Price | 19.26 | EPS | 2 | |
Shares | 18 | P/E | 11 | |
MCap | 352 | P/FCF | 15 | |
Net Debt | -66 | EBIT | 46 | |
TEV | 287 | TEV/EBIT | 6 | TTM 2019-09-30, in MM, except price, ratios |
10-Q | 2020-09-30 | Filed 2020-11-05 |
10-Q | 2020-06-30 | Filed 2020-08-10 |
10-Q | 2020-03-31 | Filed 2020-07-24 |
10-K | 2019-12-31 | Filed 2020-06-29 |
10-Q | 2019-09-30 | Filed 2019-11-07 |
10-Q | 2019-06-30 | Filed 2019-08-09 |
10-Q | 2019-03-31 | Filed 2019-05-08 |
10-K | 2018-12-31 | Filed 2019-03-14 |
10-Q | 2018-09-30 | Filed 2018-11-07 |
10-Q | 2018-06-30 | Filed 2018-08-07 |
10-Q | 2018-03-31 | Filed 2018-05-08 |
10-K | 2017-12-31 | Filed 2018-03-14 |
10-Q | 2017-09-30 | Filed 2017-11-08 |
10-Q | 2017-06-30 | Filed 2017-08-07 |
10-Q | 2017-03-31 | Filed 2017-05-09 |
10-K | 2016-12-31 | Filed 2017-03-09 |
10-Q | 2016-09-30 | Filed 2016-11-07 |
10-Q | 2016-06-30 | Filed 2016-08-08 |
10-Q | 2016-03-31 | Filed 2016-05-05 |
10-K | 2015-12-31 | Filed 2016-03-10 |
10-Q | 2015-09-30 | Filed 2015-11-05 |
10-Q | 2015-06-30 | Filed 2015-08-07 |
10-Q | 2015-03-31 | Filed 2015-05-07 |
10-K | 2014-12-31 | Filed 2015-03-12 |
10-Q | 2014-09-30 | Filed 2014-11-07 |
10-Q | 2014-06-30 | Filed 2014-08-07 |
10-Q | 2014-03-31 | Filed 2014-05-08 |
10-K | 2013-12-31 | Filed 2014-03-12 |
10-Q | 2013-09-30 | Filed 2013-11-07 |
10-Q | 2013-06-30 | Filed 2013-08-08 |
10-Q | 2013-03-31 | Filed 2013-05-09 |
10-K | 2012-12-31 | Filed 2013-03-14 |
10-Q | 2012-09-30 | Filed 2012-11-07 |
10-Q | 2012-06-30 | Filed 2012-08-06 |
10-Q | 2012-03-31 | Filed 2012-05-08 |
10-K | 2011-12-31 | Filed 2012-03-14 |
10-Q | 2011-09-30 | Filed 2011-11-09 |
10-Q | 2011-06-30 | Filed 2011-08-09 |
10-Q | 2011-03-31 | Filed 2011-05-10 |
10-K | 2010-12-31 | Filed 2011-03-15 |
10-Q | 2010-09-30 | Filed 2010-11-12 |
10-Q | 2010-06-30 | Filed 2010-08-16 |
10-Q | 2010-03-31 | Filed 2010-05-13 |
10-K | 2009-12-31 | Filed 2010-03-25 |
8-K | 2021-02-12 | Officers |
8-K | 2021-01-11 | Officers |
8-K | 2020-12-22 | Shareholder Vote |
8-K | 2020-12-21 | Regulation FD |
8-K | 2020-11-05 | |
8-K | 2020-09-22 | |
8-K | 2020-09-15 | |
8-K | 2020-08-10 | |
8-K | 2020-07-31 | |
8-K | 2020-07-23 | |
8-K | 2020-07-16 | |
8-K | 2020-06-29 | |
8-K | 2020-05-13 | |
8-K | 2020-04-27 | |
8-K | 2020-04-20 | |
8-K | 2020-03-18 | |
8-K | 2020-03-12 | |
8-K | 2020-03-05 | |
8-K | 2020-03-02 | |
8-K | 2019-11-07 | |
8-K | 2019-08-19 | |
8-K | 2019-08-12 | |
8-K | 2019-08-07 | |
8-K | 2019-05-30 | |
8-K | 2019-05-08 | |
8-K | 2019-03-11 | |
8-K | 2019-03-05 | |
8-K | 2018-11-07 | |
8-K | 2018-08-07 | |
8-K | 2018-08-06 | |
8-K | 2018-06-25 | |
8-K | 2018-06-19 | |
8-K | 2018-05-31 | |
8-K | 2018-05-24 | |
8-K | 2018-05-08 | |
8-K | 2018-03-15 | |
8-K | 2018-03-12 |
Part I |
Item 1. Financial Statements |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk. |
Item 4. Controls and Procedures. |
Part II |
Item 1. Legal Proceedings. |
Item 1A. Risk Factors. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 3. Defaults Upon Senior Securities. |
Item 4. Mine Safety Disclosures. |
Item 5. Other Information. |
Item 6. Exhibits. |
EX-31.(A) | hall-20200930xex31da.htm |
EX-31.(B) | hall-20200930xex31db.htm |
EX-32.(A) | hall-20200930xex32da.htm |
EX-32.(B) | hall-20200930xex32db.htm |
Balance Sheet | Income Statement | Cash Flow |
---|---|---|
Assets, Equity
|
Rev, G Profit, Net Income
|
Ops, Inv, Fin
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
Quarterly report pursuant to Section 13 or 15(d) of the
(Mark One) Securities Exchange Act of 1934
For the quarterly period ended
Commission file number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer |
Incorporation or organization) | Identification No.) |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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.
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).
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 ☐ | ||
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
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 $0.18 per share –
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
2
Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands, except par value)
September 30, | December 31, | |||||
2020 | 2019 | |||||
(unaudited) | ||||||
ASSETS |
|
|
| |||
Investments: |
|
|
| |||
Debt securities, available-for-sale, at fair value (amortized cost: $ | $ | | $ | | ||
Equity securities (cost: $ |
| |
| | ||
Other investments (cost: $ |
| |
| | ||
Total investments |
| |
| | ||
Cash and cash equivalents |
| |
| | ||
Restricted cash |
| |
| | ||
Ceded unearned premiums |
| |
| | ||
Premiums receivable |
| |
| | ||
Accounts receivable |
| |
| | ||
Receivable for securities |
| |
| | ||
Reinsurance recoverable |
| |
| | ||
Deferred policy acquisition costs |
| |
| | ||
Goodwill |
| — |
| | ||
Intangible assets, net |
| |
| | ||
Federal income tax recoverable | | | ||||
Deferred federal income taxes, net |
| |
| | ||
Prepaid expenses |
| |
| | ||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
| ||
Liabilities: |
|
|
|
| ||
Senior unsecured notes due 2029 (less unamortized debt issuance cost of $ | $ | | $ | | ||
Subordinated debt securities (less unamortized debt issuance cost of $ |
| |
| | ||
Reserves for unpaid losses and loss adjustment expenses |
| |
| | ||
Unearned premiums |
| |
| | ||
Reinsurance balances payable |
| |
| | ||
Pension liability |
| |
| | ||
Payable for securities |
| |
| | ||
Accounts payable and other accrued expenses |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and contingencies (Note 19) |
|
|
|
| ||
Stockholders’ equity: |
|
|
|
| ||
Common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Retained earnings |
| |
| | ||
Accumulated other comprehensive (loss) income |
| ( |
| | ||
Treasury stock ( |
| ( |
| ( | ||
Total stockholders’ equity |
| |
| | ||
Total liabilities and stockholders’ equity | $ | | $ | |
The accompanying notes are an integral part of the consolidated financial statements
3
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 | $ | | $ | | $ | | $ | | |||||
Ceded premiums written |
| ( |
| ( |
| ( |
| ( | |||||
Net premiums written |
| |
| |
| |
| | |||||
Change in unearned premiums |
| |
| ( |
| |
| ( | |||||
Net premiums earned |
| |
| |
| |
| | |||||
Investment income, net of expenses |
| |
| |
| |
| | |||||
Investment (losses) gains, net |
| ( |
| ( |
| ( |
| | |||||
Finance charges |
| |
| |
| |
| | |||||
Commission and fees |
| |
| |
| |
| | |||||
Other income |
| |
| |
| |
| | |||||
Total revenues |
| |
| |
| |
| | |||||
Losses and loss adjustment expenses |
| |
| |
| |
| | |||||
Operating expenses |
| |
| |
| |
| | |||||
Interest expense |
| |
| |
| |
| | |||||
Impairment of goodwill and other intangible assets | — | — | | — | |||||||||
Amortization of intangible assets |
| |
| |
| |
| | |||||
Total expenses |
| |
| |
| |
| | |||||
(Loss) income before tax |
| ( |
| |
| ( |
| | |||||
Income tax (benefit) expense |
| ( |
| |
| ( |
| | |||||
Net (loss) income | $ | ( | $ | | $ | ( | $ | | |||||
Net (loss) income per share: |
|
|
|
|
|
|
|
| |||||
Basic | $ | ( | $ | | $ | ( | $ | | |||||
Diluted | $ | ( | $ | | $ | ( | $ | |
The accompanying notes are an integral part of the consolidated financial statements
4
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 | $ | ( | $ | | $ | ( | $ | | |||||
Other comprehensive income (loss): |
|
|
|
|
|
|
| ||||||
Change in net actuarial gain |
| |
| |
| |
| | |||||
Tax effect on change in net actuarial gain |
| ( |
| ( |
| ( |
| ( | |||||
Unrealized holding gains arising during the period |
| |
| |
| |
| | |||||
Tax effect on unrealized holding gains arising during the period |
| ( |
| ( |
| ( |
| ( | |||||
Reclassification adjustment for gains included in net (loss) income |
| ( |
| ( |
| ( |
| ( | |||||
Tax effect on reclassification adjustment for gains included in net (loss) income |
| |
| |
| |
| | |||||
Other comprehensive income (loss), net of tax |
| |
| |
| ( |
| | |||||
Comprehensive (loss) income | $ | ( | $ | | $ | ( | $ | |
The accompanying notes are an integral part of the consolidated financial statements
5
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 | $ | | $ | | $ | | $ | | ||||
Balance, end of period |
| |
| |
| |
| | ||||
Additional Paid-In Capital |
|
|
|
|
|
|
| |||||
Balance, beginning of period |
| |
| |
| |
| | ||||
Equity based compensation |
| |
| |
| ( |
| | ||||
Shares issued under employee benefit plans |
| ( |
| — |
| ( |
| ( | ||||
Balance, end of period |
| |
| |
| |
| | ||||
Retained Earnings |
|
|
|
|
|
|
|
| ||||
Balance, beginning of period |
| |
| |
| |
| | ||||
Net (loss) income |
| ( |
| |
| ( |
| | ||||
Balance, end of period |
| |
| |
| |
| | ||||
Accumulated Other Comprehensive (Loss) Income |
|
|
|
|
|
|
|
| ||||
Balance, beginning of period |
| ( |
| ( |
| |
| ( | ||||
Additional minimum pension liability, net of tax |
| |
| |
| |
| | ||||
Unrealized holding gains arising during period, net of tax |
| |
| |
| |
| | ||||
Reclassification adjustment for gains included in net income, net of tax |
| ( |
| ( |
| ( |
| ( | ||||
Balance, end of period |
| ( |
| |
| ( |
| | ||||
Treasury Stock |
|
|
|
|
|
|
|
| ||||
Balance, beginning of period |
| ( |
| ( |
| ( |
| ( | ||||
Acquisition of treasury stock |
| — |
| — |
| — |
| ( | ||||
Shares issued under employee benefit plans |
| |
| — |
| |
| | ||||
Balance, end of period |
| ( |
| ( |
| ( |
| ( | ||||
Total Stockholders' Equity | $ | | $ | | $ | | $ | |
The accompanying notes are an integral part of the consolidated financial statements
6
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 | $ | ( | $ | | |||
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities: |
|
|
|
| |||
Depreciation and amortization expense |
| |
| | |||
Deferred federal income taxes (benefit) expense |
| ( |
| | |||
Investment losses (gains), net |
| |
| ( | |||
Share-based payments (benefit) expense |
| ( |
| | |||
Impairment of goodwill and other intangibles | | — | |||||
Change in ceded unearned premiums |
| |
| ( | |||
Change in premiums receivable |
| |
| ( | |||
Change in accounts receivable |
| ( |
| ( | |||
Change in deferred policy acquisition costs |
| |
| ( | |||
Change in reserves for unpaid losses and loss adjustment expenses |
| |
| | |||
Change in unearned premiums |
| ( |
| | |||
Change in reinsurance recoverable |
| ( |
| ( | |||
Change in reinsurance balances payable |
| |
| ( | |||
Change in federal income tax (recoverable) payable |
| ( |
| | |||
Change in all other liabilities |
| ( |
| | |||
Change in all other assets |
| |
| | |||
Net cash (used in) provided by operating activities |
| ( |
| | |||
Cash flows from investing activities: |
|
|
|
| |||
Purchases of property and equipment |
| ( |
| ( | |||
Purchases of investment securities |
| ( |
| ( | |||
Maturities, sales and redemptions of investment securities |
| |
| | |||
Net cash provided by (used in) investing activities |
| |
| ( | |||
Cash flows from financing activities: |
|
|
|
| |||
Proceeds from exercise of employee stock options |
| — |
| | |||
Payment of revolving credit facility | — | ( | |||||
Payment of debt issuance costs | — | ( | |||||
Proceeds from senior unsecured note offering | — | | |||||
Purchase of treasury shares |
| — |
| ( | |||
Net cash provided by financing activities |
| — |
| | |||
Increase in cash and cash equivalents and restricted cash |
| |
| | |||
Cash and cash equivalents and restricted cash at beginning of period |
| |
| | |||
Cash and cash equivalents and restricted cash at end of period | $ | | $ | |
The accompanying notes are an integral part of the consolidated financial statements
7
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
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.
8
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 $
Subordinated Debt Securities: Our trust preferred securities had a carrying value of $
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 $
On August 23, 2007, we formed Hallmark Statutory Trust II (“Trust II”), an unconsolidated trust subsidiary, for the sole purpose of issuing $
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
9
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, $
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 $
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
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 | $ | — | $ | | $ | - | $ | | ||||
Corporate bonds |
| — |
| |
| |
| | ||||
Collateralized corporate bank loans |
| — |
| |
| - |
| | ||||
Municipal bonds |
| — |
| |
| - |
| | ||||
Mortgage-backed |
| — |
| |
| - |
| | ||||
Total debt securities |
| — |
| |
| |
| | ||||
Total equity securities |
| |
| — |
| — |
| | ||||
Total other investments |
| |
| — |
| — |
| | ||||
Total investments | $ | | $ | | $ | | $ | |
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 | $ | | $ | | $ | | $ | | ||||
Corporate bonds |
| |
| |
| |
| | ||||
Collateralized corporate bank loans |
| |
| |
| |
| | ||||
Municipal bonds |
| |
| |
| |
| | ||||
Mortgage-backed |
| |
| |
| |
| | ||||
Total debt securities |
| |
| |
| |
| | ||||
Total equity securities |
| |
| |
| |
| | ||||
Total other investments |
| |
| |
| |
| | ||||
Total investments | $ | | $ | | $ | | $ | |
Due to significant unobservable inputs into the valuation model for
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