CHFC 2018 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, 2018 Fair value, beginning of period $ 427 $ 63,414 $ 63,841 Additions from loans sold with servicing retained 139 8,087 8,226 Changes in fair value due to: Reductions from pay-offs, pay downs and run-off (115) (2,766) (2,881) Changes in estimates of fair value (1) — 1,827 1,827 Fair value, end of period $ 451 $ 70,562 $ 71,013 Principal balance of loans serviced $ 41,127 $ 6,826,952 $ 6,868,079 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 (2) — 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. (2) The Corporation elected as of January 1, 2017 to account for all loan servicing rights previously accounted for at the lower of cost or fair value under the fair value measurement method. For further information on this election, refer to Note 1, Summary of SignificantAccounting Policies. Chemical Financial Corporation Notes to Consolidated Financial Statements December 31, 2018 134