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Discontinued Operations
9 Months Ended
Sep. 30, 2020
Discontinued Operations  
Discontinued Operations

T

3. Discontinued Operations

NLC Sale

On June 30, 2020, Hilltop completed the sale of all of the outstanding capital stock of NLC, which comprised the operations of the insurance segment, for cash proceeds of $154.1 million. Hilltop recognized a gain associated with this transaction of $32.3 million, net of customary transaction costs of $5.1 million and was subject to post-closing adjustments. During the third quarter of 2020, Hilltop recognized a $0.7 million pre-tax post-closing adjustment to income from discontinued operations related to the finalization of the June 30, 2020 closing balance sheet, resulting in an aggregate gain on the sale of NLC of $33.1 million. The resulting book gain from this sale transaction was not recognized for tax purposes due to the excess tax basis over book basis being greater than the recorded book gain. Any tax loss related to this transaction is deemed disallowed pursuant to the rules under the Internal Revenue Code.

During the first quarter of 2020, management had determined that the pending sale of NLC met the criteria to be presented as discontinued operations. Therefore, NLC’s results and its assets and liabilities have been presented as discontinued operations in the consolidated financial statements. All related notes to consolidated financial statements for discontinued operations have been included in this note. The following table details the carrying amounts of assets and liabilities of NLC reflected in the consolidated balance sheet under the caption “Assets of discontinued operations” and “Liabilities of discontinued operations”, respectively.

December 31,

    

2019

Assets

Cash and due from banks

$

51,333

Securities:

Available for sale, at fair value

86,899

Equity, at fair value

19,841

106,740

Premises and equipment, net

9,607

Operating lease right-of-use assets

2,739

Other assets

50,533

Goodwill

23,988

Other intangible assets, net

3,489

Total assets of discontinued operations

$

248,429

Liabilities

Notes payable

$

27,500

Operating lease liabilities

2,783

Other liabilities

110,391

Total liabilities of discontinued operations

$

140,674

The following table presents the results of discontinued operations for NLC for the periods indicated.

Three Months Ended September 30,

Nine Months Ended September 30,

2020

    

2019

2020

2019

Interest income:

Securities:

Taxable

$

$

879

$

1,752

$

2,745

Other

137

71

429

Total interest income

1,016

1,823

3,174

Interest expense:

Notes payable

450

775

1,374

Noninterest income:

Net insurance premiums earned

32,654

65,077

99,323

Other

2,242

3,051

8,246

Total noninterest income

34,896

68,128

107,569

Noninterest expense:

Employees' compensation and benefits

2,748

6,002

8,734

Occupancy and equipment, net

200

464

725

Professional services

8,874

18,201

27,687

Loss and loss adjustment expenses

14,677

38,419

54,584

Other

2,424

3,987

7,120

Total noninterest expense

28,923

67,073

98,850

Income from discontinued operations before income taxes

6,539

2,103

10,519

Gain on disposal of discontinued operations

736

33,077

Income tax expense

1,278

518

2,152

Income from discontinued operations, net of income taxes

$

736

$

5,261

$

34,662

$

8,367

Securities

The available for sale securities held by NLC at December 31, 2019 reflected in the consolidated balance sheets under the caption “Assets of discontinued operations” were primarily comprised of U.S. Treasury, residential mortgage-backed and corporate debt securities with aggregate unrealized gross gains of $2.5 million and measured using Level 2 inputs on a recurring basis. NLC’s available for sale portfolio had nominal unrealized gross losses at December 31, 2019.

NLC had unrealized net gains of $1.1 million from the equity securities held at December 31, 2019, measured using Level 1 inputs on a recurring basis. No activity was recognized for NLC equity securities for the three months ended September 30, 2020 as the sale was finalized June 30, 2020. NLC recognized net losses of $0.1 million during the three months ended September 30, 2019, and recognized net gains of $1.4 million during the nine months ended September 30, 2019 due to changes in the fair value of equity securities still held at the balance sheet date.

Reinsurance Activity

The effects of reinsurance on premiums written and earned are included within discontinued operations for all periods presented and are summarized as follows (in thousands).

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

   

Written

    

Earned

    

Written

    

Earned

    

Written

    

Earned

    

Written

 

Earned

 

Premiums from direct business

$

$

$

31,269

$

31,698

$

63,811

$

61,384

$

97,621

$

95,161

Reinsurance assumed

 

 

 

3,440

 

3,289

 

6,396

 

6,452

 

10,191

 

9,736

Reinsurance ceded

 

 

 

(2,333)

 

(2,333)

 

(2,759)

 

(2,759)

 

(5,574)

 

(5,574)

Net premiums

$

$

$

32,376

$

32,654

$

67,448

$

65,077

$

102,238

$

99,323

The effects of reinsurance on incurred losses and LAE are included within discontinued operations for all periods and are as follows (in thousands).

Three Months Ended September 30,

Nine Months Ended September 30,

 

    

2020

    

2019

    

2020

    

2019

 

Losses and LAE incurred

$

$

14,508

$

38,225

$

53,450

Reinsurance recoverables

 

 

169

 

194

 

1,134

Net loss and LAE incurred

$

$

14,677

$

38,419

$

54,584