Discontinued Operations

6 Months Ended

Jun. 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 comprises the operations of the insurance segment, for cash proceeds of $154.1 million. During the three months ended June 30, 2020, Hilltop recognized a pre-tax gain associated with this transaction of $32.3 million, net of customary transaction costs of $5.1 million and subject to post-closing adjustments. 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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Interest income:
Securities:
Taxable	$	814	$	906	$	1,752	$	1,866
Other		4		150		71		292
Total interest income		818		1,056		1,823		2,158
Interest expense:
Notes payable		369		464		775		924
Noninterest income:
Net insurance premiums earned		32,440		33,466		65,077		66,669
Other		5,297		2,702		3,051		6,004
Total noninterest income		37,737		36,168		68,128		72,673
Noninterest expense:
Employees' compensation and benefits		3,225		2,784		6,002		5,986
Occupancy and equipment, net		217		281		464		525
Professional services		9,674		9,980		18,201		18,813
Loss and loss adjustment expenses		25,470		24,981		38,419		39,907
Other		1,511		1,563		3,987		4,696
Total noninterest expense		40,097		39,589		67,073		69,927
Income (loss) from discontinued operations before income taxes		(1,911)		(2,829)		2,103		3,980
Gain on disposal of discontinued operations		32,341		—		32,341		—
Income tax (benefit) expense		(345)		(575)		518		874
Income (loss) from discontinued operations, net of income taxes	$	30,775	$	(2,254)	$	33,926	$	3,106

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. NLC recognized net gains of $1.9 million and $0.2 million during the three months ended June 30, 2020 and 2019, respectively, and recognized net losses of $2.5 million and net gains of $1.4 million during the six months ended June 30, 2020 and 2019, respectively, 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 June 30,								Six Months Ended June 30,
	2020				2019				2020				2019
	Written		Earned		Written		Earned		Written		Earned		Written		Earned
Premiums from direct business	$	33,831	$	30,638	$	35,562	$	31,727	$	63,811	$	61,384	$	66,352	$	63,463
Reinsurance assumed		3,444		3,208		3,622		3,256		6,396		6,452		6,751		6,448
Reinsurance ceded		(1,406)		(1,406)		(1,517)		(1,517)		(2,759)		(2,759)		(3,242)		(3,242)
Net premiums	$	35,869	$	32,440	$	37,667	$	33,466	$	67,448	$	65,077	$	69,861	$	66,669

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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Losses and LAE incurred	$	25,462	$	23,959	$	38,225	$	38,943
Reinsurance recoverables		8		1,022		194		964
Net loss and LAE incurred	$	25,470	$	24,981	$	38,419	$	39,907