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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 September 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 – 18,142,158 shares outstanding as of  November 5, 2020.

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.   Financial Statements

INDEX TO FINANCIAL STATEMENTS

Page
Number

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

3

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

4

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

5

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

6

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2020 and September 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)

September 30,

December 31,

2020

2019

(unaudited)

ASSETS

  

 

  

Investments:

  

 

  

Debt securities, available-for-sale, at fair value (amortized cost: $414,197 in 2020 and $569,498 in 2019)

$

417,569

$

574,279

Equity securities (cost: $25,735 in 2020 and $71,895 in 2019)

 

23,372

 

99,215

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

 

34

 

2,169

Total investments

 

440,975

 

675,663

Cash and cash equivalents

 

186,683

 

53,336

Restricted cash

 

17,671

 

1,612

Ceded unearned premiums

 

144,075

 

164,221

Premiums receivable

 

112,367

 

148,288

Accounts receivable

 

5,194

 

4,286

Receivable for securities

 

1,568

 

12,581

Reinsurance recoverable

 

504,472

 

315,466

Deferred policy acquisition costs

 

22,365

 

22,994

Goodwill

 

 

44,695

Intangible assets, net

 

1,938

 

5,087

Federal income tax recoverable

19,748

8,995

Deferred federal income taxes, net

 

8,012

 

2,185

Prepaid expenses

 

3,634

 

2,603

Other assets

 

28,805

 

33,262

Total assets

$

1,497,507

$

1,495,274

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Senior unsecured notes due 2029 (less unamortized debt issuance cost of $868 in 2020 and $942 in 2019)

$

49,132

$

49,058

Subordinated debt securities (less unamortized debt issuance cost of $808 in 2020 and $846 in 2019)

 

55,894

 

55,856

Reserves for unpaid losses and loss adjustment expenses

 

755,891

 

620,355

Unearned premiums

 

351,294

 

388,926

Reinsurance balances payable

 

67,346

 

59,274

Pension liability

 

1,141

 

1,388

Payable for securities

 

507

 

1,648

Accounts payable and other accrued expenses

 

40,123

 

55,487

Total liabilities

 

1,321,328

 

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

 

122,877

 

123,468

Retained earnings

 

74,957

 

160,570

Accumulated other comprehensive (loss) income

 

(386)

 

688

Treasury stock (2,730,673 shares in 2020 and 2,749,738 in 2019), at cost

 

(25,026)

 

(25,201)

Total stockholders’ equity

 

176,179

 

263,282

Total liabilities and stockholders’ equity

$

1,497,507

$

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 September 30,

Nine Months Ended September 30,

    

2020

    

2019

    

2020

    

2019

Gross premiums written

$

196,464

$

224,178

$

581,697

$

629,730

Ceded premiums written

 

(80,353)

 

(96,405)

 

(230,094)

 

(260,711)

Net premiums written

 

116,111

 

127,773

 

351,603

 

369,019

Change in unearned premiums

 

3,449

 

(15,274)

 

17,486

 

(50,991)

Net premiums earned

 

119,560

 

112,499

 

369,089

 

318,028

Investment income, net of expenses

 

2,660

 

5,050

 

10,314

 

15,573

Investment (losses) gains, net

 

(627)

 

(1,342)

 

(27,899)

 

17,412

Finance charges

 

1,316

 

1,778

 

4,488

 

5,309

Commission and fees

 

209

 

287

 

793

 

944

Other income

 

15

 

13

 

48

 

43

Total revenues

 

123,133

 

118,285

 

356,833

 

357,309

Losses and loss adjustment expenses

 

124,253

 

78,548

 

312,531

 

221,861

Operating expenses

 

34,296

 

31,074

 

93,703

 

87,656

Interest expense

 

1,273

 

1,386

 

4,061

 

3,879

Impairment of goodwill and other intangible assets

45,996

Amortization of intangible assets

 

617

 

617

 

1,851

 

1,851

Total expenses

 

160,439

 

111,625

 

458,142

 

315,247

(Loss) income before tax

 

(37,306)

 

6,660

 

(101,309)

 

42,062

Income tax (benefit) expense

 

(9,302)

 

1,373

 

(15,696)

 

8,721

Net (loss) income

$

(28,004)

$

5,287

$

(85,613)

$

33,341

Net (loss) income per share:

 

  

 

  

 

  

 

  

Basic

$

(1.54)

$

0.29

$

(4.72)

$

1.84

Diluted

$

(1.54)

$

0.29

$

(4.72)

$

1.82

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 (Loss) Income

(Unaudited)

($ in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

    

2020

    

2019

    

2020

    

2019

Net (loss) income

$

(28,004)

$

5,287

$

(85,613)

$

33,341

Other comprehensive income (loss):

 

  

 

  

 

 

  

Change in net actuarial gain

 

35

 

36

 

104

 

108

Tax effect on change in net actuarial gain

 

(8)

 

(8)

 

(22)

 

(23)

Unrealized holding gains arising during the period

 

2,706

 

1,777

 

4,149

 

13,010

Tax effect on unrealized holding gains arising during the period

 

(568)

 

(373)

 

(872)

 

(2,732)

Reclassification adjustment for gains included in net (loss) income

 

(390)

 

(175)

 

(5,612)

 

(4,376)

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

 

82

 

36

 

1,179

 

919

Other comprehensive income (loss), net of tax

 

1,857

 

1,293

 

(1,074)

 

6,906

Comprehensive (loss) income

$

(26,147)

$

6,580

$

(86,687)

$

40,247

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

Nine Months Ended

September 30,

September 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

 

122,729

 

122,778

 

123,468

 

123,168

Equity based compensation

 

154

 

317

 

(416)

 

514

Shares issued under employee benefit plans

 

(6)

 

 

(175)

 

(587)

Balance, end of period

 

122,877

 

123,095

 

122,877

 

123,095

Retained Earnings

 

  

 

  

 

  

 

  

Balance, beginning of period

 

102,961

 

189,249

 

160,570

 

161,195

Net (loss) income

 

(28,004)

 

5,287

 

(85,613)

 

33,341

Balance, end of period

 

74,957

 

194,536

 

74,957

 

194,536

Accumulated Other Comprehensive (Loss) Income

 

  

 

  

 

  

 

  

Balance, beginning of period

 

(2,243)

 

(1,047)

 

688

 

(6,660)

Additional minimum pension liability, net of tax

 

27

 

28

 

82

 

85

Unrealized holding gains arising during period, net of tax

 

2,138

 

1,404

 

3,277

 

10,278

Reclassification adjustment for gains included in net income, net of tax

 

(308)

 

(139)

 

(4,433)

 

(3,457)

Balance, end of period

 

(386)

 

246

 

(386)

 

246

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

 

6

 

 

175

 

2,107

Balance, end of period

 

(25,026)

 

(25,201)

 

(25,026)

 

(25,201)

Total Stockholders' Equity

$

176,179

$

296,433

$

176,179

$

296,433

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)

Nine Months Ended September 30,

2020

2019

Cash flows from operating activities:

  

 

  

 

Net (loss) income

$

(85,613)

$

33,341

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

 

  

 

  

Depreciation and amortization expense

 

4,257

 

4,001

Deferred federal income taxes (benefit) expense

 

(5,597)

 

2,596

Investment losses (gains), net

 

27,899

 

(17,412)

Share-based payments (benefit) expense

 

(416)

 

514

Impairment of goodwill and other intangibles

45,996

Change in ceded unearned premiums

 

20,146

 

(31,015)

Change in premiums receivable

 

35,921

 

(20,802)

Change in accounts receivable

 

(908)

 

(27)

Change in deferred policy acquisition costs

 

629

 

(7,613)

Change in reserves for unpaid losses and loss adjustment expenses

 

135,536

 

38,049

Change in unearned premiums

 

(37,632)

 

82,005

Change in reinsurance recoverable

 

(189,006)

 

(61,523)

Change in reinsurance balances payable

 

8,072

 

(5,529)

Change in federal income tax (recoverable) payable

 

(10,753)

 

676

Change in all other liabilities

 

(15,499)

 

677

Change in all other assets

 

4,073

 

4,962

Net cash (used in) provided by operating activities

 

(62,895)

 

22,900

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(1,277)

 

(3,688)

Purchases of investment securities

 

(160,410)

 

(184,689)

Maturities, sales and redemptions of investment securities

 

373,988

 

171,587

Net cash provided by (used in) investing activities

 

212,301

 

(16,790)

Cash flows from financing activities:

 

  

 

  

Proceeds from exercise of employee stock options

 

 

1,520

Payment of revolving credit facility

(30,000)

Payment of debt issuance costs

(979)

Proceeds from senior unsecured note offering

50,000

Purchase of treasury shares

 

 

(1,380)

Net cash provided by financing activities

 

 

19,161

Increase in cash and cash equivalents and restricted cash

 

149,406

 

25,271

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

$

204,354

$

65,742

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 September 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 September 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 $52.6 million as of September 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 $30.3 million as of September 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 September 30, 2020, $14.5 million of right-of-use assets and $16.3 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 September 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 September 30, 2020 and December 31, 2019 (in thousands):

As of September 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

$

$

61,001

$

-

$

61,001

Corporate bonds

 

 

239,154

 

325

 

239,479

Collateralized corporate bank loans

 

 

55,334

 

-

 

55,334

Municipal bonds

 

 

55,638

 

-

 

55,638

Mortgage-backed

 

 

6,117

 

-

 

6,117

Total debt securities

 

 

417,244

 

325

 

417,569

Total equity securities

 

23,372

 

 

 

23,372

Total other investments

 

34

 

 

 

34

Total investments

$

23,406

$

417,244

$

325

$

440,975

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 September 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 nine months ended September 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

 

Net gain included in other comprehensive income

 

(14)

Transfers into Level 3

 

Transfers out of Level 3

 

Ending balance as of September 30, 2020

$

325

Beginning balance as of January 1, 2019

    

$

291

Sales

 

Settlements

 

Purchases

 

Issuances

 

Total realized/unrealized gains included in net income

 

Net gains included in other comprehensive income

 

153

Transfers into Level 3

 

Transfers out of Level 3

 

Ending balance as of September 30, 2019

$

444

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Table of Contents

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

    

Cost /

Unrealized

Unrealized

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

As of September 30, 2020

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

$

60,332

$

671

$

(2)

$

61,001

Corporate bonds

 

235,469

 

5,291

 

(1,281)

 

239,479

Collateralized corporate bank loans

 

57,559

 

-

 

(2,225)

 

55,334

Municipal bonds

 

54,837

 

852

 

(51)

 

55,638

Mortgage-backed

 

6,000

 

122

 

(5)

 

6,117

Total debt securities

 

414,197

 

6,936

 

(3,564)

 

417,569

Total equity securities

 

25,735

 

2,989

 

(5,352)

 

23,372

Total other investments

 

3,763

 

 

(3,729)

 

34

Total investments

$

443,695

$

9,925

$

(12,645)

$

440,975

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):