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Note 4: Acquired Loans, Loss Sharing Agreements and FDIC Indemnification Assets: Business Acquisition Fair Value and Expected Cash Flows Policy (Policies) | 12 Months Ended
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Dec. 31, 2019
Policies |
Business Acquisition Fair Value and Expected Cash Flows Policy | Fair Value and Expected Cash Flows At the time of these acquisitions, the Company determined the fair value of the loan portfolios based on several assumptions. Factors considered in the valuations were projected cash flows for the loans, type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, current discount rates and whether or not the loan was amortizing. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. Management also estimated the amount of credit losses that were expected to be realized for the loan portfolios. The discounted cash flow approach was used to value each pool of loans. For non-performing loans, fair value was estimated by calculating the present value of the recoverable cash flows using a discount rate based on comparable corporate bond rates. This valuation of the acquired loans is a significant component leading to the valuation of the loss sharing assets recorded. The amount of the estimated cash flows expected to be received from the acquired loan pools in excess of the fair values recorded for the loan pools is referred to as the accretable yield. The accretable yield is recognized as interest income over the estimated lives of the loans. On an ongoing basis, the Company has evaluated the fair value of the loans including cash flows expected to be collected. Increases in the Company’s cash flow expectations are recognized as increases to the accretable yield while decreases are recognized as impairments through the allowance for loan losses. During the years ended December 31, 2019, 2018 and 2017, improvements in expected cash flows related to the acquired loan portfolios resulted in adjustments to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis. The increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements, when applicable, until they were terminated or expired. This resulted in corresponding adjustments during the year ended December 31, 2017, to the indemnification assets (which during 2017 were reduced to $-0- due to the termination of the loss sharing agreements). The amounts of these adjustments were as follows:
|  | Year Ended December 31,
|  | 2019 |  |  | 2018 |  |  | 2017
|  | (In Thousands)
Increase in accretable yield due to increased cash flow expectations | $ | 12,323 |  | $ | 5,202 |  | $ | 1,333
The adjustments, along with those made in previous years, impacted the Company’s Consolidated Statements of Income as follows:
|  | Year Ended December 31,
|  | 2019 |  |  | 2018 |  |  | 2017
|  | (In Thousands)
Interest income | $ | 7,431 |  | $ | 5,134 |  | $ | 5,014
Noninterest income |  | — |  |  | — |  |  | (634)
Net impact to pre-tax income | $ | 7,431 |  | $ | 5,134 |  | $ | 4,380
On an on-going basis the Company has estimated the cash flows expected to be collected from the acquired loan pools. For each of the loan portfolios acquired, the cash flow estimates have increased, based on payment histories and reduced credit loss expectations. This resulted in increased income that has been spread, on a level-yield basis, over the remaining expected lives of the loan pools (and, therefore, has decreased over time). Increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC (when such agreements were in place), which were recorded as indemnification assets. Therefore, the expected indemnification assets had also been reduced, resulting in adjustments to be amortized on a comparable basis over the remainder of the loss sharing agreements or the remaining expected lives of the loan pools, whichever was shorter. Additional estimated cash flows totaling approximately $12.3 million were recorded in the year ended December 31, 2019 related to these loan pools, with no corresponding reduction in expected reimbursement from the FDIC as the remaining loss sharing agreements were terminated in 2017. Because these adjustments to accretable yield will be recognized generally over the remaining lives of the loan pools, they will impact future periods as well. As of December 31, 2019, the remaining accretable yield adjustment that will affect interest income was $7.6 million. Of the remaining adjustments affecting interest income, we expect to recognize $5.6 million of interest income during 2020. As there is no longer, nor will there be in the future, indemnification asset amortization related to TeamBank, Vantus Bank, Sun Security Bank or InterBank due to the termination or expiration of the related loss sharing agreements for those transactions, there is no remaining indemnification asset or related adjustments that will affect non-interest income (expense). During the three months ending March 31, 2020, we will adopt the new accounting standard related to accounting for credit losses. With the adoption of this standard, there will be no more reclassification of discounts from non-accretable to accretable subsequent to December 31, 2019. All adjustments made prior to December 31, 2019 will continue to be accreted to interest income. Changes in the accretable yield for acquired loan pools were as follows for the years ended December 31, 2019, 2018 and 2017:
|  |  |  |  |  |  |  | Sun |  |  |  |  |  |
|  | TeamBank |  |  | Vantus Bank |  |  | Security Bank |  |  | InterBank |  |  | Valley Bank
|  | (In Thousands)
Balance, January 1, 2017 | $ | 2,477 |  | $ | 2,547 |  | $ | 4,277 |  | $ | 8,512 |  | $ | 4,797
Accretion |  | (1,563) |  |  | (1,373) |  |  | (2,251) |  |  | (7,505) |  |  | (5,823)
Reclassification from nonaccretable difference(1) |  | 1,157 |  |  | 676 |  |  | 875 |  |  | 4,067 |  |  | 3,721
Balance, December 31, 2017 |  | 2,071 |  |  | 1,850 |  |  | 2,901 |  |  | 5,074 |  |  | 2,695
Accretion |  | (1,042) |  |  | (1,196) |  |  | (1,667) |  |  | (8,349) |  |  | (3,892)
Reclassification from nonaccretable difference(1) |  | 327 |  |  | 778 |  |  | 1,008 |  |  | 8,269 |  |  | 4,260
Balance, December 31, 2018 |  | 1,356 |  |  | 1,432 |  |  | 2,242 |  |  | 4,994 |  |  | 3,063
Accretion |  | (955) |  |  | (1,006) |  |  | (1,562) |  |  | (8,798) |  |  | (4,302)
Reclassification from nonaccretable difference(1) |  | 756 |  |  | 697 |  |  | 1,268 |  |  | 12,081 |  |  | 5,817
Balance, December 31, 2019 | $ | 1,157 |  | $ | 1,123 |  | $ | 1,948 |  | $ | 8,277 |  | $ | 4,578
(1) | Represents increases in estimated cash flows expected to be received from the acquired loan pools, primarily due to lower estimated credit losses. The numbers also include changes in expected accretion of the loan pools for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the year ended December 31, 2019, totaling $667,000, $480,000, $810,000, $3.9 million and $2.5 million, respectively; for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the year ended December 31, 2018, totaling $312,000, $778,000, $756,000, $4.1 million and $3.5 million, respectively; and for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the year ended December 31, 2017, totaling $1.1 million, $663,000, $850,000, $3.5 million and $3.0 million, respectively

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