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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the

(Mark One) Securities Exchange Act of 1934

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2020

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 001-11252

Hallmark Financial Services, Inc.

(Exact name of registrant as specified in its charter)

Nevada

87-0447375

(State or other jurisdiction of

(I.R.S. Employer

Incorporation or organization)

Identification No.)

5420 Lyndon B. Johnson Freeway, Suite 1100, Dallas, Texas

75240

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (817) 348-1600

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.18 par value

HALL

Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes        No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,  a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 15(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, par value $0.18 per share –18,141,496 shares outstanding as of August 10, 2020.

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.   Financial Statements

INDEX TO FINANCIAL STATEMENTS

Page
Number

Consolidated Balance Sheets at June 30, 2020 (unaudited) and December 31, 2019

3

Consolidated Statements of Operations (unaudited) for the three months and six months ended June 30, 2020 and June 30, 2019

4

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months and six months ended June 30, 2020 and June 30, 2019

5

Consolidated Statements of Stockholders’ Equity (unaudited) for the three months and six months ended June 30, 2020 and June 30, 2019

6

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2020 and June 30, 2019

7

Notes to Consolidated Financial Statements (unaudited)

8

2

Table of Contents

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands, except par value)

June 30,

December 31,

2020

2019

(unaudited)

ASSETS

  

 

  

Investments:

  

 

  

Debt securities, available-for-sale, at fair value (amortized cost; $552,266 in 2020 and $569,498 in 2019)

$

553,322

$

574,279

Equity securities (cost; $21,249 in 2020 and $71,895 in 2019)

 

17,949

 

99,215

Other investments (cost; $3,763 in 2020 and $3,763 in 2019)

 

295

 

2,169

Total investments

 

571,566

 

675,663

Cash and cash equivalents

 

126,619

 

53,336

Restricted cash

 

1,858

 

1,612

Ceded unearned premiums

 

144,169

 

164,221

Premiums receivable

 

128,924

 

148,288

Accounts receivable

 

5,046

 

4,286

Receivable for securities

 

1,304

 

12,581

Reinsurance recoverable

 

377,988

 

315,466

Deferred policy acquisition costs

 

23,110

 

22,994

Goodwill

 

 

44,695

Intangible assets, net

 

2,556

 

5,087

Federal income tax recoverable

9,258

8,995

Deferred federal income taxes, net

 

9,031

 

2,185

Prepaid expenses

 

3,654

 

2,603

Other assets

 

29,313

 

33,262

Total assets

$

1,434,396

$

1,495,274

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Senior unsecured notes due 2029 (less unamortized debt issuance cost of $893 in 2020 and $942 in 2019)

$

49,107

$

49,058

Subordinated debt securities (less unamortized debt issuance cost of $820 in 2020 and $846 in 2019)

 

55,882

 

55,856

Reserves for unpaid losses and loss adjustment expenses

 

670,936

 

620,355

Unearned premiums

 

354,837

 

388,926

Reinsurance balances payable

 

55,818

 

59,274

Pension liability

 

1,223

 

1,388

Payable for securities

 

3

 

1,648

Accounts payable and other accrued expenses

 

44,418

 

55,487

Total liabilities

 

1,232,224

 

1,231,992

Commitments and contingencies (Note 19)

 

  

 

  

Stockholders’ equity:

 

  

 

  

Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2020 and 2019

 

3,757

 

3,757

Additional paid-in capital

 

122,729

 

123,468

Retained earnings

 

102,961

 

160,570

Accumulated other comprehensive (loss) income

 

(2,243)

 

688

Treasury stock (2,731,335 shares in 2020 and 2,749,738 in 2019), at cost

 

(25,032)

 

(25,201)

Total stockholders’ equity

 

202,172

 

263,282

Total liabilities and stockholders’ equity

$

1,434,396

$

1,495,274

The accompanying notes are an integral part of the consolidated financial statements

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

($ in thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

    

2020

    

2019

    

2020

    

2019

Gross premiums written

$

183,644

$

218,236

$

385,233

$

405,552

Ceded premiums written

 

(74,657)

 

(94,393)

 

(149,741)

 

(164,306)

Net premiums written

 

108,987

 

123,843

 

235,492

 

241,246

Change in unearned premiums

 

16,609

 

(17,344)

 

14,037

 

(35,717)

Net premiums earned

 

125,596

 

106,499

 

249,529

 

205,529

Investment income, net of expenses

 

3,196

 

5,412

 

7,654

 

10,523

Investment gains (losses), net

 

2,058

 

6,817

 

(27,272)

 

18,754

Finance charges

 

1,528

 

1,797

 

3,172

 

3,531

Commission and fees

 

260

 

364

 

584

 

657

Other income

 

14

 

14

 

33

 

30

Total revenues

 

132,652

 

120,903

 

233,700

 

239,024

Losses and loss adjustment expenses

 

94,873

 

73,226

 

188,278

 

143,313

Operating expenses

 

30,259

 

29,336

 

59,407

 

56,582

Interest expense

 

1,320

 

1,240

 

2,788

 

2,493

Impairment of goodwill and other intangible assets

45,996

Amortization of intangible assets

 

617

 

617

 

1,234

 

1,234

Total expenses

 

127,069

 

104,419

 

297,703

 

203,622

Income (loss) before tax

 

5,583

 

16,484

 

(64,003)

 

35,402

Income tax (benefit) expense

 

(1,118)

 

3,455

 

(6,394)

 

7,348

Net income (loss)

6,701

13,029

(57,609)

28,054

Net income (loss) per share:

 

  

 

  

 

  

 

  

Basic

$

0.37

$

0.72

$

(3.18)

$

1.55

Diluted

$

0.37

$

0.71

$

(3.18)

$

1.54

The accompanying notes are an integral part of the consolidated financial statements

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

($ in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

    

2020

    

2019

    

2020

    

2019

Net income (loss)

$

6,701

$

13,029

$

(57,609)

$

28,054

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

Change in net actuarial gain

 

35

 

37

 

69

 

72

Tax effect on change in net actuarial gain

 

(7)

 

(8)

 

(14)

 

(15)

Unrealized holding gains arising during the period

 

8,430

 

3,460

 

1,443

 

11,233

Tax effect on unrealized holding gains arising during the period

 

(1,771)

 

(727)

 

(304)

 

(2,359)

Reclassification adjustment for losses (gains) included in net income (loss)

 

414

 

(60)

 

(5,222)

 

(4,201)

Tax effect on reclassification adjustment for (losses) gains included in net income (loss)

 

(87)

 

13

 

1,097

 

883

Other comprehensive income (loss), net of tax

 

7,014

 

2,715

 

(2,931)

 

5,613

Comprehensive income (loss)

$

13,715

$

15,744

$

(60,540)

$

33,667

The accompanying notes are an integral part of the consolidated financial statements

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(Unaudited)

($ in thousands)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Common Stock

    

  

    

  

    

  

    

  

Balance, beginning of period

$

3,757

$

3,757

$

3,757

$

3,757

Balance, end of period

 

3,757

 

3,757

 

3,757

 

3,757

Additional Paid-In Capital

 

 

  

 

  

 

  

Balance, beginning of period

 

122,718

 

122,638

 

123,468

 

123,168

Equity based compensation

 

11

 

140

 

(570)

 

197

Shares issued under employee benefit plans

 

 

 

(169)

 

(587)

Balance, end of period

 

122,729

 

122,778

 

122,729

 

122,778

Retained Earnings

 

  

 

  

 

  

 

  

Balance, beginning of period

 

96,260

 

176,220

 

160,570

 

161,195

Net income (loss)

 

6,701

 

13,029

 

(57,609)

 

28,054

Balance, end of period

 

102,961

 

189,249

 

102,961

 

189,249

Accumulated Other Comprehensive Income

 

  

 

  

 

  

 

  

Balance, beginning of period

 

(9,257)

 

(3,762)

 

688

 

(6,660)

Additional minimum pension liability, net of tax

 

28

 

29

 

55

 

57

Unrealized holding gains arising during period, net of tax

 

6,659

 

2,733

 

1,139

 

8,874

Reclassification adjustment for losses (gains) included in net income, net of tax

 

327

 

(47)

 

(4,125)

 

(3,318)

Balance, end of period

 

(2,243)

 

(1,047)

 

(2,243)

 

(1,047)

Treasury Stock

 

  

 

  

 

  

 

  

Balance, beginning of period

 

(25,032)

 

(25,201)

 

(25,201)

 

(25,928)

Acquisition of treasury stock

 

 

 

 

(1,380)

Shares issued under employee benefit plans

 

 

 

169

 

2,107

Balance, end of period

 

(25,032)

 

(25,201)

 

(25,032)

 

(25,201)

Total Stockholders' Equity

$

202,172

$

289,536

$

202,172

$

289,536

The accompanying notes are an integral part of the consolidated financial statements

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Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

($ in thousands)

Six Months Ended June 30,

2020

2019

Cash flows from operating activities:

  

 

  

 

Net (loss) income

$

(57,609)

$

28,054

Adjustments to reconcile net income to cash (used in) provided by operating activities:

 

  

 

  

Depreciation and amortization expense

 

2,818

 

2,626

Deferred federal income taxes (benefit) expense

 

(6,122)

 

3,634

Investment losses (gains), net

 

27,272

 

(18,754)

Share-based payments (benefit) expense

 

(570)

 

197

Impairment of goodwill and other intangibles

45,996

Change in ceded unearned premiums

 

20,052

 

(17,852)

Change in premiums receivable

 

19,364

 

(24,896)

Change in accounts receivable

 

(760)

 

287

Change in deferred policy acquisition costs

 

(116)

 

(6,017)

Change in reserves for losses and loss adjustment expenses

 

50,581

 

24,296

Change in unearned premiums

 

(34,089)

 

53,569

Change in reinsurance recoverable

 

(62,522)

 

(48,126)

Change in reinsurance balances (recoverable) payable

 

(3,456)

 

6,649

Change in federal income tax (recoverable) payable

 

(263)

 

866

Change in all other liabilities

 

(11,159)

 

(2,708)

Change in all other assets

 

3,623

 

4,860

Net cash (used in) provided by operating activities

 

(6,960)

 

6,685

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(1,122)

 

(2,447)

Purchases of investment securities

 

(153,708)

 

(97,292)

Maturities, sales and redemptions of investment securities

 

235,319

 

123,599

Net cash provided by investing activities

 

80,489

 

23,860

Cash flows from financing activities:

 

  

 

  

Proceeds from exercise of employee stock options

 

 

1,520

Purchase of treasury shares

 

 

(1,380)

Net cash provided by financing activities

 

 

140

Increase in cash and cash equivalents and restricted cash

 

73,529

 

30,685

Cash and cash equivalents and restricted cash at beginning of period

 

54,948

 

40,471

Cash and cash equivalents and restricted cash at end of period

$

128,477

$

71,156

The accompanying notes are an integral part of the consolidated financial statements

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Hallmark Financial Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

1. General

Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, the “Company”, “we,” “us” or “our”) is an insurance holding company that, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing our insurance products, as well as providing other insurance related services.

We market, distribute, underwrite and service our property/casualty insurance products primarily through business units organized by products and distribution channel. Our business units are supported by our insurance company subsidiaries.  Our Commercial Auto business unit offers primary and excess commercial vehicle insurance products and services; our E&S Casualty business unit offers primary and excess liability, excess public entity liability, E&S package and garage liability insurance products and services; our E&S Property business unit offers primary and excess commercial property insurance for both catastrophe and non-catastrophe exposures; our Professional Liability business unit offers healthcare and financial lines professional liability insurance products and services primarily for businesses, medical professionals, medical facilities and senior care facilities; and our Aerospace & Programs business unit offers general aviation and satellite launch property/casualty insurance products and services, as well as certain specialty programs.  Our Commercial Accounts business unit offers package and monoline property/casualty and occupational accident insurance products. Effective June 1, 2016 we ceased marketing new or renewal occupational accident policies.  Our former Workers Compensation operating unit specialized in small and middle market workers compensation business. Effective July 1, 2015, we no longer market or retain any risk on new or renewal workers compensation policies. Our Specialty Personal Lines business unit offers non-standard personal automobile and renters insurance products and services. Our insurance company subsidiaries supporting these business units are American Hallmark Insurance Company of Texas (“AHIC”), Hallmark Insurance Company (“HIC”), Hallmark Specialty Insurance Company (“HSIC”), Hallmark County Mutual Insurance Company (“HCM”), Hallmark National Insurance Company (“HNIC”) and Texas Builders Insurance Company (“TBIC”).

These business units are segregated into three reportable industry segments for financial accounting purposes. The Specialty Commercial Segment includes our Commercial Auto business unit, E&S Casualty business unit, E&S Property business unit, Professional Liability business unit and Aerospace & Programs business unit. The Standard Commercial Segment consists of the Commercial Accounts business unit and the runoff from our former Workers Compensation operating unit. The Personal Segment consists solely of our Specialty Personal Lines business unit.

 

2. Basis of Presentation

Our unaudited consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include our accounts and the accounts of our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K filed with the SEC.

The interim financial data as of June 30, 2020 and 2019 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for the periods ended June 30, 2020 are not necessarily indicative of the operating results to be expected for the full year.

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Use of Estimates in the Preparation of the Financial Statements

Our preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the date of our consolidated financial statements, as well as our reported amounts of revenues and expenses during the reporting period. Refer to “Critical Accounting Estimates and Judgments” under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 for information on accounting policies that we consider critical in preparing our consolidated financial statements. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments

Fair value estimates are made at a point in time based on relevant market data as well as the best information available about the financial instruments. Fair value estimates for financial instruments for which no or limited observable market data is available are based on judgments regarding current economic conditions, credit and interest rate risk. These estimates involve significant uncertainties and judgments and cannot be determined with precision. As a result, such calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique, including discount rate and estimates of future cash flows, could significantly affect these fair value estimates.

Cash and Cash Equivalents:  The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

Restricted Cash:  The carrying amount for restricted cash reported in the balance sheet approximates the fair value.

Senior Unsecured Notes Due 2029:  Our senior unsecured notes payable due in 2029 had a carrying value of $49.1 million and a fair value of $52.3 million as of June 30, 2020.   Our senior unsecured notes payable would be included in Level 3 of the fair value hierarchy if they were reported at fair value

Subordinated Debt Securities:  Our trust preferred securities had a carrying value of $55.9 million and a fair value of $29.3 million as of June 30, 2020. Our trust preferred securities would be included in Level 3 of the fair value hierarchy if they were reported at fair value.

For reinsurance balances, premiums receivable, federal income tax recoverable, other assets and other liabilities, the carrying amounts approximate fair value because of the short maturity of such financial instruments.

Variable Interest Entities

On June 21, 2005, we formed Hallmark Statutory Trust I (“Trust I”), an unconsolidated trust subsidiary, for the sole purpose of issuing $30.0 million in trust preferred securities. Trust I used the proceeds from the sale of these securities and our initial capital contribution to purchase $30.9 million of subordinated debt securities from Hallmark. The debt securities are the sole assets of Trust I, and the payments under the debt securities are the sole revenues of Trust I.

On August 23, 2007, we formed Hallmark Statutory Trust II (“Trust II”), an unconsolidated trust subsidiary, for the sole purpose of issuing $25.0 million in trust preferred securities. Trust II used the proceeds from the sale of these securities and our initial capital contribution to purchase $25.8 million of subordinated debt securities from Hallmark. The debt securities are the sole assets of Trust II, and the payments under the debt securities are the sole revenues of Trust II.

We evaluate on an ongoing basis our investments in Trust I and Trust II (collectively the “Trusts”) and have determined that we do not have a variable interest in the Trusts. Therefore, the Trusts are not included in our consolidated financial statements.

We are also involved in the normal course of business with variable interest entities primarily as a passive investor in mortgage-backed securities and certain collateralized corporate bank loans issued by third-party variable interest

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entities. The maximum exposure to loss with respect to these investments is limited to the investment carrying values included in the consolidated balance sheets.

Income Taxes

We file a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end. Deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are adjusted for tax rate changes in effect for the year in which these temporary differences are expected to be recovered or settled.

Adoption of New Accounting Pronouncements

On August 28, 2018, the FASB issued ASU 2018-13, “Fair Value Measurement: Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement” (Topic 820), which amends ASC 820 to add, remove, and modify fair value measurement disclosure requirements.  The requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements have all been removed. However, the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period must be disclosed along with the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements (or other quantitative information if it is more reasonable). Finally, for investments measured at net asset value, the requirements have been modified so that the timing of liquidation and the date when restrictions from redemption might lapse are only disclosed if the investee has communicated the timing to the entity or announced the timing publicly. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. As the amendments are only disclosure related, our financial statements were not materially impacted by this update.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (Topic 350). ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill. The ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this guidance did not have a material effect on the Company’s results of operations, financials position or liquidity.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additionally, ASU 2016-02 modifies current guidance for lessors' accounting. ASU 2016-02 is effective for interim and annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. During 2018, the FASB issued several amendments and targeted improvements to ease the application of the standard, including the addition of a transition approach that gives the Company the option of applying the standard at either the beginning of the earliest comparative period presented or the beginning of the period of adoption. We adopted the standard on its effective date of January 1, 2019. We also elected certain practical expedients that allow us not to reassess existing leases under the new guidance. As of June 30, 2020, $15.0 million of right-of-use assets and $16.9 million of lease liabilities for operating leases were included in the other assets and other liabilities line items of the balance sheet, respectively, as a result of the adoption of this update.

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued updated guidance for the accounting for income taxes.  The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in the existing guidance and amending other existing guidance to simplify several other income tax accounting matters.  The updated guidance is effective for the quarter ending March 31, 2021.  Early adoption is permitted.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financials position or liquidity.

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In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326). ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including receivables and available-for-sale debt securities, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. As a smaller reporting company, ASU 2016-13 is effective for fiscal years of the Company beginning after December 15, 2022, including interim periods within those fiscal years.  ASU 2016-13 requires a modified retrospective transition method and early adoption is permitted. We are currently evaluating the impact that the adoption of this standard will have on our financial results and disclosures, but do not anticipate that any potential impact would be material.  

3. Acquisitions, Goodwill and Intangible Assets

In connection with its normal process for evaluating impairment triggering events, the Company determined that a significant decline in its market capitalization below its stockholders’ equity during the first quarter of 2020  indicated the impairment of the goodwill and indefinite-lived intangible assets included in its balance sheet.  As a result, the Company took a $44.7 million charge to goodwill and a $1.3 million charge to indefinite-lived intangible assets during the first quarter of 2020. As of June 30, 2020 there is no goodwill reported on our consolidated balance sheet.

4. Fair Value

ASC 820 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820, among other things, requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In addition, ASC 820 precludes the use of block discounts when measuring the fair value of instruments traded in an active market, which were previously applied to large holdings of publicly traded equity securities.

We determine the fair value of our financial instruments based on the fair value hierarchy established in ASC 820. In accordance with ASC 820, we utilize the following fair value hierarchy:

Level 1: quoted prices in active markets for identical assets;
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, inputs of identical assets for less active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument; and
Level 3: inputs to the valuation methodology that are unobservable for the asset or liability.

This hierarchy requires the use of observable market data when available.

Under ASC 820, we determine fair value based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy described above. Fair value measurements for assets and liabilities where there exists limited or no observable market data are calculated based upon our pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other factors as appropriate. These estimated fair values may not be realized upon actual sale or immediate settlement of the asset or liability.

Where quoted prices are available on active exchanges for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include common and preferred stock and an equity warrant classified as Other Investments.

Level 2 investment securities include corporate bonds, collateralized corporate bank loans, municipal bonds, U.S. Treasury securities, other obligations of the U.S. Government and mortgage-backed securities for which quoted prices are

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not available on active exchanges for identical instruments. We use third-party pricing services to determine fair values for each Level 2 investment security in all asset classes. Since quoted prices in active markets for identical assets are not available, these prices are determined using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other things. We have reviewed the processes used by the pricing services and have determined that they result in fair values consistent with the requirements of ASC 820 for Level 2 investment securities. We have not adjusted any prices received from third-party pricing sources. There were no transfers between Level 1 and Level 2 securities.

In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. Level 3 investments are valued based on the best available data in order to approximate fair value. This data may be internally developed and consider risk premiums that a market participant would require. Investment securities classified within Level 3 include other less liquid investment securities.

The following table presents, for each of the fair value hierarchy levels, assets that are measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019 (in thousands):

As of June 30, 2020

    

Quoted Prices in

    

    

    

Active Markets for

Identical Assets

Other Observable

Unobservable

    

(Level 1)

    

Inputs (Level 2)

    

Inputs (Level 3)

    

Total

U.S. Treasury securities and obligations of U.S. Government

$

$

155,065

$

-

$

155,065

Corporate bonds

 

 

269,000

 

306

 

269,306

Collateralized corporate bank loans

 

 

56,364

 

-

 

56,364

Municipal bonds

 

 

65,326

 

-

 

65,326

Mortgage-backed

 

 

7,261

 

-

 

7,261

Total debt securities

 

 

553,016

 

306

 

553,322

Total equity securities

 

17,949

 

 

 

17,949

Total other investments

 

295

 

 

 

295

Total investments

$

18,244

$

553,016

$

306

$

571,566

As of December 31, 2019

    

Quoted Prices in

    

    

    

Active Markets for

Identical Assets

Other Observable

Unobservable

    

(Level 1)

    

Inputs (Level 2)

    

Inputs (Level 3)

    

Total

U.S. Treasury securities and obligations of U.S. Government

$

$

66,600

$

$

66,600

Corporate bonds

 

 

300,486

 

339

 

300,825

Collateralized corporate bank loans

 

 

115,757

 

 

115,757

Municipal bonds

 

 

83,270

 

 

83,270

Mortgage-backed

 

 

7,827

 

 

7,827

Total debt securities

 

 

573,940

 

339

 

574,279

Total equity securities

 

99,215

 

 

 

99,215

Total other investments

 

2,169

 

 

 

2,169

Total investments

$

101,384

$

573,940

$

339

$

675,663

Due to significant unobservable inputs into the valuation model for one corporate bond as of June 30, 2020 and December 31, 2019, we classified this investment as Level 3 in the fair value hierarchy. The corporate bond is a convertible senior note and its fair value was estimated by the sum of the bond value using an income approach discounting the scheduled interest and principal payments and the conversion feature utilizing a binomial lattice model. We also estimated the fair value of the corporate bond utilizing an as-if converted basis into the underlying securities. Significant changes in the unobservable inputs in the fair value measurement of this corporate bond could result in a significant change in the fair value measurement.

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The following table summarizes the changes in fair value for all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2020 and 2019 (in thousands):

Beginning balance as of January 1, 2020

    

$

339

Sales

 

Settlements

 

Purchases

 

Issuances

 

Total realized/unrealized losses included in net income

 

(33)

Net gain included in other comprehensive income

 

Transfers into Level 3

 

Transfers out of Level 3

 

Ending balance as of June 30, 2020

$

306

Beginning balance as of January 1, 2019

    

$

291

Sales

 

Settlements

 

Purchases

 

Issuances

 

Total realized/unrealized gains included in net income

 

242

Net gains included in other comprehensive income

 

Transfers into Level 3

 

Transfers out of Level 3

 

Ending balance as of June 30, 2019

$

533

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5. Investments

The amortized cost and estimated fair value of investments in debt and equity securities by category is as follows (in thousands):

    

    

Gross

    

Gross

    

Unrealized

Unrealized

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

As of June 30, 2020

U.S. Treasury securities and obligations of U.S. Government

$

154,267

$

833

$

(35)

$

155,065

Corporate bonds

 

266,926

 

5,992

 

(3,612)

 

269,306

Collateralized corporate bank loans

 

59,409

 

-

 

(3,045)

 

56,364

Municipal bonds

 

64,540

 

843

 

(57)

 

65,326

Mortgage-backed

 

7,124

 

141

 

(4)

 

7,261

Total debt securities

 

552,266

 

7,809

 

(6,753)

 

553,322

Total equity securities

 

21,249

 

2,085

 

(5,385)

 

17,949

Total other investments

 

3,763

 

 

(3,468)

 

295

Total investments

$

577,278

$

9,894

$

(15,606)

$

571,566

As of December 31, 2019

 

  

 

  

 

  

U.S. Treasury securities and obligations of U.S. Government

$

66,441

$

162

$

(3)

$

66,600

Corporate bonds

 

297,601

 

3,387

 

(163)

 

300,825

Collateralized corporate bank loans

 

115,669

 

556

 

(468)

 

115,757

Municipal bonds

 

81,787

 

1,531

 

(48)

 

83,270

Mortgage-backed

 

8,000

 

46

 

(219)

 

7,827

Total debt securities

 

569,498

 

5,682

 

(901)

 

574,279

Total equity securities

 

71,895

 

35,028

 

(7,708)

 

99,215

Total other investments

 

3,763

 

 

(1,594)

 

2,169

Total investments

$

645,156

$

40,710

$

(10,203)

$

675,663

Major categories of net investment gains (losses) on investments are summarized as follows (in thousands):

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

    

U.S. Treasury securities and obligations of U.S. Government

$

$

$

$

Corporate bonds

 

359

 

(6)

 

414