloanarea,wherewehavealwaysbeenaleaderwithinourcommunity,wearespendingevenmoretimewiththecustomertoassuretheyunderstandnewregulatorychang-eswhenselectingthebestloanproducttomeettheirneeds.WithrespecttoourCertificateofDepositprograms,duringthisextraordinarilylowinterestrateenvironment,ourinterestrateshaveremainedamongthehighestratesofferedwhencomparedtoourlocalbankcompetitors.Finally,inourcheckingaccountproducts,ourCashManagementaccountoffersoneofthehighestinterestratesintheareawithoutcheckwritingrestrictions.Wealsointroducedelectronicstate-mentsavailableonallcheckingproductstoexpeditestatementreceipt,accountbalancingwhilereducingpaperandrecordkeeping.
The Year of 2012 Withthestartofanewyearandtheeconomicenvironmentshowingsignsofimproving,sodoesouroptimism.Itwillbeayeardominatedbypolitics,moreuncertainty,change,andneverendingquestionsoropinionsastothepathournationistraveling.HuronCommunityBankwillcontinuewithastrategysimilarto2011applyingacommonsenseapproachtothemanagingofourbank.Wewillcontinuetobuilduponourstrongfinancialcoreofcapital,liquidityandearn-ingsandmostimportantlywillcontinuetosupportanddevelopthepeopleofourorganizationinservingtheneedsofthepeopleinourcommunity. Asaforementioned,during2010CongressadoptedtheDodd-FrankBillwhichishavingsweeping regulatory impact upon the financial services industry and the people our industryserves,you.Aswithanynewbill,ithasitsgoodpointsandbad.Itwill,however,inmanyways,changethewaycommunitybanksandcommunitycreditunionsdobusiness.Anenormousin-creaseinregulatoryrequirementstoinclude,butnotallinclusive,monitoring,reporting,assessingandmeasuringbankandcustomerdataisinprocess.Enhancementsinthebank’ssystemsandanincreaseinstaffingtoaccommodatetheseregulatorychangeswillbenecessitated. Wemadesignificantimprovementinthereductionoftroubledloans,mortgageforeclo-suresandloandelinquenciesduring2011,alikeeffortwillbeextendedduring2012.Weshallalsocontinueinanefforttofurtherreduceourborrowingcostswhilesimultaneouslyminimizingnetinterestmarginerosion.
3
During2010and2011,weadheredtoastrategicdecisiontoreducethesizeofthebalancesheet,thatpositionisbeingreversedandwewillagainbegintogrow(inacontrolledmanner)thebalancesheetby$3,000,000-$5,000,000in2012.Thisgrowthwillberealizedorganicallywiththeintroductionofnewcheckingaccountproducts,aswellasenhancementormodificationofexistingcheckingproducts.Thenewdepositgrowthwillbeemployedinthepaydownofbor-rowingsandthefundingofnewloangrowthinourinstallmentandcommercialloanportfolios.Aspreviouslynoted,HCBwillmakeaveryconcertedeffortin2012toboostinstallmentloanborrowingsthroughverycompetitiveloanratesandterms,marketingandpromotion. Wearealsopleasedtoannouncethatwewillbeintroducinganewservicethatallofourcustomersshouldtakealookatandconsider;anIDTheftProtectionProgramwillbeintroducedinAprilorearlyMay.WithIDTheftgrowingatepidemicproportions,it’saservicethatallofusshould,unfortunately,haveoratleastconsider. Itseemswitheachpassingyear,technologyplaysalargerroleinourlivesand2012won’tbeanydifferent.Plansareunderwaytoenhanceourwebsite,particularlyintheloaninformationarea.AnalysisofanE-checkingaccountandtheviabilityofmobilebankingusagearealsobeingexplored.RealtimeinternetbankingwillbeavailableatHCBbythe3rdquarterof2012.Duringthefirstquarterof this year,ourentireATMnetworkwasupgradedwithfivenewmachinespurchasedtomeetnewADAcompliantstandards for thevisually impaired. ManagementwillalsobeexploringtheviabilityofexpandingourATMnetworktoaccommodateourATMcustom-ersonanationallevel.Theyear2012shouldbechallengingandexcitingaswebridgeourwaythroughthiseverchangingfinancialenvironment;HCFSIandHCBhaveanimpressivehistory.
Annual Meeting TheHCFSIAnnualMeetingwillbeheldonMonday,May21,2012,at4:30PMattheTawasBayBeachResort,300E.BayStreet,EastTawas,Michigan.Wewillusethesameformataslastyear,providingadditionaltimeuponconclusionofthemeetingtoenjoyhorsd’oeuvres,cocktailsandcamaraderiewitheachofyou.Pleaseplanonjoiningusasweespeciallyenjoyjoiningyou.
Warmestregards,
RobertM.BenesonPresident
4
HURON COMMUNITY FINANCIAL SERVICES, INC.
BoardofDirectors
AlanJ.Stephenson,Chairman RobertM.BenesonThomasB.Huck WayneD.BigelowDavidH.Cook MatthewW.Buresh
MarkD.Elliott
DirectorsEmeritus
RichardM.Harris RobertW.Elliott,Jr.EarlT.O’Loughlin EugeneJ.WeaverHowardC.Look RobertD.Hodges
Monty L. Kruttlin
Officers
RobertM.Beneson,President&CEOThomasB.Huck,VicePresidentWayneD.Bigelow,TreasurerDavidH.Cook,Secretary
HURON COMMUNITY BANK
BoardofDirectors
AlanJ.Stephenson,Chairman RobertM.BenesonThomasB.Huck WayneD.Bigelow DavidH.Cook MatthewW.BureshMarkD.Elliott
Officers
RobertM.Beneson President&CEOJohnA.Emmendorfer,Jr. ExecutiveVicePresidentDavidM.McMahon ExecutiveVicePresidentJanieL.Williamson SeniorVicePresident&CashierDavidJ.Celeskey VicePresidentCraigM.Roberts VicePresidentGaryE.Schlinkert VicePresidentAmyE.Peterson AssistantVicePresidentPaulT.Phelan LoanOfficer
5
Independent Auditor's Report
To the Board of Directors and StockholdersHuron Community Financial Services, Inc.
We have audited the accompanying consolidated balance sheet of Huron Community FinancialServices, Inc. (the "Corporation") as of December 31, 2011 and 2010 and the relatedconsolidated statements of income, stockholders' equity, and cash flows for the years thenended. These consolidated financial statements are the responsibility of the Corporation'smanagement. Our responsibility is to express an opinion on these consolidated financialstatements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the UnitedStates of America. Those standards require that we plan and perform the audits to obtainreasonable 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 inthe financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Huron Community Financial Services,Inc. at December 31, 2011 and 2010 and the consolidated results of its operations, changes instockholders' equity, and its cash flows for the years then ended, in conformity with accountingprinciples generally accepted in the United States of America.
February 13, 2012
6
Huron Community Financial Services, Inc.
Consolidated Balance Sheet(000s omitted, except per share data)
December 31,2011
December 31,2010
Assets
Cash and due from banks $ 2,838 $ 1,753
Federal funds sold 3,539 12,551
Total cash and cash equivalents 6,377 14,304
Investment securities - Available for sale (Note 2) 30,906 22,604Other securities 1,282 1,416Loans - Net of allowance for loan losses of $1,860 and
$2,293 in 2011 and 2010, respectively (Note 3) 130,611 140,726Foreclosed assets 2,285 1,674Premises and equipment (Note 5) 2,977 3,153Goodwill 405 405Accrued interest receivable 518 572Other assets 6,013 6,473
Total assets $ 181,374 $ 191,327
Liabilities and Stockholders' Equity
LiabilitiesDeposits:
Noninterest-bearing $ 25,802 $ 26,048
Interest-bearing (Note 6) 119,291 126,521
Total deposits 145,093 152,569
Short-term borrowings (Note 7) 7,619 8,253Federal Home Loan Bank advances (Note 8) 5,000 7,000Accrued and other liabilities 242 784
Total liabilities 157,954 168,606
Stockholders' EquityCommon stock - $1 par value:
Authorized - 1,050,000 sharesIssued and outstanding - 586,029 shares and 598,212
shares in 2011 and 2010, respectively 586 598Additional paid-in capital 19,182 19,817Undivided profits 3,306 2,284Accumulated other comprehensive income 346 22
Total stockholders' equity 23,420 22,721
Total liabilities and stockholders' equity $ 181,374 $ 191,327
See Notes to Consolidated Financial Statements.
7
Huron Community Financial Services, Inc.
Consolidated Statement of Income(000s omitted, except per share data)
Year Ended
December 31,
2011
December 31,
2010
Interest Income
Loans - Including fees $ 8,233 $ 8,933
Investment securities:
Taxable 364 222
Tax-exempt 227 280
Other 55 31
Total interest income 8,879 9,466
Interest Expense
Deposits 992 1,611
Interest on FHLB advances 112 299
Interest on short-term borrowings 11 19
Total interest expense 1,115 1,929
Net Interest Income 7,764 7,537
Provision for Loan Losses (Note 3) 881 774
Net Interest Income After Provision for Loan Losses 6,883 6,763
Other Operating Income
Service charges - Deposits 576 576
Gain on sale of securities - 540
Loan servicing income - Net 297 307
Other 259 41
Total other operating income 1,132 1,464
Other Operating Expenses
Salaries and employee benefits 2,864 2,988
Amortization of intangible assets - 115
FDIC assessment 277 326
Occupancy expense 496 482
Service fees 389 307
Depreciation expense 296 315
Other 1,471 1,398
Total other operating expenses 5,793 5,931
Income - Before income taxes 2,222 2,296
Provision for Income Taxes (Note 9) 565 602
Net Income $ 1,657 $ 1,694
Earnings per Share
Basic earnings per common share $ 2.81 $ 2.84
Diluted earnings per common share 2.78 2.80
See Notes to Consolidated Financial Statements.
Huron Community Financial Services, Inc.
Consolidated Statement of Income(000s omitted, except per share data)
Year Ended
December 31,
2011
December 31,
2010
Interest Income
Loans - Including fees $ 8,233 $ 8,933
Investment securities:
Taxable 364 222
Tax-exempt 227 280
Other 55 31
Total interest income 8,879 9,466
Interest Expense
Deposits 992 1,611
Interest on FHLB advances 112 299
Interest on short-term borrowings 11 19
Total interest expense 1,115 1,929
Net Interest Income 7,764 7,537
Provision for Loan Losses (Note 3) 881 774
Net Interest Income After Provision for Loan Losses 6,883 6,763
Other Operating Income
Service charges - Deposits 576 576
Gain on sale of securities - 540
Loan servicing income - Net 297 307
Other 259 41
Total other operating income 1,132 1,464
Other Operating Expenses
Salaries and employee benefits 2,864 2,988
Amortization of intangible assets - 115
FDIC assessment 277 326
Occupancy expense 496 482
Service fees 389 307
Depreciation expense 296 315
Other 1,471 1,398
Total other operating expenses 5,793 5,931
Income - Before income taxes 2,222 2,296
Provision for Income Taxes (Note 9) 565 602
Net Income $ 1,657 $ 1,694
Earnings per Share
Basic earnings per common share $ 2.81 $ 2.84
Diluted earnings per common share 2.78 2.80
See Notes to Consolidated Financial Statements.
8
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9
Huron Community Financial Services, Inc.
Consolidated Statement of Cash Flows(000s omitted)
Year Ended
2011 2010
Cash Flows from Operating ActivitiesNet income $ 1,657 $ 1,694Adjustments to reconcile net income to net cash from operating
activities:Depreciation and amortization 428 578Gain on sale of securities - (540)Gain on sale of fixed assets - (2)Net loss on foreclosed assets 97 250Net gain on sale of mortgage loans (181) (205)Proceeds from sale of mortgage loans 11,672 11,820Origination cost of mortgages held for sale (11,491) (11,615)Provision for loan losses 881 774Amortization and accretion on securities 206 267Deferred tax benefit 209 -Stock-based compensation 12 16Net change in:
Accrued interest receivable 54 169Other assets (646) 706Accrued expenses and other liabilities (653) (705)
Net cash provided by operating activities 2,245 3,207
Cash Flows from Investing ActivitiesNet change in interest-bearing deposits in banks (1,735) (2,087)Activity in available-for-sale securities:
Sales - 1,171Maturities, prepayments, and calls 11,552 17,361Purchases (17,834) (15,829)
Net decrease in loans 9,234 5,757Decrease in other securities 134 138Capital expenditures (119) (425)Sales of fixed assets - 226
Net cash provided by investing activities 1,232 6,312
Cash Flows from Financing ActivitiesNet (decrease) increase in deposits (7,476) 111Net change in short-term borrowings (634) (109)Proceeds from FHLB advances - 3,000Payments on FHLB advances (2,000) (9,000)Proceeds from sale of common stock 915 1,662Purchases of common stock (1,574) (1,263)Cash dividends paid on common stock (635) (474)
Net cash used in financing activities (11,404) (6,073)
Net (Decrease) Increase in Cash and Cash Equivalents (7,927) 3,446
Cash and Cash Equivalents - Beginning of year 14,304 10,858
Cash and Cash Equivalents - End of year $ 6,377 $ 14,304
Supplemental Cash Flow Information - Cash paid forInterest $ 1,153 $ 2,023Income taxes 403 608Loans transferred to other real estate 571 419
See Notes to Consolidated Financial Statements.
10
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 1 - Nature of Business and Significant Accounting Policies
Basis of Presentation and Consolidation - The consolidated financial statementsinclude the accounts of Huron Community Financial Services, Inc. (the "Corporation")and its wholly owned subsidiary, Huron Community Bank (the "Bank"). The Bank alsoowns 100 percent of HCB Investments, Inc., which provides insurance products tocustomers. All significant intercompany transactions and balances have been eliminatedin consolidation. The 000s have been omitted in tabular columns.
Nature of Operations - The Bank operates in Iosco, Arenac, and southern Alconacounties in the state of Michigan. The Bank's revenue results primarily from providingreal estate and commercial loans and, to a lesser extent, consumer loans. Its primarydeposit products are savings and term certificate accounts.
Use of Estimates - In preparing consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America, management isrequired to make estimates and assumptions that affect the reported amounts of assetsand liabilities as of the date of the consolidated balance sheet and reported amounts ofrevenue and expenses during the reporting period. Actual results could differ fromthose estimates. Material estimates that are particularly susceptible to significant changein the near term relate to the determination of the allowance for loan losses, thevaluation of investment securities, mortgage servicing rights, and goodwill.
Significant Group Concentrations of Credit Risk - Most of the Corporation'sactivities are with customers located within the counties of Iosco, Arenac, and Alcona inMichigan. Note 2 discusses the types of securities in which the Corporation invests.Note 3 discusses the types of lending in which the Corporation engages. TheCorporation does not have any significant concentrations to any one industry orcustomer.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand,amounts due from banks, and federal funds sold. Federal funds sold are generally soldfor one-day periods.
Securities - Securities not classified as held to maturity or trading, including equitysecurities and deposits with other financial institutions with readily determinable fairvalues, are classified as "available for sale" and are recorded at fair value, with unrealizedgains and losses excluded from earnings and reported in other comprehensive income.Restricted investment securities include Federal Reserve and Federal Home Loan Bankstock and are carried at cost.
11
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 1 - Nature of Business and Significant Accounting Policies(Continued)
Purchase premiums and discounts are recognized in interest income using the interestmethod over the terms of the securities. Declines in the fair value of available-for-salesecurities below their cost that are deemed to be other than temporary are reflected inearnings as realized losses. In estimating other-than-temporary impairment losses,management considers (1) the length of time and the extent to which the fair value hasbeen less than cost, (2) the financial condition and near-term prospects of the issuer,and (3) the intent and ability of the Corporation to retain its investment in the issuer fora period of time sufficient to allow for any anticipated recovery in fair value. Gains andlosses on the sale of securities are recorded on the trade date and are determined usingthe specific identification method.
Loans - The Corporation grants mortgage, commercial, and consumer loans tocustomers. A substantial portion of the loan portfolio is represented by mortgage loansthroughout Michigan. The ability of the Corporation's debtors to honor their contracts isdependent upon the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future oruntil maturity or pay-off are reported at their outstanding unpaid principal balancesadjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs onoriginated loans. Interest income is accrued on the unpaid principal balance. Loanorigination fees, net of certain direct origination costs, are deferred and recognized asan adjustment of the related loan yield using the interest method.
The accrual of interest on loans is discontinued at the time the loan is 90 days delinquentunless the credit is well-secured and in process of collection. In all cases, loans areplaced on nonaccrual or charged off at an earlier date if collection of principal or interestis considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or chargedoff is reversed against interest income. The interest on these loans is accounted for onthe cash basis or cost-recovery method, until qualifying for return to accrual. Loans arereturned to accrual status when all the principal and interest amounts contractually dueare brought current and future payments are reasonably assured.
Allowance for Loan Losses - The allowance for loan losses is established as losses areestimated to have occurred through a provision for loan losses charged to earnings.Loan losses are charged against the allowance when management believes theuncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are creditedto the allowance.
12
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 1 - Nature of Business and Significant Accounting Policies(Continued)
The allowance for loan losses is evaluated on a regular basis by management and isbased upon management's periodic review of the collectibility of the loans in light ofhistorical experience, the nature and volume of the loan portfolio, adverse situationsthat may affect the borrower's ability to repay, estimated value of any underlyingcollateral, and prevailing economic conditions. This evaluation is inherently subjective asit requires estimates that are susceptible to significant revision as more informationbecomes available.
The allowance consists of specific, general, and unallocated components. The specificcomponent relates to loans that are classified as either doubtful, substandard, or specialmention. For such loans that are also classified as impaired, an allowance is establishedwhen the discounted cash flows (or collateral value or observable market price) of theimpaired loan are lower than the carrying value of that loan. The general componentcovers nonclassified loans and is based on historical loss experience adjusted forqualitative factors. An unallocated component is maintained to cover uncertainties thatcould affect management's estimate of probable losses. The unallocated component ofthe allowance reflects the margin of imprecision inherent in the underlying assumptionsused in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it isprobable that the Corporation will be unable to collect the scheduled payments ofprincipal or interest when due according to the contractual terms of the loanagreement. Factors considered by management in determining impairment includepayment status, collateral value, and the probability of collecting scheduled principal andinterest payments when due. Loans that experience insignificant payment delays andpayment shortfalls generally are not classified as impaired. Management determines thesignificance of payment delays and payment shortfalls on a case-by-case basis, taking intoconsideration all of the circumstances surrounding the loan and the borrower, includinglength of the delay, the reasons for the delay, the borrower's prior payment record, andthe amount of the shortfall in relation to the principal and interest owed. Impairment ismeasured on a loan-by-loan basis for commercial and construction loans by either thepresent value of expected future cash flows discounted at the loan's effective interestrate, the loan's obtainable market price, or the fair value of the collateral if the loan iscollateral dependent.
Large groups of homogeneous loans are collectively evaluated for impairment.Accordingly, the Corporation does not separately identify individual consumer andresidential loans for impairment disclosures until a loss is imminent.
13
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 1 - Nature of Business and Significant Accounting Policies(Continued)
Foreclosed Assets - Assets acquired through, or in lieu of, loan foreclosure are heldfor sale and are initially recorded at fair value at the date of the foreclosure, establishinga new cost basis. Subsequent to foreclosure, valuations are periodically performed bymanagement and the assets are carried at the lower of carrying amount or fair value lesscost to sell. Revenue and expenses from operations and changes in the valuationallowance are included in net other operating expenses.
Banking Premises and Equipment - Land is carried at cost. Buildings and equipmentare carried at cost, less accumulated depreciation computed on the straight-line methodover the estimated useful lives of the assets.
Goodwill - Goodwill results from prior business acquisitions and represents the excessof the purchase price over the fair value of acquired tangible assets and liabilities andidentifiable intangible assets. Goodwill is assessed at least annually for impairment, andany such impairment will be recognized in the period identified.
Bank-owned Life Insurance - The Bank has purchased life insurance policies oncertain key officers. Bank-owned life insurance is recorded at its cash surrender value,or the amount that can be realized.
Short-term Borrowings - Short-term borrowings consist of repurchase agreements.Substantially all repurchase agreement liabilities represent amounts advanced by variouscustomers. Securities are pledged to cover these liabilities, which are not covered byfederal deposit insurance.
Off-balance-sheet Instruments - In the ordinary course of business, the Corporationhas entered into commitments under commercial letters of credit and standby letters ofcredit. The Corporation is considered a guarantor when it issues a letter of credit.Accordingly, the Corporation recognizes, at the inception of a guarantee, a liability forthe fair value of the obligation undertaken.
Servicing - Servicing assets are recognized as separate assets when rights are acquiredthrough purchase or through sale of financial assets. Capitalized servicing rights arereported in other assets and are amortized into noninterest income in proportion to,and over the period of, the estimated future net servicing income of the underlyingfinancial assets. Servicing assets are evaluated for impairment based on the fair value ofthe rights as compared to amortized cost. Impairment is determined by stratifying rightsby predominant characteristics, such as interest rates and terms. Fair value isdetermined by using prices for similar assets with similar characteristics, when available,or based on discounted cash flows using market-based assumptions. Impairment isrecognized through a valuation allowance for an individual stratum, to the extent thatfair value is less than the capitalized amount for the stratum.
14
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 1 - Nature of Business and Significant Accounting Policies(Continued)
Stock Purchases and Sales - The Corporation regularly engages in the purchase andsale of Corporation common stock. Proceeds from the sale of common stock arerecorded to additional paid-in capital. Prior to December 31, 2009, purchases ofCorporation common stock were recorded to undivided profits. Effective January 1,2010, all subsequent purchases of Corporation stock will be recorded to additional paid-in capital.
Comprehensive Income - Accounting principles generally require that recognizedrevenue, expenses, gains, and losses be included in net income. Although certainchanges in assets and liabilities, such as unrealized gains and losses on available-for-salesecurities, are reported as a separate component of the equity section of theconsolidated balance sheet, such items, along with net income, are components ofcomprehensive income.
The components of other comprehensive (loss) income and related tax effects are asfollows (000s omitted):
2011 2010
Unrealized holding gains (losses) on available-for-salesecurities $ 491 $ (1)
Reclassification adjustment for gains realized in income - (540)
Net unrealized gains (losses) 491 (541)
Tax effect (167) 172
Other comprehensive income (loss) $ 324 $ (369)
Earnings per Common Share - Earnings per common share are computed by dividingnet income by the average number of common shares outstanding during the period.The number of weighted average common shares outstanding was 590,717 and 596,886for the years ended December 31, 2011 and 2010, respectively. The Corporation usesthe treasury stock method to compute diluted earnings per share, which assumes thatproceeds from the assumed exercise of stock options would be used to purchasecommon stock at the average market price during the period. The dilutive effect ofstock options increased average common shares outstanding by 5,661 and 7,934 sharesat December 31, 2011 and 2010, respectively. Approximately 9,900 options were notconsidered for dilution in 2011 and 2010 because the exercise price was in excess of thecurrent market price.
15
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 1 - Nature of Business and Significant Accounting Policies(Continued)
Subsequent Events - The consolidated financial statements and related disclosuresinclude evaluation of events up through and including February 13, 2012, which is thedate the consolidated financial statements were issued.
Reclassification - Certain amounts appearing in the prior year's consolidated financialstatements have been reclassified to conform to the current year's consolidated financialstatements.
New Accounting Pronouncements
FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivablesand the Allowance for Credit Losses - In July 2010, the FASB issued ASU 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for CreditLosses, which requires new qualitative and quantitative disclosures on the allowance forcredit losses, credit quality, impaired loans, modifications and nonaccrual, and past duefinancing receivables. The guidance requires that an entity provide disclosures facilitatingfinancial statement users’ evaluation of the nature of credit risk inherent in the entity’sportfolio of financing receivables (i.e., loans), how that risk is analyzed and assessed inarriving at the allowance for credit losses, and the changes and reasons for thosechanges in the allowance for credit losses. These required disclosures are to bepresented on a disaggregated basis at the portfolio segment and the class of financingreceivables level. As it relates to disclosures as of the end of a reporting period, ASU2010-20 is effective for the Corporation as of December 31, 2011. The adoption of thisstandard had no impact on the Corporation’s consolidated financial statements. Therequired disclosures are included in Note 3.
FASB ASU 2011-02, A Creditor's Determination of Whether a Restructuring is aTroubled Debt Restructuring - In April 2011, the FASB issued ASU 2011-02, ACreditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,which provides additional guidance to help creditors in determining whether a creditorhas granted a concession and whether a debtor is experiencing financial difficulties forthe purpose of determining whether a restructuring constitutes a troubled debtrestructuring. The amendments in this update are effective for the Corporation for theyear ending December 31, 2012. The Corporation is currently evaluating the potentialeffect on the Corporation's consolidated financial statements.
16
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 1 - Nature of Business and Significant Accounting Policies(Continued)
ASU 2011-04, Fair Value Measurements (Topic 820) - In May 2011, the FASB issuedASU 2011-04, Amendments to Achieve Common Fair Value Measurement and DisclosureRequirements in U.S. GAAP and IFRS. The standard clarifies existing fair valuemeasurement and disclosure requirements and changes existing principles anddisclosure guidance. Clarifications were made to the relevancy of the highest and bestuse valuation concept and measurement of an instrument classified in an entity’sstockholder’s equity. Changes to existing principles and disclosures includedmeasurement of financial instruments managed within a portfolio, the application ofpremiums and discounts in fair value measurement, and additional disclosures related tofair value measurements. The updated guidance and requirements are effective forfinancial statements issued for the first annual period beginning after December 15,2011. The adoption of this standard is not expected to have a material effect on theCorporation’s consolidated financial statements.
FASB ASU 2011-05, Presentation of Comprehensive Income - In June 2011, theFASB issued ASU 2011-05, Presentation of Comprehensive Income. This standard requiresan entity to present the total of comprehensive income, the components of net income,and the components of other comprehensive income either in a single continuousstatement of comprehensive income or in two separate but continuous statements.This standard eliminates the option to present the components of other comprehensiveincome as part of the statement of equity. This standard is effective for fiscal yearsending after December 15, 2012. The implementation of this standard will only changethe presentation of comprehensive income; it will not have an impact on theCorporation’s financial position or results of operations. In December 2011, the FASBissued ASU 2011-12. This standard defers the requirement to present reclassificationadjustments for each component of OCI in both net income and OCI on the face of thefinancial statements.
17
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 2 - Securities
The amortized cost and fair value of securities, with gross unrealized gains and losses,are as follows (000s omitted):
2011
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
U.S. government and federalagency $ 12,581 $ 81 $ (3) $ 12,659
State and municipal 4,826 367 - 5,193Corporate 1,004 2 - 1,006Deposits with financial
institutions 3,822 - (26) 3,796Mortgage-backed 3,756 48 (3) 3,801Collateralized mortgage
obligations 4,393 66 (8) 4,451
Total available-for-sale securities $ 30,382 $ 564 $ (40) $ 30,906
2010
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
U.S. government and federalagency $ 10,139 $ 17 $ (35) $ 10,121
State and municipal 5,833 140 (88) 5,885Corporate 2,039 8 - 2,047Deposits with financial
institutions 2,087 - - 2,087
Mortgage-backed 2,473 - (9) 2,464
Total available-for-sale securities $ 22,571 $ 165 $ (132) $ 22,604
At December 31, 2011 and 2010, securities with a carrying value of $12,581,000 and$10,050,000, respectively, were pledged to secure borrowings and public deposits andfor other purposes required or permitted by law.
18
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 2 - Securities (Continued)
The amortized cost and fair value of debt securities by contractual maturity atDecember 31, 2011 follows (000s omitted):
Available for Sale
Amortized
Cost Fair Value
Due in 1 year or less $ 3,799 $ 3,807Due in 1 through 5 years 15,177 15,301Due after 5 years through 10 years 1,687 1,785
Due after 10 years 1,570 1,761
Total 23,233 22,654
Mortgage-backed securities 3,756 3,801
Collateralized mortgage obligations 4,393 4,451
Total $ 30,382 $ 30,906
For the years ended December 31, 2011 and 2010, proceeds from sales of securitiesavailable for sale amounted to $0 and $1,171,000, respectively. Gross realized gainsamounted to $540,000 for the year ended December 31, 2010. The tax provisionapplicable to these net realized gains amounted to $184,000.
Information pertaining to securities with gross unrealized losses at December 31, 2011and 2010, aggregated by investment category and length of time that individual securitieshave been in a continuous loss position, is as follows (000s omitted):
2011
Less Than 12 Months Over 12 Months
Gross
Unrealized
Losses Fair Value
Gross
Unrealized
Losses Fair Value
U.S. government and federalagency $ 3 $ 2,037 $ - $ -
Deposits with financialinstitutions 26 2,454 - -
Mortgage-backed 3 1,007 - -Collateralized mortgage
obligations 8 794 - -
Total available-for-sale securities $ 40 $ 6,292 $ - $ -
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 2 - Securities (Continued)
The amortized cost and fair value of debt securities by contractual maturity atDecember 31, 2011 follows (000s omitted):
Available for Sale
Amortized
Cost Fair Value
Due in 1 year or less $ 3,799 $ 3,807Due in 1 through 5 years 15,177 15,301Due after 5 years through 10 years 1,687 1,785
Due after 10 years 1,570 1,761
Total 23,233 22,654
Mortgage-backed securities 3,756 3,801
Collateralized mortgage obligations 4,393 4,451
Total $ 30,382 $ 30,906
For the years ended December 31, 2011 and 2010, proceeds from sales of securitiesavailable for sale amounted to $0 and $1,171,000, respectively. Gross realized gainsamounted to $540,000 for the year ended December 31, 2010. The tax provisionapplicable to these net realized gains amounted to $184,000.
Information pertaining to securities with gross unrealized losses at December 31, 2011and 2010, aggregated by investment category and length of time that individual securitieshave been in a continuous loss position, is as follows (000s omitted):
2011
Less Than 12 Months Over 12 Months
Gross
Unrealized
Losses Fair Value
Gross
Unrealized
Losses Fair Value
U.S. government and federalagency $ 3 $ 2,037 $ - $ -
Deposits with financialinstitutions 26 2,454 - -
Mortgage-backed 3 1,007 - -Collateralized mortgage
obligations 8 794 - -
Total available-for-sale securities $ 40 $ 6,292 $ - $ -
19
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 2 - Securities (Continued)
2010
Less Than 12 Months Over 12 Months
Gross
Unrealized
Losses Fair Value
Gross
Unrealized
Losses Fair Value
U.S. government and federalagency $ 35 $ 1,964 $ - $ -
State and municipal 88 1,722 - -
Mortgage-backed 9 2,464 - -
Total available-for-sale securities $ 132 $ 6,150 $ - $ -
Unrealized losses on securities have not been recognized into income because theissuers' bonds are of high credit quality, the Corporation has the intent and ability tohold the securities for the foreseeable future, and the decline in fair value is dueprimarily to increased market interest rates. The fair value is expected to recover as thebonds approach the maturity date.
Other securities, totaling $1,282,000 and $1,416,000 at December 31, 2011 and 2010,respectively, consist of restricted Federal Home Loan Bank stock and Federal ReserveBank stock. These stocks are carried at cost, which approximates market value.
Note 3 - Loans
A summary of the balances of loans follows (000s omitted):
2011 2010
Mortgage loans on real estate - Residential 1-4 family $ 47,260 $ 51,381Commercial loans 74,324 80,237
Consumer installment loans 10,887 11,401
Total loans 132,471 143,019
Less allowances for loan losses 1,860 2,293
Net loans $ 130,611 $ 140,726
Allowance for loan losses as a percentage of loans 1.4% 1.6%
20
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 3 - Loans (Continued)
An analysis of the allowance for loan losses follows (000s omitted):
2011 2010
Balance at beginning of year $ 2,293 $ 1,919Provision for loan losses 881 774Loans charged off (1,332) (416)Recoveries of loans previously charged off 18 16
Balance at end of year $ 1,860 $ 2,293
The following is a summary of information pertaining to impaired loans (000s omitted):
2011 2010
Impaired loans without a valuation allowance $ 1,669 $ 2,465Impaired loans with a valuation allowance 1,164 1,491
Total impaired $ 2,833 $ 3,956
Valuation allowance related to impaired loans $ 288 $ 478Total nonaccrual loans 2,833 3,269Total loans past due 90 days or more and still accruing 47 -
The following is a summary of information pertaining to impaired loans (000s omitted):
2011 2010
Average investment in impaired loans $ 3,307 $ 3,125Interest income recognized on impaired loans 50 -Interest income recognized on a cash basis on
impaired loans 50 -
No additional funds are committed to be advanced in connection with impaired loans.
In the ordinary course of business, the Bank has granted loans to principal officers anddirectors and their affiliates amounting to $4,414,000 at December 31, 2011 and$3,959,000 at December 31, 2010. During the year ended December 31, 2011, totalprincipal additions were $2,560,000 and total principal payments were $2,105,000.
21
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 3 - Loans (Continued)
A breakdown for the allowance for loan losses and recorded balances in loans atDecember 31, 2011 is as follows (000s omitted):
Twelve Months Ended December 31, 2011
Commercial
Real Estate
Commercial
and Industrial
Real Estate -
Residential Consumer Total
Beginning balance $ 1,270 $ 284 $ 610 $ 129 $ 2,293Charge-offs (1,112) (24) (142) (54) (1,332)Recoveries 10 1 - 7 18
Provision 898 (132) 55 60 881
Ending balance $ 1,066 $ 129 $ 523 $ 142 $ 1,860
Ending allowance balance attributableto loans:
Individually evaluated forimpairment $ 96 $ 10 $ 146 $ 36 $ 288
Collectively evaluated forimpairment 970 119 377 106 1,572
Ending allowance balance $ 1,066 $ 129 $ 523 $ 142 $ 1,860
Loans and leases:Individually evaluated for
impairment $ 1,470 $ 108 $ 1,219 $ 36 $ 2,833Collectively evaluated for
impairment 55,916 16,830 46,041 10,851 129,638
Total loans and leases $ 57,386 $ 16,938 $ 47,260 $ 10,887 $ 132,471
Credit Risk Grading
As part of the management of the loan portfolio at the time of origination and throughthe continuing loan review process, the Corporation categorizes each loan into creditrisk categories based on several factors including current financial information, overalldebt service coverage, comparison against industry averages, collateral coverage,historical payment experience, and current economic trends. The credit risk ratingstructure used is shown below:
22
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 3 - Loans (Continued)
Monitor - A monitor asset is not considered "rated" or "classified" for regulatorypurposes, but is considered an asset which bears watching due to some modestdeterioration in financial performance or external threats, such as a lawsuit,environmental issue, or potential loss of a significant customer. Some of the followingcharacteristics may exist: financial condition has taken a negative turn and may betemporarily strained; borrower may have experienced recent losses from operations;cash flow may be insufficient to service debt, based on most recent six-month period;financial covenant defaults are occurring with some regularity, and they would bedeemed more than inconsequential; need for guarantor is critical, but guarantor’scondition adds little substance to credit quality; loss of principal is not at question, unlesscurrent trends were to continue; however, there are aspects of this underwriting whichmay not now conform to bank lending policy; borrowing base deficiencies may exist andare becoming a concern.
Special Mention - A special mention asset has potential weaknesses that deservemanagement’s close attention. If left uncorrected, these potential weaknesses mayresult in deterioration of the repayment prospects for the loan, or in the institution’scredit position at some future date. Special mention assets are not adversely classifiedand do not expose an institution to sufficient risk to warrant adverse classification.Some of the following characteristics may exist: loans are currently protected, but arepotentially weak due to negative trends in balance sheet or income statement; cash flowmay be insufficient to meet debt service, with the prospect that this condition may notbe temporary; lack of effective control over the collateral or existence of documentationdeficiencies; there is a potential risk of payment default; management’s ability to copewith current financial conditions is questioned; collateral coverage has weakened;moderate operating losses may have occurred; financial information may be inadequateto depict condition of borrower adequately; consistent borrowing deficiencies.
Substandard - A substandard asset has well-defined weaknesses whereby collection ispossible, but jeopardized. However, jeopardized payment does not imply ultimate loss.Assets so classified are inadequately protected by current net worth and repaymentcapacity, and there is a high probability that collateral will have to be liquidated to repaythe debt. If deficiencies are not corrected quickly, there is a real possibility of loss, andof the company’s ability to operate as a going concern. Loan may be in default,borrower may be in bankruptcy, loan restructure at less than market terms, or has beenpartially charged off. Nonaccrual loans would be classified, at least, “substandard”.
23
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 3 - Loans (Continued)
Doubtful - A doubtful asset has characteristics of “substandard”, but informationavailable suggests it is highly improbable that liquidation of collateral will retire the loanin its entirety. It may be impossible to calculate exactly what the loss may be, but theprobability of some loss is high. Loans are to be placed on nonaccrual status when asignificant percentage is classified “doubtful” and collateral liquidation is probable. (Notall nonaccrual loans necessarily have to be classified “doubtful” if collateral appearsadequate to retire remaining outstandings).
Pass - Credits not covered by the above definitions are pass credits, which are notconsidered to be adversely rated.
For residential real estate and consumer loan segments, the Corporation monitorscredit quality using a combination of the delinquency status of the loan and other knownborrower circumstances and classifies loans as performing and nonperforming.Performing loans pay as agreed and nonperforming loans represent loans typically innonaccrual, in process of foreclosure, or other form of liquidation or collection.
Twelve Months Ended December 31, 2011
Pass Monitor
Special
Mention Substandard Doubtful Performing
Non-
performing Total
Commercial real estate:Commercial real estate
and other $ 35,866 $ 4,785 $ 3,906 $ 2,339 $ 20 $ - $ - $ 46,916Hotels and motels 3,985 1,113 - 1,367 - - - 6,465Golf courses 400 1,352 2,253 - - - - 4,005
Commercial and industrial 15,422 1,082 125 309 - - - 16,938Real estate - Residential:
1-4 family residential - - - - - 38,537 970 39,507Construction and land
loans - - - - - 7,505 248 7,753Consumer:
Home equity lines ofcredit - - - - - 7,528 36 7,564
Other - - - - - 3,323 - 3,323
Total $ 55,673 $ 8,332 $ 6,284 $ 4,015 $ 20 $ 56,893 $ 1,254 $ 132,471
24
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 3 - Loans (Continued)
Age Analysis of Past Due Loans
A summary of past due loans at December 31, 2011 is as follows (000s omitted):
As of December 31, 2011
30-59
Days Past
Due
60-89
Days Past
Due
Greater
Than 90
Days
Total Past
Due Current
Total
Financing
Receivables
Recorded
Investment
> 90 Days
and Accruing
Commercial real estate:Commercial real estate and
other $ 586 $ 813 $ 1,470 $ 2,869 $ 44,047 $ 46,916 $ -Hotels and motels - 1,367 - 1,367 5,098 6,465 -Golf courses - - - - 4,005 4,005 -
Commercial and industrial - - 108 108 16,830 16,938 -Real estate - Residential:
1-4 family residential 813 707 830 2,350 37,157 39,507 -Construction and land loans 127 72 160 359 7,394 7,753 47
Consumer:Home equity lines of credit 196 - 36 232 7,332 7,564 -
Other 151 34 - 185 3,138 3,323 -
Total $ 1,873 $ 2,993 $ 2,604 $ 7,470 $ 125,001 $ 132,471 $ 47
Impaired Loans
Nonperforming loans are those which are contractually past due 90 days or more as tointerest or principal payments, on nonaccrual status, or loans, the terms of which havebeen renegotiated to provide a reduction or deferral on interest or principal.
The accrual of interest on loans is discontinued when, in management’s opinion, theborrower may be unable to meet payment obligations as they become due, as well aswhen required by regulatory provisions. When interest accrual is discontinued, allunpaid accrued interest is reversed. Interest income is subsequently recognized only tothe extent cash payments are received in excess of principal due. Loans are returned toaccrual status when all the principal and interest amounts contractually due are broughtcurrent and future payments are reasonably assured.
25
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 3 - Loans (Continued)
Loans are considered impaired when, based on current information and events, it isprobable the Corporation will be unable to collect all amounts due in accordance withthe original contractual terms of the loan agreement, including scheduled principal andinterest payments. Impairment is evaluated on an individual loan basis for all loans. If aloan is impaired, a specific valuation allowance is allocated, if necessary, so that the loanis reported net, at the present value of estimated future cash flows using the loan’sexisting rate or at the fair value of collateral if repayment is expected solely from thecollateral. Interest payments on impaired loans are typically applied to principal unlesscollectibility of the principal amount is reasonably assured, in which case interest isrecognized on a cash basis. Impaired loans, or portions thereof, are charged off whendeemed uncollectible.
December 31, 2011
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment for
the Year
Interest Income
Recognized for
the Year
With no related allowance recorded:Commercial real estate - Commercial real
estate and other $ 1,222 $ 1,889 $ - $ 1,297 $ 12Commercial and industrial 88 201 - 98 -Real estate - Residential:
1-4 family residential 346 367 - 392 11Construction and land loans 13 25 - 49 -
Consumer - Home equity line of credit - - - 13 -
Total $ 1,669 $ 2,482 $ - $ 1,849 $ 23
With an allowance recorded:
Commercial real estate - Commercial realestate and other $ 248 $ 262 $ 96 $ 807 $ 3
Commercial and industrial 20 23 10 23 -Real estate - Residential:
1-4 family residential 760 785 90 530 22Construction and land loans 100 114 56 60 1
Consumer - Home equity line of credit 36 36 36 38 1
Total $ 1,164 $ 1,220 $ 288 $ 1,458 $ 27
26
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 3 - Loans (Continued)
Nonaccrual Loans
The following is a schedule of nonaccrual loans as of December 31, 2011 (000s omitted):
2011
Commercial real estate - Commercial real estate and other $ 1,471Commercial and industrial 108Real estate - Residential:
1-4 family residential 970
Construction and land loans 248
Total real estate - Residential 1,218
Consumer - Home equity lines of credit 36
Unallocated -
Total $ 2,833
Nonaccrual - Commercial loans include business installment loans and real estateconstruction loans. Loans on which interest and/or principal is 90 days or more past dueand are placed on nonaccrual status and any previously accrued but uncollected interestis reversed against income (current year) or charged to the allowance for loan and leaselosses (prior year). Such loans will remain on a cash basis for the recognition of incomeuntil such time as the loan has remained current for a period of not less than six (6)months and it is determined an adequate propensity for timely payment to occur in thefuture. Past due is measured from the date through which interest is due or on whichprincipal payment is due irrespective of the date on which the billing may have beenrendered. Unless otherwise specified in the note or loan agreement, demand notesshall, for purposes of measuring past due status, have an interest due date no lessfrequently than once each calendar quarter. Other loans on which there is serious doubtas to collectibility are placed on nonaccrual because of past due status. Any loanwhereby some or all of the balance has been charged off is placed on nonaccrual, unlessit is part of an A - B loan restructure. If the loan was on non-accrual at the time of therestructure, it will remain in nonaccrual until such time as the above stated criteria ismet. If the loan was not in nonaccrual at the time of the A - B note restructuring andthere is concrete evidence the payment structure will be met, the loan will not have tobe placed in nonaccrual, provided the B portion has been charged off. Mortgages areplaced on nonaccrual status when the account is three months (typically four payments)past due. All previously accrued, but uncollected interest is reversed when the loan isplaced on nonaccrual.
27
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 4 - Loan Servicing
Loans serviced for others are not included in the accompanying consolidated balancesheet. The unpaid principal balances of mortgages and other loans serviced for otherswere $69,420,000 and $70,200,000 at December 31, 2011 and 2010, respectively.
The balance of capitalized servicing rights, net of valuation allowance, included in otherassets at December 31, 2011 and 2010 was $395,000 and $404,000, respectively. Thefair value of the capitalized servicing rights approximates the carrying value. The keyeconomic assumptions used in determining the fair value of the mortgage servicingrights include an annual constant prepayment speed (CPR) of 16.2 and 13.6 percent forDecember 31, 2011 and 2010, respectively, and a discount rate of 8.0 percent forDecember 31, 2011 and 2010.
The following summarizes mortgage servicing rights capitalized and amortized, alongwith the aggregate activity in related valuation allowances (000s omitted):
2011 2010
Mortgage servicing rights capitalized $ 124 $ 125Mortgage servicing rights amortized and closed 133 148Valuation allowances - Balance at beginning of year - -
Note 5 - Bank Premises and Equipment
A summary of the cost and accumulated depreciation of premises and equipmentfollows (000s omitted):
2011 2010
Buildings and improvements $ 4,263 $ 4,261Furniture and fixtures 2,860 2,786Vault and equipment 300 300Automobiles 77 34Land 711 711
Total premises and equipment 8,211 8,092
Accumulated depreciation (5,234) (4,939)
Net premises and equipment $ 2,977 $ 3,153
Depreciation expense for the years ended December 31, 2011 and 2010 amounted to$295,000 and $315,000, respectively.
28
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 6 - Deposits
The following is a summary of the distribution of interest-bearing deposits atDecember 31 (000s omitted):
2011 2010
NOW accounts $ 54,429 $ 54,140Savings 15,881 14,463Money market demand 1,037 964Time:
Under $100,000 35,429 45,644$100,000 and over 12,515 11,310
Total interest-bearing deposits $ 119,291 $ 126,521
At December 31, 2011, the scheduled maturities of time deposits are as follows (000somitted):
2012 $ 31,4632013 9,1582014 2,5662015 3,420
2016 1,337
Total $ 47,944
Note 7 - Short-term Borrowings
Short-term borrowings include securities sold under agreements to repurchase, whichare classified as secured borrowings and generally mature within one or two years.Securities sold under agreements to repurchase are reflected at the amount of cashreceived in connection with the transaction. The Corporation may be required toprovide additional collateral based on the fair value of the underlying securities.
Note 8 - FHLB Advances
The Bank has advances from the Federal Home Loan Bank (FHLB). Interest rates rangefrom 1.27 percent to 4.05 percent during 2011 and 2010. Interest is payable monthly.The advances are collateralized by approximately $21,993,000 and $25,773,000 ofmortgage loans as of December 31, 2011 and 2010, respectively, under a blanketcollateral agreement.
29
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 8 - FHLB Advances (Continued)
The advances are subject to prepayment penalties and the provisions and conditions ofthe credit policy of the Federal Home Loan Bank. Future obligations of the advances areas follows at December 31, 2011 (000s omitted):
2012 $ 3,000
2013 2,000
Total $ 5,000
Note 9 - Income Taxes
The components of the net deferred tax asset, included in other liabilities, are asfollows (000s omitted):
2011 2010
Deferred tax assets:Allowance for loan losses $ 452 $ 662Capital loss carryforward 111 111Accrued employee benefits 241 225
Other 157 175
Total deferred tax assets 961 1,173
Deferred tax liabilities:Prepaid assets 40 40Net unrealized gain on securities available for sale 178 11
Servicing rights 134 137
Total deferred tax liabilities 352 188
Net deferred tax asset $ 609 $ 985
Allocation of income taxes between current and deferred portions is as follows (000somitted):
2011 2010
Current $ 356 $ 602
Deferred 209 -
Total income tax expense $ 565 $ 602
30
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 9 - Income Taxes (Continued)
The reasons for the differences between the income tax expense at the federalstatutory income tax rate and the recorded income tax expense are summarized asfollows (000s omitted):
2011 2010
Income before income taxes $ 2,222 $ 2,296
Income tax expense at federal statutory rate of 34percent $ 755 $ 781
Increases resulting from nondeductible expenses 20 15
Decreases resulting from nontaxable income (210) (194)
Net income tax expense $ 565 $ 602
Note 10 - Benefit Plan
The Corporation has a 401(k) plan whereby a certain percentage of employees'contributions can be matched with discretionary contributions by the Corporation.Contributions to the plan for the years ended December 31, 2011 and 2010 were$51,000 and $49,000, respectively.
Note 11 - Fair Value of Financial Instruments
The fair value of a financial instrument is the current amount that would be exchangedbetween willing parties, other than in a forced liquidation. Fair value is best determinedbased upon quoted market prices. However, in many instances, there are no quotedmarket prices for the Corporation's various financial instruments. In cases where quotedmarket prices are not available, fair values are based on estimates using present value orother valuation techniques. Those techniques are significantly affected by theassumptions used, including the discount rate and estimates of future cash flows.Accordingly, the fair value estimates may not be realized in an immediate settlement ofthe instrument. The fair value of financial instruments disclosures exclude certainfinancial instruments and all nonfinancial instruments from its disclosure requirements.Accordingly, the aggregate fair value amounts presented may not necessarily representthe underlying fair value of the Corporation.
31
HuronCommunityFinancialServices,Inc.HuronCommunityBank
BusinessReviewDecember31,2011
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 11 - Fair Value of Financial Instruments (Continued)
The following methods and assumptions were used by the Corporation in estimating fairvalue disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amounts of cash and cash equivalentsapproximate fair values.
Deposits in Other Financial Institutions - The carrying amounts of interest-bearingdeposits maturing within 90 days approximate their fair values. Fair values of otherinterest-bearing deposits are estimated using discounted cash flow analyses based oncurrent rates for similar types of deposits.
Securities - Fair values of securities are based on quoted market prices. If a quotedmarket price is not available, fair value is estimated using quoted market prices forsimilar securities. The carrying value of Federal Home Loan Bank and Federal ReserveBank stock approximates fair value based on the redemption provisions of the issuers.
Loans Receivable - For variable-rate loans that reprice frequently and with nosignificant change in credit risk, fair values are based on carrying values. Fair values forother loans are estimated using discounted cash flow analyses, using interest ratescurrently being offered for loans with similar terms to borrowers of similar creditquality. Fair values of nonperforming loans are estimated using discounted cash flowanalyses or underlying collateral values, where applicable.
Deposit Liabilities - The fair values disclosed for demand deposits are, by definition,equal to the amount payable on demand at the reporting date (i.e., their carryingamounts). The carrying amounts of variable-rate, fixed-term money market accountsand certificates of deposit approximate their fair values at the reporting date. Fair valuesfor fixed-rate certificates of deposit are estimated using a discounted cash flowcalculation that applies interest rates currently being offered on certificates to a scheduleof aggregated expected monthly maturities on time deposits.
Short-term Borrowings - The carrying amounts of borrowings under repurchaseagreements maturing within 90 days approximate their fair values. Fair values of othershort-term borrowings are estimated using discounted cash flow analyses based on theCorporation's current incremental borrowing rates for similar types of borrowingarrangements.
Other Borrowings - The fair values of the Corporation's other borrowings areestimated using discounted cash flow analyses based on the Corporation's currentincremental borrowing rates for similar types of borrowing arrangements.
Accrued Interest - The carrying amounts of accrued interest approximate fair value.
32
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 11 - Fair Value of Financial Instruments (Continued)
Other Financial Instruments - The fair value of other financial instruments, includingloan commitments and unfunded letters of credit, based on discounted cash flowanalyses, is not material.
The estimated fair values and related carrying or notional amounts of the Corporation'sfinancial instruments are as follows (000s omitted):
2011 2010
Carrying
Amount
Estimated Fair
Value
Carrying
Amount
Estimated Fair
ValueFinancial assets:
Cash and equivalents $ 6,377 $ 6,377 $ 14,304 $ 14,304Securities 32,188 32,188 24,020 24,020Loans 130,611 133,330 140,726 142,659Accrued interest receivable 518 518 572 572
Financial liabilities:Demand deposits 25,802 25,802 26,048 26,048Interest-bearing deposits 119,291 119,509 126,521 126,770FHLB advances 5,000 5,060 7,000 7,110Short-term borrowings 7,619 7,485 8,253 7,990Accrued interest payable 75 75 113 113
Note 12 - Off-balance-sheet Activities
Credit-related Financial Instruments - The Corporation is a party to credit-relatedfinancial instruments with off-balance-sheet risk in the normal course of business tomeet the financing needs of its customers. These financial instruments includecommitments to extend credit, standby letters of credit, and commercial letters ofcredit. Such commitments involve, to varying degrees, elements of credit and interestrate risk in excess of the amount recognized in the consolidated balance sheet.
The Corporation's exposure to credit loss is represented by the contractual amount ofthese commitments. The Corporation follows the same credit policies in makingcommitments as it does for on-balance-sheet instruments.
At December 31, 2011 and 2010, the following financial instruments were outstandingwhose contract amounts represent credit risk (000s omitted):
Contract Amount
2011 2010
Commitments to grant loans $ 16,126 $ 17,800
33
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 12 - Off-balance-sheet Activities (Continued)
Commitments to extend credit are agreements to lend to a customer as long as there isno violation of any condition established in the contract. Commitments generally havefixed expiration dates or other termination clauses and may require payment of a fee.The commitments for equity lines of credit may expire without being drawn upon.Therefore, the total commitment amounts do not necessarily represent future cashrequirements. The amount of collateral obtained, if it is deemed necessary by theCorporation, is based on management's credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines, andoverdraft protection agreements are commitments for possible future extensions ofcredit to existing customers. These lines of credit are collateralized and usually do notcontain a specified maturity date and may not be drawn upon to the total extent towhich the Corporation is committed.
Commercial and standby letters of credit are conditional commitments issued by theCorporation to guarantee the performance of a customer to a third party. Those lettersof credit are used primarily to support public and private borrowing arrangements.Essentially all letters of credit issued have expiration dates within one year. The creditrisk involved is extending loan facilities to customers. The Corporation generally holdscollateral supporting those commitments if deemed necessary.
Collateral Requirements - To reduce credit risk related to the use of credit-relatedfinancial instruments, the Corporation might deem it necessary to obtain collateral. Theamount and nature of the collateral obtained are based on the Corporation's creditevaluation of the customer. Collateral held varies but may include cash, securities,accounts receivable, inventory, property, plant, equipment, and real estate.
If the counterparty does not have the right and ability to redeem the collateral or theCorporation is permitted to sell or repledge the collateral on short notice, theCorporation records the collateral in its consolidated balance sheet at fair value with acorresponding obligation to return it.
Legal Contingencies - Various legal claims also arise from time to time in the normalcourse of business which, in the opinion of management, will have no material effect onthe Corporation's consolidated financial statements.
Note 13 - Stock Option Plan
As of December 31, 2011, the Corporation has two share-based compensation planswhich are described below. Options available for grant under the 1996 NonemployeeDirector Stock Option Plan, the 1996 Employee Stock Option Plan, and the 1997Nonemployee Director Discretionary Stock Option Plan have been issued. Some of theoptions issued under the 1996 and 1997 plans are exercisable by the participants untilthe end of the contractual terms.
34
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 13 - Stock Option Plan (Continued)
The Corporation’s 2005 Nonemployee Director Stock Option Plan and 2005 EmployeeStock Option Plan (the "Plans"), which are stockholder approved, permit the grant ofstock options for up to 15,000 shares and 35,000 shares of common stock, respectively.The Corporation believes that such awards better align the interests of its employeeswith those of its stockholders. Option awards are generally granted with an exerciseprice equal to the market price of the entity's stock at the date of grant; those optionawards generally vest immediately for nonemployees and over three years foremployees and have 10-year contractual terms. Certain option awards provide foraccelerated vesting if there is a change in control (as defined in the Plans). Thecompensation cost that has been charged against income for the Plans wasapproximately $12,000 and $16,000 for 2011 and 2010, respectively.
The Corporation uses a Black-Scholes formula to estimate the calculated value of itsshare-based payments. The volatility assumption used in the Black-Scholes formula isbased on the volatility of the Corporation's stock price and dividend paymentsthroughout the year. The Corporation calculated the historical volatility using themonthly closing total stock price for the one year immediately prior.
The weighted average assumptions used in the Black-Scholes model are noted in thefollowing table. The Corporation uses historical data to estimate option exercise andemployee termination within the valuation model. The risk-free rate for periods withinthe contractual life of the option is based on the U.S. Treasury yield curve in effect atthe time of grant.
2011 2010
Calculated volatility %12.00 %12.00Weighted average dividends %2.90 %2.61Expected term (in years) 8 8Risk-free rate %2.59 %2.34
35
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 13 - Stock Option Plan (Continued)
A summary of option activity under the Plans for the years ended December 31, 2011and 2010 is presented below:
2011 2010
Number of
Shares
Weighted
Average
Exercise
Price
Number of
Shares
Weighted
Average
Exercise
Price
Options outstanding at beginning ofyear 55,690 $ 40.08 60,824 $ 37.91
Options granted 5,726 46.00 5,636 46.00Options exercised (7,470) 32.00 (10,420) 23.50
Options forfeited - - (350) -
Options outstanding at end of year 53,946 42.21 55,690 40.45Exercisable at year end 51,872 42.06 52,157 40.08
The weighted average grant date-calculated value of options granted during the years2011 and 2010 was $4.50 and $5.00, respectively.
As of December 31, 2011, there was approximately $45,000 of total unrecognizedcompensation cost related to nonvested share-based compensation arrangementsgranted under the Plans. That cost is expected to be recognized over a weightedaverage period of 2.5 years.
Note 14 - Restrictions on Dividends, Loans, and Advances
Banking regulations place certain restrictions on dividends paid and loans or advancesmade by the Bank to the Corporation.
Prior approval of the Bank's federal regulator is required if the total dividends declaredby the Bank in a calendar year exceed the sum of the net profits of the Bank for thepreceding three years, less any required transfers to surplus. In addition, dividends paidby the Bank would be prohibited if the effect thereof would cause the Bank's capital tobe reduced below applicable minimum standards.
Loans or advances made by the Bank to the Corporation are generally limited to10 percent of the Bank's capital stock and surplus.
36
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 15 - Minimum Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by thefederal banking agencies. Failure to meet minimum capital requirements can initiatecertain mandatory and possibly additional discretionary actions by regulators that, ifundertaken, could have a direct material effect on the Bank's financial statements.Under capital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involve quantitative measuresof its assets, liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices. The capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require theBank to maintain minimum amounts and ratios (set forth in the following table) of totaland Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) andof Tier 1 capital (as defined) to average assets (as defined). Management believes, as ofDecember 31, 2011 and 2010, that the Bank met all capital adequacy requirements towhich it is subject.
As of December 31, 2011, the most recent notification from the Bank's primaryregulator categorized the Bank as well capitalized under the regulatory framework forprompt corrective action. To be categorized as well capitalized, an institution mustmaintain minimum total risk-based, Tier 1 risked-based, and Tier 1 leverage ratios as setforth in the following tables. There are no conditions or events since the notification thatmanagement believes have changed the Bank's category. The Bank's actual capitalamounts and ratios as of December 31, 2011 and 2010 are also presented in the table.
ActualFor Capital Adequacy
Purposes
To be Well Capitalized UnderPrompt Corrective Action
Provisions
(000s omitted) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2011Total capital to risk-
weighted assets -Bank $ 23,167 18.0% $10,289 8.0% $ 12,862 10.0%
Tier 1 capital to risk-weighted assets -Bank 21,556 16.8 5,145 4.0 7,717 6.0
Tier I capital to averageassets - Bank 21,556 11.6 7,440 4.0 9,300 5.0
As of December 31, 2010Total capital to risk-
weighted assets -Bank 22,819 16.9 10,783 8.0 13,478 10.0
Tier 1 capital to risk-weighted assets -Bank 21,126 15.7 5,393 4.0 8,089 6.0
Tier I capital to averageassets - Bank 21,126 10.9 7,760 4.0 9,700 5.0
37
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 16 - Fair Value Measurements
Accounting standards require certain assets and liabilities be reported at fair value in thefinancial statements and provide a framework for establishing that fair value. Theframework for determining fair value is based on a hierarchy that prioritizes the inputsand valuation techniques used to measure fair value.
The following tables present information about the Corporation’s assets measured atfair value on a recurring basis at December 31, 2011 and 2010 and the valuationtechniques used by the Corporation to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active marketsfor identical assets or liabilities that the Corporation has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, eitherdirectly or indirectly. These Level 2 inputs include quoted prices for similar assets andliabilities in active markets and other inputs such as interest rates and yield curves thatare observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situationswhere there is little, if any, market activity for the related asset. These Level 3 fair valuemeasurements are based primarily on management’s own estimates using pricingmodels, discounted cash flow methodologies, or similar techniques taking into accountthe characteristics of the asset.
In instances where inputs used to measure fair value fall into different levels in the abovefair value hierarchy, fair value measurements in their entirety are categorized based onthe lowest level input that is significant to the valuation. The Corporation’s assessmentof the significance of particular inputs to these fair value measurements requiresjudgment and considers factors specific to each asset or liability.
38
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 16 - Fair Value Measurements (Continued)
Assets Measured at Fair Value on a Recurring Basis at December 31, 2011(000s omitted)
Quoted Pricesin Active
Markets forIdentical Assets
(Level 1)
SignificantOther
ObservableInputs
(Level 2)
SignificantUnobservable
Inputs(Level 3)
Balance atDecember 31,
2011
Available-for-sale debt securities:U.S. government and federal
agency $ 1,004 $ 11,655 $ - $ 12,659State and municipal - 5,193 - 5,193Corporate - 1,006 - 1,006Deposits with other financial
institutions - 3,796 - 3,796Mortgage-backed securities - 3,801 - 3,801Collateralized mortgage
obligations - 4,451 - 4,451
Total available-for-saledebt securities $ 1,004 $ 29,902 $ - $ 30,906
Assets Measured at Fair Value on a Recurring Basis at December 31, 2010(000s omitted)
Quoted Pricesin Active
Markets forIdentical Assets
(Level 1)
SignificantOther
ObservableInputs
(Level 2)
SignificantUnobservable
Inputs(Level 3)
Balance atDecember 31,
2010
Available-for-sale debt securities:U.S. government and federal
agency $ 1,000 $ 9,121 $ - $ 10,121State and municipal - 5,885 - 5,885Corporate - 2,047 - 2,047Deposits with other financial
institutions - 2,087 - 2,087
Mortgage-backed securities - 2,464 - 2,464
Total available-for-saledebt securities $ 1,000 $ 21,604 $ - $ 22,604
39
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 16 - Fair Value Measurements (Continued)
The fair value of available-for-sale securities at December 31, 2011 was determinedprimarily based on Level 2 inputs. The Corporation estimates the fair value of theseinvestment inputs include quoted prices for similar assets in active markets, and otherinputs such as interest rates and yield curves that are observable at commonly quotedintervals.
The Corporation also has assets that under certain conditions are subject tomeasurement at fair value on a non-recurring basis. These assets include impaired loans(see Note 3) and other real estate owned.
The change in fair value of impaired loans is recorded through the allowance for loanlosses. The Corporation estimates the fair value of impaired loans based on Level 3inputs which include the present value of expected future cash flows usingmanagement’s best estimate of key assumptions. These assumptions include futurepayment ability, timing of payment streams, and estimated realizable values of availablecollateral (typically based on outside appraisals).
Other real estate-owned assets are reported in the following table at initial recognitionof impairment and on an ongoing basis until recovery or charge-off. At the time offoreclosure or repossession, real estate owned and repossessed assets are adjusted tofair value less estimated costs to sell, establishing a new cost basis. At that time, theyare reported in the Corporation's fair value disclosures in the following nonrecurringtables (000s omitted):
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2011
Quoted Pricesin Active
Markets forIdenticalAssets
(Level 1)
SignificantOther
ObservableInputs
(Level 2)
SignificantUnobservable
Inputs(Level 3)
Balance atDecember 31,
2011
Total Lossesfor the Period
EndedDecember 31,
2011
AssetsImpaired loans $ 2,832 $ - $ - $ 2,832 $ 978Other real estate
owned 2,285 - - 2,285 113
Total $ 1,091
40
Huron Community Financial Services, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2011 and 2010
Note 16 - Fair Value Measurements (Continued)
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2010
Quoted Pricesin Active
Markets forIdenticalAssets
(Level 1)
SignificantOther
ObservableInputs
(Level 2)
SignificantUnobservable
Inputs(Level 3)
Balance atDecember 31,
2010
Total Lossesfor the Period
EndedDecember 31,
2010
AssetsImpaired loans $ 3,956 $ - $ - $ 3,956 $ 416Other real estate
owned 1,674 - - 1,674 42
Total $ 458
41
HuronCommunityFinancialServices,Inc.HuronCommunityBank
BusinessReviewDecember31,2011
42
HC
FSI
-6.0
0%
-3.0
0%
0.00
%
3.00
%
6.00
%
9.00
%
2007
2008
2009
2010
2011
-2.3
6
3.21
4.47
-2.5
6
-4.8
4
6.34
6.93
5.37
2.86
4.13
-0.4
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Year
End
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ecem
ber
31,
Ass
et G
row
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ate
HC
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ve Y
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rage
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HC
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-3.0
0%-2
.00%
-1.0
0%0.
00%
1.00
%2.
00%
3.00
%4.
00%
2007
2008
2009
2010
2011
-1.7
6
1.57
3.37
-0.1
7
-4.9
0
-0.3
8
Percent
Year
End
ed D
ecem
ber
31,
Dep
osit
Gro
wth
Rat
e
HC
FSI
Five
Yea
r A
vera
ge
44
HC
FSI
68.0
0%
70.0
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72.0
0%
74.0
0%
76.0
0%
78.0
0%
80.0
0%
82.0
0%
84.0
0%
2007
2008
2009
2010
2011
81.7
782
.08
76.4
875
.25
73.2
5
Percent
Year
End
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ecem
ber
31,
Loan
s as
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erce
nt o
f Ass
ets
HC
FSI
5.00
%
6.00
%
7.00
%
8.00
%
9.00
%
10.0
0%
11.0
0%
12.0
0%
2007
2008
2009
2010
2011
11.0
8
10.0
810
.17
11.0
211
.55
9.50
9.31
9.30
9.40
9.66
9.80
8.40
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9.14
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Percent
Year
End
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ecem
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31,
Tie
r O
ne C
apit
al(%
of a
vg. a
sset
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HC
FSI
Peer
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ichi
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45
HC
FSI
0.00
%0.
20%
0.40
%0.
60%
0.80
%1.
00%
1.20
%1.
40%
1.60
%
2007
2008
2009
2010
2011
0.20
0.33
0.55
0.27
0.95
0.19
0.32
0.56
0.56
0.48
0.30
0.78
1.46
0.99
0.87
Percent
Year
End
ed D
ecem
ber
31,
Net
Cha
rge-
offs
(as
a %
to
avg.
loan
s)
HC
FSI
Peer
Gro
upM
ichi
gan
Peer
46
HC
FSI
0.00
%
1.00
%
2.00
%
3.00
%
4.00
%
5.00
%
2007
2008
2009
2010
2011
0.99
1.80
2.01
2.29
2.14
0.95
1.44
1.87
1.93
1.85
1.27
2.62
3.61
2.72
4.59
Percent
Year
End
ed D
ecem
ber
31,
Non
perf
orm
ing
Loan
s(%
of g
ross
loan
s)
HC
FSI
Peer
Gro
upM
ichi
gan
Peer
47
HC
FSI
0.00
%
0.50
%
1.00
%
1.50
%
2.00
%
2.50
%
2007
2008
2009
2010
2011
1.51
1.40
1.29
1.60
1.40
1.20
1.25
1.42
1.57
1.66
1.28
1.45
2.04
2.20
2.01
Percent
Year
End
ed D
ecem
ber
31,
Res
erve
for
Loan
Los
ses
(as
a %
of l
oans
)
HC
FSI
Peer
Gro
upM
ichi
gan
Peer
48
HC
FSI
-0.5
0%
-0.2
5%
0.00
%
0.25
%
0.50
%
0.75
%
1.00
%
1.25
%
1.50
%
2007
2008
2009
2010
2011
1.28
0.61
0.81
0.91
0.92
1.14
0.95
0.72
0.84
0.90
0.99
0.21
-0.3
2
0.31
0.50
Percent
Year
End
ed D
ecem
ber
31,
Ret
urn
on A
vera
ge A
sset
s
HC
FSI
Peer
Gro
upM
ichi
gan
Peer
49
HC
FSI
0.0%
2.0%
4.0%
6.0%
8.0%
10.0
%
12.0
%
2007
2008
2009
2010
2011
11.4
6
5.76
7.38
8.51
8.00
11.5
0
9.60
7.16
8.29
8.75
Percent
Year
End
ed D
ecem
ber
31,
Ret
urn
on A
vera
ge E
quit
y
HC
FSI
Peer
Gro
up
50
HC
FSI
2.74
2.10
1.52
1.01
0.60
6.93
5.93
5.34
4.93
4.76
4.19
3.84
3.81
3.93
4.16
2007
2008
2009
2010
2011
Year
End
ed D
ecem
ber
31,
Yie
ld, R
ate
& M
argi
n (%
of A
vg. A
sset
s)
Net
Inte
rest
Mar
gin
Inte
rest
Inco
me
Inte
rest
Exp
ense
P e r c e n t
51
HC
FSI
56%
58%
60%
62%
64%
66%
68%
70%
2007
2008
2009
2010
2011
61
64
69
6564
Percent
Year
End
ed D
ecem
ber
31,
Effic
ienc
y R
atio
52
HC
FSI
$30
$31
$32
$33
$34
$35
$36
$37
$38
$39
$40
2007
2008
2009
2010
2011
$36.
80
$35.
67
$36.
64
$37.
98
$39.
96
Dollars
Year
End
ed D
ecem
ber
31,
Boo
k V
alue
per
Sha
re
53
HC
FSI
$0.0
0
$0.5
0
$1.0
0
$1.5
0
$2.0
0
$2.5
0
$3.0
0
$3.5
0
$4.0
0
2007
2008
2009
2010
2011
$3.8
5
$1.8
5
$2.5
2$2
.84
$2.8
1
Dollars
Year
End
ing
Dec
embe
r 31
,
Earn
ings
per
Sha
re, b
ased
on
wei
ghte
d av
erag
e sh
ares
out
stan
ding
54
HC
FSI
0.0%
20.0
%
40.0
%
60.0
%
80.0
%
100.
0%
120.
0%
140.
0%
2007
2008
2009
2010
2011
51.9
129.
7
87.3
28.2
38.1
54.0
55.4
43.5
37.6
36.8
Percent
Year
End
ed D
ecem
ber
31,
Div
iden
d Pa
yout
Rat
io
HC
FSI
Peer
Gro
up
55