CHFC 2017 Annual Report

LSRs are established and recorded at the estimated fair value by calculating the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. The following table represents the activity for LSRs and the related fair value changes: (Dollars in thousands) Commercial Real Estate Mortgage Total For the year ended December 31, 2017 Fair value, beginning of period $ 344 $ 47,741 $ 48,085 Transfers in based on new accounting policy election — 15,891 15,891 Additions from loans sold with servicing retained 188 8,557 8,745 Changes in fair value due to: Reductions from pay-offs, pay downs and run-off (105) (2,400) (2,505) Changes in estimates of fair value (1) — (6,375) (6,375) Fair value, end of period $ 427 $ 63,414 $ 63,841 Principal balance of loans serviced $ 40,316 $ 7,068,431 $ 7,108,747 For the year ended December 31, 2016 Fair value, beginning of period $ — $ — $ — Acquired in Talmer Bancorp, Inc. merger 365 42,097 42,462 Additions from loans sold with servicing retained — 1,030 1,030 Changes in fair value due to: Reductions from pay-offs, pay downs and run-off (17) (502) (519) Changes in estimates of fair value (1) (4) 5,116 5,112 Fair value, end of period $ 344 $ 47,741 $ 48,085 Principal balance of loans serviced under the fair value measurement method $ 64,756 $ 5,235,415 $ 5,300,171 (1) Represents estimated LSR value change resulting primarily from market-driven changes in interest rates and prepayments. Included in "Net gain on sale of loans and other mortgage banking revenue" in the Consolidated Statements of Income. The following shows the net carrying value and fair value of LSRs and the total loans that the Corporation serviced for others accounted for at the lower of cost or fair value for the years ended December 31, 2016 and 2015: Years Ended December 31, (Dollars in thousands) 2016 2015 Net carrying value of LSRs $ 10,230 $ 11,122 Fair value of LSRs $ 15,891 $ 15,542 Valuation allowance $ 8 $ — Loans serviced for others that have servicing rights capitalized $ 2,074,057 $ 2,082,899 Activity for LSRs accounted for at the lower of cost or fair value and the related valuation allowance for the years ended December 31, 2016 and 2015 are as follows: Years Ended December 31, (Dollars in thousands) 2016 2015 Balance at beginning of period $ 11,122 $ 12,217 Acquired through acquisitions — 1,284 Additions 3,303 1,476 Amortization (4,187) (4,055) Change in valuation allowance (8) 200 Balance at end of period $ 10,230 $ 11,122 Chemical Financial Corporation Notes to Consolidated Financial Statements December 31, 2017 129