CHFC 2017 Annual Report

The Corporation has elected the fair value option for loans held-for-sale. These loans are intended for sale and the Corporation believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans in accordance with the Corporation's policy on loans held for investment in “Interest and fees on loans” in the Consolidated Statements of Income. There were no loans held-for-sale that were on nonaccrual status or 90 days past due and on accrual status as of December 31, 2017 and 2016. The aggregate fair value, contractual balance (including accrued interest), and gain or loss for loans held-for-sale carried at fair value option was as follows: December 31, (Dollars in thousands) 2017 2016 Aggregate fair value $ 52,133 $ 81,830 Contractual balance 50,597 81,009 Unrealized gain (loss) 1,536 821 The total amount of gains (losses) from loans held-for-sale included in the Consolidated Statements of Income was as follows: Year Ended December 31, (Dollars in thousands) 2017 2016 2015 Interest income (1) $ 2,540 $ 1,606 $ 83 Change in fair value (2) 715 39 (61) Net gain on sales of loans (2) 31,734 15,686 6,354 Total included in earnings $ 34,989 $ 17,331 $ 6,376 (1) Included in "Interest and fees on loans" in the Consolidated Statements of Income. (2) Included in "Net gain on sale of loans and other mortgage banking revenue" in the Consolidated Statements of Income. Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis Investment securities: Investment securities classified as held to maturity are recorded at fair value if the value is below amortized cost and the Corporation has determined that such unrealized loss is an other-than-temporary impairment. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are generally measured using independent pricing models or other model-based valuation techniques that include market inputs, such as benchmark yields, reported trades, broker dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry and economic events. Impaired Loans: The Corporation does not record loans held for investment at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allocation of the allowance (valuation allowance) may be established or a portion of the loan is charged off. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including the loan's observable market price, the fair value of the collateral or the present value of the expected future cash flows discounted at the loan's effective interest rate. Those impaired loans not requiring a valuation allowance represent loans for which the fair value of the expected repayments or collateral exceed the remaining carrying amount of such loans. Impaired loans where a valuation allowance is established or a portion of the loan is charged off based on the fair value of collateral are subject to nonrecurring fair value measurement and require classification in the fair value hierarchy. The Corporation records impaired loans as Level 3 valuations as there is generally no observablemarket price ormanagement determines the fair value of the collateral is further impaired below the independent appraised value. When management determines the fair value of the collateral is further impaired below the appraised value, discounts ranging between 20% and 30% of the appraised value are used depending on the nature of the collateral and the age of the most recent appraisal. Goodwill: Goodwill is subject to impairment testing on an annual basis. The assessment of goodwill for impairment requires a significant degree of judgment. In the event the assessment indicates that it is more-likely-than-not that the fair value is less than the carrying value, the asset is considered impaired and recorded at fair value. Goodwill that is impaired and subject to nonrecurring fair value measurements is a Level 3 valuation. At December 31, 2017 and 2016, no goodwill was impaired. Chemical Financial Corporation Notes to Consolidated Financial Statements December 31, 2017 105