8-K
false 0001801754 0001801754 2022-05-04 2022-05-04

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): May 4, 2022

 

 

TREAN INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   001-39392   84-4512647
(State or Other Jurisdiction
of Incorporation)
  (Commission
File Number)
  (I.R.S. Employer
Identification No.)

 

150 Lake Street West

Wayzata, Minnesota

  55391
(Address of principal executive offices)   (Zip Code)

(952) 974-2200

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

 

 

Check the appropriate box if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d- 2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e- 4(c))

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

 

Title of each class

  

Trading
symbol

  

Name of each exchange
on which registered

Common Stock, par value $0.01 per share    TIG    The Nasdaq Global Select Market

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

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 13(a) of the Exchange Act.

 

 

 


ITEM 2.02.

RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

On May 4, 2022, Trean Insurance Group, Inc. (the “Company”) issued a press release announcing the Company’s financial results for the three months ended March 31, 2022. The full text of the press release is furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference.

Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), the information furnished pursuant to Item 2.02 of this Current Report on Form 8-K (including Exhibit 99.1) is deemed to have been furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. Such information shall not be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

ITEM 9.01.

FINANCIAL STATEMENTS AND EXHIBITS.

 

(d)

Exhibits.

 

Exhibit No.   

Description

99.1    Press Release issued by Trean Insurance Group, Inc., dated May 4, 2022
104    Cover Page Interactive Data File (embedded within the Inline XBRL document)


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: May 4, 2022

 

TREAN INSURANCE GROUP, INC.

By:

 

/s/ Nicholas J. Vassallo

Name:

 

Nicholas J. Vassallo

Title:

 

Chief Financial Officer

EX-99.1

Exhibit 99.1

TREAN INSURANCE GROUP REPORTS FIRST QUARTER 2022 RESULTS

Net Income of $12.3 Million, Diluted Earnings per Share of $0.24

Adjusted Net Income of $8.3 Million, Adjusted Diluted Earnings per Share of $0.16

Provides Second Quarter and Updates Full Year 2022 Outlook

Wayzata, MN, May 4, 2022 – Trean Insurance Group, Inc. (Nasdaq: TIG) (“Trean” or the “Company”), a leading provider of products and services to the specialty insurance market, today reported results for the first quarter ended March 31, 2022.

First Quarter 2022 Highlights

 

 

Gross written premiums were $161.4 million, a $14.7 million, or 10.0%, increase compared to the same prior-year period.

 

 

Net earned premiums were $64.2 million, a $23.0 million, or 56.0%, increase compared to the same prior-year period.

 

 

Net income was $12.3 million, or $0.24 per diluted share, compared to $9.4 million, or $0.18 per diluted share in the same prior-year period.

 

 

Adjusted net income(1) was $8.3 million, or $0.16 per diluted share, compared to $8.1 million, or $0.16 per diluted share in the same prior-year period.

 

 

Underwriting income was $6.7 million, a $2.3 million, or 53.2%, increase compared to the same prior-year period

 

 

Loss and expense ratios were 61.1% and 28.5%, respectively, compared to 60.5% and 28.9%, respectively, in the same prior-year period.

 

 

Combined ratio was 89.6%, compared to 89.4% for the same prior-year period.

 

 

Return on equity of 11.8%; adjusted return on equity(1) of 7.9%; return on tangible equity of 24.1%; and adjusted return on tangible equity(1) of 16.2%.

 

(1) 

Adjusted net income, adjusted diluted earnings per share, adjusted return on equity, adjusted return on tangible equity and underwriting income are non-GAAP financial measures. See discussion of “Key Metrics” below.

“We are very pleased with our first quarter performance,” said Andrew O’Brien, Chief Executive Officer of Trean. “Our first quarter loss ratio exceeded our expectations, leading to a solid double-digit adjusted return on tangible equity for the quarter. We are continuing to focus on our strategic plan, emphasizing strong partner relationships, efficient claims processes and expense management.”


Underwriting Results

Gross written premiums increased 10.0% to $161.4 million for the first quarter of 2022, compared to $146.7 million for the first quarter of 2021. The increase was attributable to growth in our existing Program Partner business, primarily in the accident & health, commercial auto and commercial lines as a result of continuing our line of business diversification.

Gross unearned premiums increased $2.9 million in the first quarter of 2022, compared to $18.4 million in the same prior-year period. As of March 31, 2022, the Company had net unearned premiums reflected on its balance sheet of $101.8 million, an increase of $11.3 million, or 12.5%, compared to December 31, 2021 and up $35.7 million, or 53.9%, from March 31, 2021. This continued growth in net unearned premium represents a material source of deferred potential profit.

Net earned premiums increased 56.0% to $64.2 million for the first quarter of 2022, compared to $41.1 million for the first quarter of 2021, driven by an increase in gross earned premiums and the strategic decision to retain more gross written premiums.

General and administrative expenses were $18.3 million for the first quarter of 2022, compared to $11.9 million for the same prior-year period. The Company’s expense ratio was 28.5% for the first quarter of 2022, a 40 basis-point improvement compared to 28.9% for the same prior-year period.

Net income was $12.3 million for the first quarter of 2022, compared to net income of $9.4 million for the same prior-year period. Diluted earnings per share for the first quarter of 2022 was $0.24. Adjusted net income(1), which excludes intangible asset amortization, noncash stock compensation and the change in fair value of embedded derivatives and their related tax impact, was $8.3 million for the first quarter of 2022, compared to adjusted net income of $8.1 million for the same prior-year period. Adjusted diluted earnings per share for the first quarter of 2022 was $0.16.

Underwriting income of $6.7 million resulted in a combined ratio of 89.6% for the first quarter of 2022, compared to underwriting income of $4.4 million and a combined ratio of 89.4% for the same prior-year period. Losses and loss adjustment expenses for the first quarter of 2022 were $39.2 million, which resulted in a 61.1% loss ratio, compared to 60.5% in the same prior-year period. Prior period favorable loss development for the first quarter 2022 totaled $0.4 million.

Investment Results

Net investment income was $2.6 million for the first quarter of 2022, compared to $2.3 million in the same prior-year period. Cash and invested assets consist primarily of fixed maturities, equity securities and cash equivalents. The Company’s investment portfolio totaled $481.5 million at March 31, 2022 and was primarily comprised of fixed maturity securities that were classified as available-for-sale. The Company also had $103.9 million of cash and cash equivalents on its balance sheet as of March 31, 2022. The Company’s fixed maturities portfolio had an average rating of “AA” at both March 31, 2022 and December 31, 2021.

Other

Other revenue was $3.2 million for the first quarter of 2022, compared to $4.7 million for the same prior-year period, due primarily to a year-over-year reduction in brokerage revenue.


Stockholders’ Equity and Returns

Total stockholders’ equity was $416.4 million at March 31, 2022, compared to $421.9 million at December 31, 2021. Return on equity was 11.8% for the first quarter of 2022, compared to 9.2% for the same prior-year period, and adjusted return on equity(1) was 7.9% for the first quarter of 2022, comparable with the same prior-year period. Return on tangible equity was 24.1% for the first quarter of 2022, compared to 19.2% for the same prior-year period and adjusted return on tangible equity was 16.2% for the first quarter of 2022, compared to 16.5% for the same prior-year period.

Full Year 2022 Outlook

The Company is updating its outlook for the full year 2022, including raising its outlook for net earned premium and total revenue, to the following:

 

   

Gross written premium is still expected to be between $655 million and $670 million

 

   

Net earned premium outlook has been raised to be between $255 million and $265 million, from the previous range of between $240 million and $250 million. The new outlook represents year-over-year growth of 28% on the lower end and 33% on the upper end, and reflects an expected increased retention rate throughout 2022 based on current contracts in-force

 

   

Total revenue has been raised to be between $268 million and $278 million, from the previous range of between $253 million and $263 million

 

   

Expense ratio between 32% and 33% of net earned premium. Expense ratio reflects the aforementioned expected increase in retention, which would reduce the Company’s ceding commission offset to general and administrative expenses, as well as additional reductions in ceding commissions resulting from adding more short-tail lines of business, which typically have lower front fees, and expected continued operational investments in the Company.

Second Quarter 2022 Outlook

The company is providing the following outlook for the second quarter 2022:

 

   

Gross written premium between $158 million and $163 million

 

   

Adjusted net income between $4.3 million and $5.3 million, which implies flat to 23% growth on a year-over-year basis.

The Company reminds investors that its outlook is forward-looking information and is based on management’s assumptions and expectations as of the date of this release and is inherently subject to a number of risks and uncertainties, including as to the Company’s level of losses and loss development, many of which are beyond the Company’s immediate control.

Webcast and Conference Call

A webcast and conference call to discuss the Company’s results will be held today beginning at 5:00 p.m. (Eastern Time). The audio webcast is accessible through the investor relations section of the Company’s website at https://investors.trean.com.


The dial-in number for the conference call is (877) 407-3982 (toll-free) or (201) 493-6780 (international), conference ID# 13728756. Any person interested in listening to the call should dial in or access the website at least 10 minutes before the call.

A replay of the call will be available at https://investors.trean.com for one year following the call.

Key Metrics

The Company discusses certain key financial and operating metrics, described below, which provide useful information about its business and the operational factors underlying its financial performance.

Underwriting income is a non-GAAP financial measure defined as income before taxes excluding net investment income, investment revaluation gains, net realized capital gains or losses, IPO-related expenses, intangible asset amortization, noncash stock compensation, interest expense, other revenue and other income and expenses. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of underwriting income to income before taxes in accordance with GAAP.

Adjusted net income is a non-GAAP financial measure defined as net income excluding the impact of various specific events, including the consummation of the reorganization transactions in connection with our IPO, noncash intangible asset amortization and stock compensation, other expenses and gains or losses that the Company does not believe reflect its core operating performance, which items may have a disproportionate effect in a given period, affecting comparability of the Company’s results across periods. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted net income to net income in accordance with GAAP.

Loss ratio, expressed as a percentage, is the ratio of losses and loss adjustment expenses to net earned premiums.

Expense ratio, expressed as a percentage, is the ratio of general and administrative expenses to net earned premiums.

Combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.

Return on equity is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period.

Adjusted return on equity is a non-GAAP financial measured defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted return on equity to return on equity in accordance with GAAP.

Tangible stockholders’ equity is defined as stockholders’ equity less goodwill and other intangible assets.

Return on tangible equity is a non-GAAP financial measure defined as net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders’ equity during the period.

Adjusted return on tangible equity is a non-GAAP financial measure defined as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders’ equity during the period. See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of adjusted return on tangible equity to return on equity in accordance with GAAP.


Forward-Looking Statements

This press release contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements that are not historical or current facts. These statements may discuss the Company’s net income, cash flow, financial condition, impairments, expenditures, growth, strategies, plans, achievements, capital structure, organizational structure, market opportunities and general market and industry conditions. Such forward-looking statements can be identified by words such as “anticipate,” “estimate,” “expect,” “intend,” “plan,” “predict,” “project,” “believe,” “seek,” “outlook,” “future,” “will,” “would,” “should,” “could,” “may,” “can have,” “likely” and similar terms. Forward-looking statements are based on management’s current expectations and assumptions about future events. These statements are only predictions and are not guarantees of future performance. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements if the underlying assumptions prove to be incorrect or as a result of risks, uncertainties, and other factors, including the impact of the COVID-19 pandemic on the business and operations of the Company, our program partners and other business relations. Other factors that may cause such differences include the risks described in the Company’s filings with the U.S. Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. These forward-looking statements speak only as of the date on which they are made. Except as required by applicable securities laws, the Company disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, changes in assumptions or otherwise. Investors are cautioned not to place undue reliance on the forward-looking statements contained in this press release or in other filings and public statements of the Company.

About Trean Insurance Group, Inc.

Trean Insurance Group, Inc. (Nasdaq: TIG) provides products and services to the specialty insurance market. Trean underwrites specialty casualty insurance products both through its program partners and its own managing general agencies. Trean also provides its program partners with a variety of services including issuing carrier services, claims administration and reinsurance brokerage. Trean is licensed to write business across 49 states and the District of Columbia. For more information, please visit www.trean.com.

Contacts

Investor Relations

investor.relations@trean.com

(952) 974-2260


Trean Insurance Group, Inc. and Subsidiaries

Condensed Consolidated and Combined Statements of Operations

(in thousands, except for percentages, share and per share amounts)

(unaudited)

 

     Three Months Ended March 31,           Percentage
Change(1)
 
     2022     2021     Change  

Revenues

        

Gross written premiums

   $ 161,403     $ 146,730       14,673       10.0

Increase in gross unearned premiums

     (2,864     (18,431     15,567       (84.5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross earned premiums

     158,539       128,299       30,240       23.6

Ceded earned premiums

     (94,362     (87,165     (7,197     8.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earned premiums

     64,177       41,134       23,043       56.0

Net investment income

     2,576       2,272       304       13.4

Net realized gains (losses)

     (1,047     13       (1,060     NM  

Other revenue

     3,201       4,655       (1,454     (31.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     68,907       48,074       20,833       43.3

Expenses

        

Losses and loss adjustment expenses

     39,193       24,881       14,312       57.5

General and administrative expenses

     18,300       11,891       6,409       53.9

Intangible asset amortization

     1,499       1,414       85       6.0

Noncash stock compensation

     156       211       (55     (26.1 )% 

Interest expense

     408       427       (19     (4.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     59,556       38,824       20,732       53.4

Gains on embedded derivatives

     6,236       2,676       3,560       133.0

Other income

     23       121       (98     (81.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     15,610       12,047       3,563       29.6

Income tax expense

     3,270       2,605       665       25.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 12,340     $ 9,442       2,898       30.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.24     $ 0.18      

Diluted

   $ 0.24     $ 0.18      

Weighted average shares outstanding:

        

Basic

     51,177,908       51,148,782      

Diluted

     51,177,908       51,179,820      

 

(1) 

The Company defines increases or decreases greater than 200% as “NM” or not meaningful.


Key Metrics

(in thousands, except for percentages)

(unaudited)

 

     Three Months Ended March 31,  
     2022     2021  

Key metrics:

    

Underwriting income (1)

   $ 6,684     $ 4,362  

Adjusted net income (1)

   $ 8,304     $ 8,109  

Loss ratio

     61.1     60.5

Expense ratio

     28.5     28.9

Combined ratio

     89.6     89.4

Return on equity

     11.8     9.2

Adjusted return on equity (1)

     7.9     7.9

Return on tangible equity (1)

     24.1     19.2

Adjusted return on tangible equity (1)

     16.2     16.5

 

(1) 

Adjusted net income, adjusted return on equity, return on tangible equity, adjusted return on tangible equity and underwriting income are non-GAAP financial measures. See “Reconciliation of Non-GAAP Financial Measures” below for a reconciliation to the applicable GAAP measure.


Trean Insurance Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands)

 

     March 31,
2022
    December 31,
2021
 

Assets

    

Fixed maturities, available for sale

   $ 447,349     $ 471,061  

Equity securities, at fair value

     34,162       969  
  

 

 

   

 

 

 

Total investments

     481,511       472,030  

Cash and cash equivalents

     103,865       129,577  

Restricted cash

     478       407  

Accrued investment income

     2,610       2,344  

Premiums and other receivables

     153,053       141,920  

Income taxes receivable

     —         460  

Reinsurance recoverable

     380,587       377,241  

Prepaid reinsurance premiums

     121,072       129,411  

Deferred policy acquisition cost, net

     15,547       13,344  

Property and equipment, net

     7,689       7,632  

Right of use asset

     4,167       4,530  

Goodwill

     142,347       142,347  

Intangible assets, net

     71,615       73,114  

Other assets

     10,173       8,658  
  

 

 

   

 

 

 

Total assets

   $ 1,494,714     $ 1,503,015  
  

 

 

   

 

 

 

Liabilities

    

Unpaid loss and loss adjustment expenses

   $ 550,981     $ 544,320  

Unearned premiums

     222,902       219,940  

Funds held under reinsurance agreements

     196,025       199,410  

Reinsurance premiums payable

     46,895       45,130  

Accounts payable and accrued expenses

     22,424       29,448  

Lease liability

     4,554       4,976  

Income Taxes Payable

     553       —    

Deferred tax liability

     3,991       7,520  

Debt

     29,992       30,362  
  

 

 

   

 

 

 

Total liabilities

     1,078,317       1,081,106  

Commitments and contingencies

    

Stockholders’ Equity

    

Common stock, $0.01 par value per share (600,000,000 authorized; 51,192,196 and 51,176,877 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively)

     512       512  

Additional paid-in capital

     288,771       288,623  

Retained earnings

     140,730       128,390  

Accumulated other comprehensive income

     (13,616     4,384  
  

 

 

   

 

 

 

Total stockholders’ equity

     416,397       421,909  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,494,714     $ 1,503,015  
  

 

 

   

 

 

 


Supplemental Table of Other Revenue Components

 

     Three Months Ended March 31,  
(unaudited, in thousands)    2022      2021  

Other Revenue

     

Brokerage

   $ 2,593      $ 3,455  

Managing general agent fees

     84        289  

Third-party administrator fees

     323        378  

Consulting and other fee-based revenue

     201        533  
  

 

 

    

 

 

 

Total Other Revenue

     3,201        4,655  
  

 

 

    

 

 

 

Supplemental Table of Net Investment Income Components

 

     Three Months Ended March 31,  
(unaudited, in thousands)    2022      2021  

Fixed maturities

   $ 1,754      $ 1,560  

Income on funds held investments

     668        680  

Equity securities

     154        30  

Interest on cash and short-term investments

     —          2  
  

 

 

    

 

 

 

Total net investment income

   $ 2,576      $ 2,272  
  

 

 

    

 

 

 

Supplemental Table of Gains (Losses) on Embedded Derivative Components

 

     Three Months Ended March 31,  
(unaudited, in thousands)    2022      2021  

Change in fair value of embedded derivatives

   $ 6,896      $ 3,356  

Effect of net investment income on funds held investments

     (668      (680

Effect of realized gains on funds held investments

     8        —    
  

 

 

    

 

 

 

Total gains on embedded derivatives

   $ 6,236      $ 2,676  
  

 

 

    

 

 

 

Supplemental Table of Net G&A Components

 

     Three Months Ended March 31,  
(unaudited, in thousands)    2022     2021  

Direct commissions

   $ 27,908     $ 23,108  

Ceding commissions

     (26,997     (28,208
  

 

 

   

 

 

 

Net commissions

     911       (5,100

Insurance-related expense

     5,771       4,276  

G&A operating expenses

     11,618       12,715  
  

 

 

   

 

 

 

Total G&A expense

   $ 18,300     $ 11,891  
  

 

 

   

 

 

 

G&A operating expense - % of GWP

     7.2     8.7

Retention rate(1)

     40.5     32.1

Direct commission rate(2)

     17.6     18.0

Ceding commission rate(3)

     28.6     32.4

 

(1)

Net earned premiums as a percentage of gross earned premiums.

(2)

Direct commissions as a percentage of gross earned premiums.

(3)

Ceding commissions as a percentage of ceded earned premiums.


Reconciliation of Non-GAAP Financial Measures

Underwriting income

The Company defines underwriting income as income before taxes excluding net investment income, non-cash changes in fair value of embedded derivatives, investment revaluation gains, net realized capital gains or losses, intangible asset amortization, noncash stock compensation, interest expense, other revenue and other income and expenses. Underwriting income represents the pre-tax profitability of the Company’s underwriting operations and allows management to evaluate the Company’s underwriting performance without regard to investment income, intangible asset amortization, noncash stock compensation, interest expense, other revenue and other income and expenses. The Company uses this metric because the Company believes it gives management and other users of the Company’s financial information useful insight into the Company’s underwriting business performance by adjusting for these expenses and sources of income. Underwriting income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define underwriting income differently.

 

     Three Months Ended March 31,  
(unaudited, in thousands)    2022      2021  

Net income

   $ 12,340      $ 9,442  

Income tax expense

     3,270        2,605  
  

 

 

    

 

 

 

Income before taxes

     15,610        12,047  

Other revenue

     (3,201      (4,655

Change in fair value of embedded derivatives

     (6,236      (2,676

Net investment income

     (2,576      (2,272

Net realized (gains) losses

     1,047        (13

Interest expense

     408        427  

Intangible asset amortization

     1,499        1,414  

Noncash stock compensation

     156        211  

Other income

     (23      (121
  

 

 

    

 

 

 

Underwriting income

   $ 6,684      $ 4,362  
  

 

 

    

 

 

 


Adjusted net income and adjusted net income outlook

The Company defines adjusted net income as net income excluding the impact of certain items, including noncash intangible asset amortization and stock compensation, non-cash changes in fair value of embedded derivatives, other expenses and gains or losses that the Company believes do not reflect its core operating performance, which items may have a disproportionate effect in a given period, affecting comparability the Company’s results across periods. The Company calculates the tax impact only on adjustments that would be included in calculating the Company’s income tax expense using the effective tax rate at the end of each period. The Company uses adjusted net income as an internal performance measure in the management of its operations because the Company believes it gives its management and other users of its financial information useful insight into the Company’s results of operations and underlying business performance by eliminating the effects of these items. Adjusted net income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define adjusted net income differently.

 

     Three Months Ended March 31,  
(unaudited, in thousands)    2022      2021  

Net income

   $ 12,340      $ 9,442  

Intangible asset amortization

     1,499        1,414  

Noncash stock compensation

     156        211  

Change in fair value of embedded derivatives

     (6,896      (3,356
  

 

 

    

 

 

 

Total adjustments

     (5,241      (1,731

Tax impact of adjustments

     1,205        398  
  

 

 

    

 

 

 

Adjusted net income

   $ 8,304      $ 8,109  
  

 

 

    

 

 

 

The Company’s outlook for second quarter 2022 adjusted net income constitutes forward-looking information and the Company believes that it cannot reconcile such forward-looking information to the most comparable GAAP measure without unreasonable efforts. Certain of the GAAP components cannot be reliably quantified due to the combination of variability and volatility of such components and may, depending on the size of the components, have a significant impact on the reconciliation.

Adjusted return on equity

The Company defines adjusted return on equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending stockholders’ equity during the period. The Company uses adjusted return on equity as an internal performance measure in the management of its operations because the Company believes it gives management and other users of the Company’s financial information useful insight into the Company’s results of operations and underlying business performance by adjusting for items that the Company believes do not reflect its core operating performance and that may diminish comparability across periods. Adjusted return on equity should not be viewed as a substitute for return on equity calculated in accordance with GAAP, and other companies may define adjusted return on equity differently.

 

     Three Months Ended March 31,  
(unaudited, in thousands)    2022     2021  

Adjusted return on equity calculation:

    

Numerator: adjusted net income

   $ 8,304     $ 8,109  

Denominator: average stockholders’ equity

     419,153       411,541  
  

 

 

   

 

 

 

Adjusted return on equity

     7.9     7.9
  

 

 

   

 

 

 

Return on equity

     11.8     9.2
  

 

 

   

 

 

 


Return on tangible equity and adjusted return on tangible equity

The Company defines tangible stockholders’ equity as stockholders’ equity less goodwill and other intangible assets. The Company defines return on tangible equity as net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders’ equity during the period. The Company defines adjusted return on tangible equity as adjusted net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders’ equity during the period. The Company regularly evaluates acquisition opportunities and have historically made acquisitions that affect stockholders’ equity. The Company uses return on tangible equity and adjusted return on tangible equity as internal performance measures in the management of the Company’s operations because the Company believes they give management and other users of its financial information useful insight into the Company’s results of operations and underlying business performance by adjusting for the effects of acquisitions on the Company’s stockholders’ equity and, in the case of adjusted return on tangible equity, by adjusting for items that the Company believes do not reflect its core operating performance and that may diminish comparability across periods. Return on tangible equity and adjusted return on tangible equity should not be viewed as substitutes for return on equity calculated in accordance with GAAP, and other companies may define return on tangible equity and adjusted return on tangible equity differently.

 

     Three Months Ended March 31,  
(unaudited, in thousands)    2022     2021  

Return on tangible equity calculation:

    

Numerator: net income

   $ 12,340     $ 9,442  

Denominator:

    

Average stockholders’ equity

     419,153       411,541  

Less: Average goodwill and other intangible assets

     214,712       215,250  
  

 

 

   

 

 

 

Average tangible stockholders’ equity

     204,441       196,291  
  

 

 

   

 

 

 

Return on tangible equity

     24.1     19.2
  

 

 

   

 

 

 

Return on equity

     11.8     9.2
  

 

 

   

 

 

 

 

     Three Months Ended March 31,  
(unaudited, in thousands)    2022     2021  

Adjusted return on tangible equity calculation:

    

Numerator: adjusted net income

   $ 8,304     $ 8,109  

Denominator: average tangible stockholders’ equity

     204,441       196,291  
  

 

 

   

 

 

 

Adjusted return on tangible equity

     16.2     16.5
  

 

 

   

 

 

 

Return on equity

     11.8     9.2
  

 

 

   

 

 

 

 

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