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EX-32.2 - EXHIBIT 32.2 - WESTWOOD HOLDINGS GROUP INCa2q17exhibit322certificati.htm
EX-32.1 - EXHIBIT 32.1 - WESTWOOD HOLDINGS GROUP INCa2q17exhibit321certificati.htm
EX-31.2 - EXHIBIT 31.2 - WESTWOOD HOLDINGS GROUP INCa2q17exhibit312certificati.htm
EX-31.1 - EXHIBIT 31.1 - WESTWOOD HOLDINGS GROUP INCa2q17exhibit311certificati.htm
________________________________________________________________________________________________________
 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________________________________
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2017
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             .
Commission file number 1-31234
________________________________________________________________________________________________________
WESTWOOD HOLDINGS GROUP, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________________________
DELAWARE
 
75-2969997
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
200 CRESCENT COURT, SUITE 1200
DALLAS, TEXAS
 
75201
(Address of principal executive office)
 
(Zip Code)
(214) 756-6900
(Registrant’s telephone number, including area code)
________________________________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “ smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
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 accounting standards provided pursuant to Section 13(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  x
Shares of common stock, par value $0.01 per share, outstanding as of July 14, 2017: 8,893,466.
________________________________________________________________________________________________________
 



WESTWOOD HOLDINGS GROUP, INC.
INDEX
 
PART I
 
FINANCIAL INFORMATION
PAGE
 
 
 
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 

 




WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
(Unaudited)
 
 
 
June 30,
2017
 
December 31, 2016
 
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
43,143

 
$
33,679

Accounts receivable
 
23,061

 
23,429

Investments, at fair value
 
45,665

 
56,485

Other current assets
 
1,914

 
2,364

Total current assets
 
113,783

 
115,957

Goodwill
 
27,144

 
27,144

Deferred income taxes
 
10,491

 
10,903

Intangible assets, net
 
20,414

 
21,394

Property and equipment, net of accumulated depreciation of $5,089 and $4,590
 
4,100

 
4,280

Total assets
 
$
175,932

 
$
179,678

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and accrued liabilities
 
$
2,973

 
$
2,641

Dividends payable
 
6,491

 
6,679

Compensation and benefits payable
 
9,774

 
17,200

Income taxes payable
 
1,989

 
3,148

Total current liabilities
 
21,227

 
29,668

Accrued dividends
 
1,269

 
1,767

Deferred rent
 
2,112

 
2,174

Total liabilities
 
24,608

 
33,609

Commitments and contingencies (Note 12)
 

 

Stockholders' Equity:
 
 
 
 
Common stock, $0.01 par value, authorized 25,000,000 shares, issued 9,994,408 and outstanding 8,893,466 shares at June 30, 2017; issued 9,801,938 and outstanding 8,810,375 shares at December 31, 2016
 
100

 
98

Additional paid-in capital
 
172,096

 
162,730

Treasury stock, at cost - 1,100,942 shares at June 30, 2017; 991,563 shares at December 31, 2016
 
(50,868
)
 
(44,353
)
Accumulated other comprehensive loss
 
(3,146
)
 
(4,287
)
Retained earnings
 
33,142

 
31,881

Total stockholders' equity
 
151,324

 
146,069

Total liabilities and stockholders' equity
 
$
175,932

 
$
179,678

 
 

See notes to condensed consolidated financial statements.

1


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data and share amounts)
(Unaudited)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
REVENUES:
 
 
 
 
 
 
 
 
Advisory fees:
 
 
 
 
 
 
 
 
Asset-based
 
$
24,496

 
$
22,666

 
$
48,285

 
$
44,481

Performance-based
 
1,031

 
409

 
1,417

 
409

Trust fees
 
7,917

 
7,643

 
15,712

 
15,108

Other, net
 
312

 
305

 
965

 
154

Total revenues
 
33,756

 
31,023

 
66,379

 
60,152

EXPENSES:
 
 
 
 
 
 
 
 
Employee compensation and benefits
 
15,557

 
15,108

 
33,274

 
31,602

Sales and marketing
 
513

 
687

 
990

 
1,015

Westwood mutual funds
 
909

 
831

 
1,772

 
1,527

Information technology
 
1,883

 
2,201

 
3,639

 
4,165

Professional services
 
1,318

 
1,158

 
2,814

 
2,804

General and administrative
 
2,993

 
2,526

 
5,537

 
4,881

Total expenses
 
23,173

 
22,511

 
48,026

 
45,994

Income before income taxes
 
10,583

 
8,512

 
18,353

 
14,158

Provision for income taxes
 
3,687

 
2,851

 
5,393

 
4,975

Net income
 
$
6,896

 
$
5,661

 
$
12,960

 
$
9,183

Other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
934

 
157

 
1,141

 
1,460

Total comprehensive income
 
$
7,830

 
$
5,818

 
$
14,101

 
$
10,643


Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.84

 
$
0.71

 
$
1.60

 
$
1.16

Diluted
 
$
0.83

 
$
0.69

 
$
1.56

 
$
1.13


Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
8,167,277

 
8,000,214

 
8,118,327

 
7,931,331

Diluted
 
8,316,508

 
8,172,923

 
8,315,722

 
8,132,941

Cash dividends declared per share
 
$
0.62

 
$
0.57

 
$
1.24

 
$
1.14

 

See notes to condensed consolidated financial statements.

2


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2017
(In thousands, except share amounts)
(Unaudited)
 
 
 
Common Stock, Par
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
 
 
Shares
 
Amount
 
 
 
 
 
BALANCE, December 31, 2016
 
8,810,375

 
$
98

 
$
162,730

 
$
(44,353
)
 
$
(4,287
)
 
$
31,881

 
$
146,069

Cumulative effect of accounting change
 

 

 
711

 

 

 
(711
)
 

Net income
 

 

 

 

 

 
12,960

 
12,960

Other comprehensive income
 

 

 

 

 
1,141

 

 
1,141

Issuance of restricted stock, net of forfeitures
 
192,470

 
2

 
(2
)
 

 

 

 

Dividends declared
 

 

 

 

 

 
(10,988
)
 
(10,988
)
Stock based compensation expense
 

 

 
8,065

 

 

 

 
8,065

Reclassification of compensation liability to be paid in shares
 

 

 
592

 

 

 

 
592

Purchases of treasury stock
 
(23,822
)
 

 

 
(1,326
)
 

 

 
(1,326
)
Restricted stock returned for payment of taxes
 
(85,557
)
 

 

 
(5,189
)
 

 

 
(5,189
)
BALANCE, June 30, 2017
 
8,893,466

 
$
100

 
$
172,096

 
$
(50,868
)
 
$
(3,146
)
 
$
33,142

 
$
151,324

 


See notes to condensed consolidated financial statements.

3


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
12,960

 
$
9,183

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
479

 
494

Amortization of intangible assets
 
980

 
980

Unrealized gains on trading investments
 
(378
)
 
(425
)
Stock based compensation expense
 
8,065

 
8,083

Deferred income taxes
 
437

 
(72
)
Excess tax benefits from stock based compensation
 

 
(165
)
Other
 

 
276

Change in operating assets and liabilities:
 
 
 
 
Net sales of investments - trading securities
 
11,198

 
27,945

Accounts receivable
 
531

 
(1,188
)
Other current assets
 
455

 
981

Accounts payable and accrued liabilities
 
266

 
(375
)
Compensation and benefits payable
 
(6,940
)
 
(11,384
)
Income taxes payable
 
(1,178
)
 
(3,889
)
Other liabilities
 
(53
)
 
166

Net cash provided by operating activities
 
26,822

 
30,610

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchase of property and equipment
 
(245
)
 
(994
)
Net cash used in investing activities
 
(245
)
 
(994
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Purchases of treasury stock
 

 
(4,421
)
Purchase of treasury stock under employee stock plans
 
(1,326
)
 
(614
)
Restricted stock returned for payment of taxes
 
(5,189
)
 
(3,696
)
Excess tax benefits from stock based compensation
 

 
165

Payment of contingent consideration in acquisition
 

 
(5,562
)
Cash dividends paid
 
(11,674
)
 
(10,282
)
Net cash used in financing activities
 
(18,189
)
 
(24,410
)
Effect of currency rate changes on cash
 
1,076

 
1,178

Net Change in Cash and Cash Equivalents
 
9,464

 
6,384

Cash and cash equivalents, beginning of period
 
33,679

 
22,740

Cash and cash equivalents, end of period
 
$
43,143

 
$
29,124

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid during the period for income taxes
 
$
5,539

 
$
8,783

Common stock issued for acquisition
 
$

 
$
3,734

Accrued dividends
 
$
7,760

 
$
7,160

Accrued purchase of property and equipment
 
$
52

 
$
332

Tenant allowance included in property and equipment
 
$

 
$
1,128


See notes to condensed consolidated financial statements.

4


WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF THE BUSINESS
Westwood Holdings Group, Inc. (“Westwood”, the “Company”, “we”, “us” or “our”) was incorporated under the laws of the State of Delaware on December 12, 2001. Westwood provides investment management services to institutional investors, private wealth clients and financial intermediaries through its subsidiaries, Westwood Management Corp. and Westwood Advisors, L.L.C. (together “Westwood Management”), Westwood Trust, and Westwood International Advisors Inc. (“Westwood International”). Revenue is largely dependent on the total value and composition of assets under management (“AUM”). Accordingly, fluctuations in financial markets and in the composition of AUM impact revenues and results of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and are presented in accordance with the requirements for quarterly reports on Form 10-Q and consequently do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).  The Company’s condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary in the opinion of management to present fairly our interim financial position and results of operations and cash flows for the periods presented. The accompanying condensed consolidated financial statements are presented in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (“SEC”).
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC. Operating results for the periods in these condensed consolidated financial statements are not necessarily indicative of the results for any future period. The accompanying condensed consolidated financial statements include the accounts of Westwood and its subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.
Recent Accounting Pronouncements
Recently Adopted
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The purpose of the amendment is to simplify the accounting for share-based payment transactions, and includes changes to the accounting for the classification of awards as either equity or liabilities, classification of certain share-based payment items on the statement of cash flows, the accounting for forfeitures and certain income tax consequences. The amendment is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Amendments related to the presentation of employee taxes paid on the statement of cash flows should be applied retrospectively. The amendment related to forfeitures, where an entity may account for forfeitures as they occur, should be applied retrospectively by means of a cumulative-effect adjustment to equity at the beginning of the period in which the guidance is adopted. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of tax benefits on the statement of cash flows using either a prospective or retrospective transition method.

5

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

We adopted ASU 2016-09 effective January 1, 2017. The following summarizes the effects of the adoption on our condensed consolidated financial statements:
Income Taxes - Upon adoption of this standard, all excess tax benefits and tax deficiencies, including tax benefits of dividends on share-based payment awards, are recognized as income tax expense or benefit in the consolidated statement of comprehensive income. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. As a result, the Company recognized discrete adjustments to income tax expense in the first half of 2017 of $1.0 million related to excess tax benefits, decreasing our effective tax rate for the first six months of 2017 to 29.4%. Without the adjustment, our effective tax rate would have been 34.5%. The Company did not have any unrecognized excess tax benefits as of December 31, 2016, and therefore there was no cumulative-effect adjustment to retained earnings related to income taxes. The Company adopted the amendments related to the recognition of excess tax benefits and tax shortfalls prospectively, with no adjustments made to prior periods.
Forfeitures - Prior to adoption, stock-based compensation expense was recognized on a straight-line basis, net of estimated forfeitures, such that expense was recognized for stock-based awards that were expected to vest. A forfeiture rate was estimated annually and revised, if necessary, in subsequent periods if actual forfeitures differed from initial estimates. Upon adoption of this standard, the Company no longer applies an estimated forfeiture rate and instead accounts for forfeitures as they occur. The Company applied the modified retrospective adoption approach, resulting in a $711,000 cumulative-effect reduction to "Retained earnings" with the offset to "Additional paid-in-capital" on January 1, 2017.
Statements of Cash Flows - The Company historically accounted for excess tax benefits on the consolidated statements of cash flows as a financing activity. Upon adoption of this standard, excess tax benefits are classified along with other income tax cash flows as an operating activity. The change in cash flow classification associated with excess tax benefits was adopted prospectively, resulting in the classification of the $1.0 million excess tax benefit as an operating activity during the six months ended June 30, 2017. No change in classification was necessary for the presentation of restricted stock returned for payment of taxes, as the Company has historically presented such payments as a financing activity. The Company adopted this portion of the standard on a prospective basis, with no adjustments made to prior periods.
Earnings Per Share - The Company uses the treasury stock method to compute diluted earnings per share, unless the effect would be anti-dilutive. Under the new standard, the Company is no longer required to estimate the tax effect of anticipated windfall benefits or shortfalls when projecting proceeds available for share repurchases in calculating dilutive shares. The Company utilized the modified retrospective adoption approach, with no adjustments made to prior periods.
Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendment eliminates step two from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. Under step two, an entity had to perform procedures to determine the fair value of its assets and liabilities at the impairment testing date following procedures required to determine the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendment is effective, on a prospective basis, for annual or interim periods beginning after December 15, 2019, with early adoption permitted. We do not expect the amendment to have a material impact on our Consolidated Financial Statements and expect to adopt the standard within the required time frame.
In May 2017, the FASB issued ASU 2017-09, Compensation- Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modified accounting under ASC 718. The purpose of the amendment is to reduce diversity, cost, and complexity in practice when analyzing and applying these modifications. The ASU is effective for periods beginning after December 15, 2017. We do not expect the amendment to have a material impact on our Consolidated Financial Statements and expect to adopt the standard within the required time frame.


6

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

3. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding for the applicable period. Diluted earnings per share is computed based on the weighted average number of shares outstanding plus the effect of any dilutive shares of restricted stock granted to employees and non-employee directors. There were approximately 7,000 and 103,000 anti-dilutive restricted shares outstanding for the three months ended June 30, 2017 and 2016, respectively, and 13,000 and 83,000 anti-dilutive restricted shares outstanding for the six months ended June 30, 2017 and 2016, respectively.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share and share amounts):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
6,896

 
$
5,661

 
$
12,960

 
$
9,183

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
 
8,167,277

 
8,000,214

 
8,118,327

 
7,931,331

Dilutive potential shares from unvested restricted shares
 
149,231

 
172,709

 
197,395

 
201,610

Weighted average shares outstanding - diluted
 
8,316,508

 
8,172,923

 
8,315,722

 
8,132,941

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.84

 
$
0.71

 
$
1.60

 
$
1.16

Diluted
 
$
0.83

 
$
0.69

 
$
1.56

 
$
1.13

4. INVESTMENTS
All investments are carried at fair value and are accounted for as trading securities. Investment balances are presented in the table below (in thousands):
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Market
Value
June 30, 2017:
 
 
 
 
 
 
 
 
U.S. Government and Government agency obligations
 
$
24,135

 
$
24

 
$
(59
)
 
$
24,100

Money market funds
 
9,620

 

 

 
9,620

Equity funds
 
11,506

 
461

 
(22
)
 
11,945

 
 
$
45,261

 
$
485

 
$
(81
)
 
$
45,665

December 31, 2016:
 
 
 
 
 
 
 
 
U.S. Government and Government agency obligations
 
$
30,275

 
$

 
$
(2
)
 
$
30,273

Money market funds
 
14,127

 

 

 
14,127

Equity funds
 
12,057

 
204

 
(176
)
 
12,085

 
 
$
56,459

 
$
204

 
$
(178
)
 
$
56,485

 
As of June 30, 2017 and December 31, 2016, $10.5 million and $11.0 million in corporate funds, respectively, were invested in Westwood Funds®, Westwood Common Trust Funds and Westwood Investment Funds PLC (the "UCITS Fund"). See Note 8 “Variable Interest Entities”.

7

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

5. FAIR VALUE MEASUREMENTS
We determine estimated fair values for our financial instruments using available information. The fair value amounts discussed in our condensed consolidated financial statements are not necessarily indicative of either amounts realizable upon disposition of these instruments or our intent or ability to dispose of these assets. The estimated fair value of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities, dividends payable, compensation and benefits payable and income taxes payable approximates their carrying value due to their short-term maturities. The carrying amount of investments designated as “trading” securities, primarily U.S. Government and Government agency obligations, money market funds, Westwood Funds® mutual funds, the UCITS Fund and Westwood Trust common trust fund shares, equals their fair value based on prices quoted in active markets and, with respect to common trust funds, the net asset value of the shares held as reported by each fund. Market values of our money market holdings generally do not fluctuate.
ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value and requires disclosures regarding certain fair value measurements. ASC 820 establishes a three-tier hierarchy for measuring fair value, as follows:
level 1 – quoted market prices in active markets for identical assets
level 2 – inputs other than quoted prices that are directly or indirectly observable
level 3 – significant unobservable inputs where there is little or no market activity
The following table summarizes the values of our assets and liabilities as of the dates indicated within the fair value hierarchy (in thousands):
 
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV (1)
 
Total
As of June 30, 2017:
 
 
 
 
 
 
 
 
 
 
Investments in trading securities
 
$
43,421

 
$

 
$

 
$
2,244

 
$
45,665

Total financial instruments
 
$
43,421

 
$

 
$

 
$
2,244

 
$
45,665

As of December 31, 2016:
 
 
 
 
 
 
 
 
 
 
Investments in trading securities
 
$
53,319

 
$

 
$

 
$
3,166

 
$
56,485

Total financial instruments
 
$
53,319

 
$

 
$

 
$
3,166

 
$
56,485

 
 
 
 
 
 
 
 
 
 
 
(1) Comprised of certain investments measured at fair value using net asset value ("NAV") as a practical expedient. These investments were recategorized and are no longer included within Level 2 of the valuation hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on our consolidated balance sheets.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the cost of acquired assets over the fair value of the underlying identifiable assets at the date of acquisition. Goodwill is not amortized but is tested for impairment at least annually. We completed our annual goodwill impairment assessment during the third quarter of 2016 and determined that no impairment loss was required. No impairments on goodwill were recorded during the three or six months ended June 30, 2017 or 2016.
Other Intangible Assets
Our intangible assets represent the acquisition date fair value of acquired client relationships, trade names and non-compete agreements and internally developed software and are reflected net of amortization. In valuing these assets, we made significant estimates regarding their useful lives, growth rates and potential attrition. We periodically review intangible assets for events or circumstances that would indicate impairment. No impairments on intangible assets were recorded during the three or six months ended June 30, 2017 or 2016.


8

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

7. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows (in thousands):
 
 
As of June 30, 2017
 
As of December 31, 2016
Foreign currency translation adjustment
 
$
(3,146
)
 
$
(4,287
)
Accumulated other comprehensive loss
 
$
(3,146
)
 
$
(4,287
)
8. VARIABLE INTEREST ENTITIES
We have evaluated all of our advisory relationships with the UCITS Fund, the Westwood Funds®, limited liability companies ("LLCs") and our relationship as sponsor of the Common Trust Funds ("CTFs") to determine whether each of these entities is a variable interest entity ("VIE") or voting ownership entity ("VOE"). Based on our analysis, we determined that the LLCs and CTFs were VIEs, as the at-risk equity holders do not have the ability to direct the activities that most significantly impact the entity’s economic performance, and the Company and its representatives have a majority control of the entity's Board of Directors and can influence the entity's management and affairs. Although we have related parties on the UCITS Fund board of directors, the shareholders have rights to remove the current directors with a simple majority vote, so we determined the UCITS Fund is not a VIE. As the Company and its representatives do not have representation on the Westwood Funds® independent board of directors, which directs the activities that most significantly impact the entity's economic performance, we determined that the Westwood Funds® were not VIEs. Therefore, the UCITS Fund and the Westwood Funds® should be analyzed under the VOE consolidation method. Based on our analysis of our seed investments in these entities for the periods ending June 30, 2017 and December 31, 2016, we have not consolidated the LLCs or CTFs under the VIE method or the UCITS Fund or the Westwood Funds® under the VOE method, and therefore the financial results of these entities are not included in the Company’s consolidated financial results.
As of June 30, 2017 and December 31, 2016, the Company had seed investments in aggregate of approximately $10.5 million and $11.0 million, respectively, in CTFs, the Westwood Funds, and the UCITS Fund. These seed investments were provided for the sole purpose of showing the economic substance needed to establish the funds or sub-funds. The Company's seed investments in these funds are included in “Investments, at fair value” on our condensed consolidated balance sheet at June 30, 2017.
Otherwise, we have not provided any financial support we were not previously contractually obligated to provide and there are no arrangements that would require us to provide additional financial support to any of these entities. Our seed investments in the above-mentioned Westwood Funds®, the UCITS Fund and the CTFs are accounted for as investments in accordance with our other investments described in Note 4 “Investments.” We recognized fee revenue from the Westwood VIEs and Westwood VOEs of $13.1 million and $13.0 million for the three months ended June 30, 2017 and 2016, respectively. We recognized fee revenue from the Westwood VIEs and Westwood VOEs of $25.9 million and $26.1 million for the six months ended June 30, 2017 and 2016, respectively.

9

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The following table displays the assets under management, the amounts of our seed investments that are included in "Investments, at fair value" on our consolidated balance sheets, and the risk of loss in each vehicle (in millions):
 
 
As of June 30, 2017
 
 
Assets
Under
Management
 
Corporate
Investment
 
Amount at Risk
VIEs/VOEs:
 
 
 
 
 
 
Westwood Funds®
 
$
4,092

 
$
6

 
$
6

Common Trust Funds
 
2,575

 
2

 
2

LLCs
 
109

 

 

UCITS Fund
 
574

 
2

 
2

All other assets:
 
 
 
 
 
 
Private Wealth
 
3,001

 
 
 
 
Institutional
 
12,199

 
 
 
 
Total Assets Under Management
 
$
22,550

 
 
 
 
9. LONG-TERM INCENTIVE COMPENSATION
Restricted Stock Awards
We have issued restricted shares to our employees and non-employee directors. The Fourth Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan, as amended (the “Plan”), reserves shares of Westwood common stock for issuance to eligible employees, directors and consultants of Westwood or its subsidiaries in the form of restricted stock. In April 2017, stockholders approved an additional 250,000 shares to be authorized under the Plan, increasing the total number of shares issuable under the Plan (including predecessor plans to the Plan) to 4,648,100 shares. At June 30, 2017, approximately 425,000 shares remain available for issuance under the Plan.
The following table presents the total stock-based compensation expense recorded for stock-based compensation arrangements for the periods indicated (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Service condition stock-based compensation expense
 
$
2,608

 
$
2,750

 
$
5,237

 
$
5,300

Performance condition stock-based compensation expense
 
1,372

 
1,228
 
2,495

 
2,471
Stock-based compensation expense under the Plan
 
3,980

 
3,978
 
7,732

 
7,771
Canadian Plan stock-based compensation expense
 
188

 
102

 
333

 
312
Total stock-based compensation expense
 
$
4,168

 
$
4,080

 
$
8,065

 
$
8,083

Restricted Stock
Under the Plan, we have granted to employees and non-employee directors restricted stock subject to service conditions, and to certain key employees restricted stock subject to both service and performance conditions.
As of June 30, 2017, there was approximately $30.7 million of unrecognized compensation cost for restricted stock grants under the Plan, which we expect to recognize over a weighted-average period of 2.5 years. Our two types of restricted stock grants under the Plan are discussed below.

10

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Restricted Stock Subject Only to a Service Condition
We calculate compensation cost for restricted stock grants by using the fair market value of our common stock at the date of grant, the number of shares issued, and an adjustment for restrictions on dividends. This compensation cost is amortized on a straight-line basis over the applicable vesting period. As discussed in Note 2 "Summary of Significant Accounting Policies," the Company made an accounting policy election to account for forfeitures as they occur effective upon the adoption of ASU 2016-09 on January 1, 2017.
The following table details the status and changes in our restricted stock grants subject only to a service condition for the six months ended June 30, 2017:

 
Shares
 
Weighted Average
Grant Date Fair Value
Non-vested, January 1, 2017
 
607,501

 
$
54.67

Granted
 
143,460

 
61.20

Vested
 
(179,481
)
 
57.43

Forfeited
 
(28,247
)
 
55.36

Non-vested, June 30, 2017
 
543,233

 
$
55.45


Restricted Stock Subject to Service and Performance Conditions
Under the Plan, certain key employees were provided agreements for grants of restricted shares that vest over multiple year periods subject to achieving annual performance goals established by the Compensation Committee of Westwood’s Board of Directors. Each year the Compensation Committee establishes a specific goal for that year’s vesting of the restricted shares. For 2017, the goal is based on Income before income tax from our audited consolidated statement of comprehensive income for fiscal 2017. The date that the Compensation Committee establishes the annual goal is considered to be the grant date and the fair value measurement date to determine expense on the shares that are likely to vest. The vesting period ends when the Compensation Committee formally approves the performance-based restricted stock vesting based on the Income before income tax from the Company’s audited consolidated financial statements. If a portion of the performance-based restricted shares does not vest, no compensation expense is recognized for that portion and any previously recognized compensation expense related to shares that do not vest is reversed. In March 2017, the Compensation Committee established the fiscal 2017 goal for our Chief Executive Officer and Chief Investment Officer as Income before income tax of $24.0 million for 50% of their respective awards, and an Income before income tax target of $34.0 million (ranging from 25% of target for threshold performance of $30.3 million to 185% of target for maximum performance of $42.5 million) for the remaining 50% of their respective awards. For all other restricted stock grants subject to performance conditions, the Compensation Committee established the fiscal 2017 goal as Income before income tax of at least $24.0 million. At the end of the second quarter of 2017, we concluded that it was probable that we would exceed the target performance goals required to vest the applicable percentage of the performance-based restricted shares this year and began recording expense related to those shares.
The following table details the status and changes in our restricted stock grants subject to service and performance conditions for the six months ended June 30, 2017:
 
 
Shares
 
Weighted Average
Grant Date Fair Value
Non-vested, January 1, 2017
 
153,620

 
$
55.90

Granted
 
155,768

 
55.59

Vested
 
(102,367
)
 
56.58

Forfeited
 
(45,675
)
 
55.86

Non-vested, June 30, 2017
 
161,346

 
$
55.89

The above amounts as of June 30, 2017 do not include 18,422 non-vested restricted shares that potentially vest over performance years subsequent to 2017 inasmuch as the Compensation Committee has not set annual performance goals for later years and therefore no grant date has been established.

11

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Canadian Plan
The Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries (the “Canadian Plan”) provides compensation in the form of common stock for services performed by employees of Westwood International. Under the Canadian Plan, no more than $10 million CDN ($7.7 million in U.S. Dollars using the exchange rate on June 30, 2017) may be funded to the plan trustee for purchases of common stock with respect to awards granted under the Canadian Plan. At June 30, 2017, approximately $4.3 million CDN ($3.3 million in U.S. Dollars using the exchange rate on June 30, 2017) remains available for issuance under the Canadian Plan, or approximately 58,500 shares based on the closing share price of our stock of $56.69 as of June 30, 2017. During the first six months of 2017, the trust formed pursuant to the Canadian Plan purchased in the open market 23,822 Westwood common shares for approximately $1.3 million. As of June 30, 2017, the trust holds 55,418 shares of Westwood common stock. As of June 30, 2017, unrecognized compensation cost related to restricted stock grants under the Canadian Plan totaled $1.1 million, which we expect to recognize over a weighted-average period of 2.0 years.
Mutual Fund Share Incentive Awards
We grant annually to certain employees mutual fund incentive awards, which are bonus awards based on our mutual funds achieving specific performance goals. Awards granted are notionally credited to a participant account maintained by us that contains a number of mutual fund shares equal to the award amount divided by the net closing value of a fund share on the date the amount is credited to the account.
For awards earned prior to 2017, the award vested after approximately one year of service following the year in which the participant earned the award. Beginning in 2017, the award vests after approximately two years of service following the year in which the participant earned the award. We begin accruing a liability for mutual fund incentive awards when we believe it is probable that the award will be earned and record expense for these awards over the service period of the award, which is approximately two or three years. During the year in which the amount of the award is determined, we record expense based on the expected value of the award. After the award is earned, we record expense based on the value of the shares awarded and the percentage of the vesting period that has elapsed. Our liability under these awards may increase or decrease based on changes in the value of the mutual fund shares awarded, including reinvested income from the mutual funds during the vesting period. Upon vesting, participants receive the value of the mutual fund share awards adjusted for earnings or losses attributable to the underlying mutual funds. For the three months ended June 30, 2017 and 2016, we recorded expense of approximately $250,000 and $357,000, respectively, related to mutual fund share incentive awards. For the six months ended June 30, 2017 and 2016, we recorded expense of approximately $538,000 and $619,000, respectively, related to mutual fund share incentive awards. As of June 30, 2017 and December 31, 2016, we had an accrued liability of approximately $1.2 million and $1.7 million, respectively, related to mutual fund share incentive awards.

12

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

10. INCOME TAXES
Our effective income tax rate was 34.8% for the second quarter of 2017, compared with 33.5% for the second quarter of 2016. Our effective income tax rate was 29.4% for the first six months of 2017, compared with 35.1% for the first six months of 2016. The decrease is primarily related to the adoption of ASU 2016-09 Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which requires recognition of excess tax benefits related to employees' restricted stock vesting to be recorded within income tax expense. Prior to adoption of ASU 2016-09, excess tax benefits were recorded through Additional paid-in capital, with no impact to the effective tax rate or our consolidated statement of comprehensive income. See further discussion in Note 2 "Summary of Significant Accounting Policies."
As of June 30, 2017 and December 31, 2016, the Company's gross liability related to uncertain tax positions was $1.1 million and $2.5 million, respectively. A number of years may elapse before an uncertain tax position is finally resolved. To the extent that the Company has favorable tax settlements, or determines that accrued amounts are no longer needed due to a lapse in the applicable statute of limitations or other changes in circumstances, such liabilities, as well as any related interest and penalties, would be reversed as a reduction of income tax expense, net of federal tax effects, in the period such determination is made. A reconciliation of the change in recorded uncertain tax positions during the six months ended June 30, 2017 is as follows (in thousands):
Balance at January 1, 2017
 
$
2,462

   Additions for tax positions related to the current year
 
64

   Additions for tax positions related to prior years
 

   Reductions for tax positions related to prior years
 
(628
)
   Payments for tax positions related to prior years
 
(773
)
Balance at June 30, 2017
 
$
1,125

Within the next twelve months, it is reasonably possible that the liability for uncertain tax positions could decrease by as much as $1.1 million as a result of settlements with certain taxing authorities, which, if recognized, would decrease our provision for income taxes by $730,000.
11. RELATED PARTY TRANSACTIONS
Some of our directors, executive officers and their affiliates invest their personal funds directly in trust accounts that we manage. For the three months ended June 30, 2017 and 2016, we recorded trust fees from these accounts of $90,000 and $101,000, respectively. For the six months ended June 30, 2017 and 2016, we recorded trust fees from these accounts of $185,000 and $197,000, respectively. There was $90,000 and $97,000 due from these accounts as of June 30, 2017 and December 31, 2016, respectively.
The Company engages in transactions with its affiliates in the ordinary course of business. Westwood International and Westwood Management provide investment advisory services to the UCITS Fund and the Westwood Funds®. Certain members of our management serve on the board of directors of the UCITS Fund, and we have capital invested in three of the Westwood Funds®. Under the terms of the investment advisory agreements, the Company earns quarterly fees paid by clients of the fund or directly by the funds. The fees are based on negotiated fee schedules applied to assets under management. These fees are commensurate with market rates. For the three months ended June 30, 2017 and 2016, the Company earned approximately $900,000 and $332,000, respectively, in fees from the affiliated funds. For the six months ended June 30, 2017 and 2016, the Company earned approximately $1.7 million and $651,000, respectively, in fees from the affiliated funds. These fees do not include fees paid directly to Westwood International by certain clients invested in the UCITS Fund that have an investment management agreement with Westwood International. As of June 30, 2017 and December 31, 2016, $412,000 and $270,000, respectively, of these fees were unpaid and included in “Accounts receivable” on our condensed consolidated balance sheets.

13

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

12. COMMITMENTS AND CONTINGENCIES
On August 3, 2012, AGF Management Limited and AGF Investments Inc. (collectively, “AGF”) filed a lawsuit in the Ontario Superior Court of Justice against Westwood, certain Westwood employees and the executive recruiting firm of Warren International, LLC. (“Warren”). The action relates to the hiring of certain members of Westwood’s global and emerging markets investment team previously employed by AGF. AGF is alleging that the former employees breached certain obligations when they resigned from AGF and that Westwood and Warren induced such breaches. AGF is seeking an unspecified amount of damages and punitive damages of $10 million CDN in the lawsuit. On November 5, 2012, Westwood responded to AGF’s lawsuit with a counterclaim against AGF for defamation. Westwood is seeking $1 million CDN in general damages, $10 million CDN in special damages, $1 million CDN in punitive damages, and costs. On November 6, 2012, AGF filed a second lawsuit against Westwood, Westwood Management and an employee of a Westwood subsidiary, alleging that the employee made defamatory statements about AGF. In this second lawsuit, AGF is seeking $5 million CDN in general damages, $1 million CDN per defendant in punitive damages, unspecified special damages, interest and costs. The pleadings phase was completed in 2013, and we continue to be in the discovery phase.
While we intend to defend both actions and pursue our counterclaims, we are currently unable to estimate the ultimate aggregate amount of monetary gain, loss or financial impact of these actions and counterclaims. Defending these actions and pursuing these counterclaims may be expensive for us, as well as time consuming for our personnel. While we do not currently believe these proceedings will have a material impact, adverse resolution of these actions and counterclaims could have a material adverse effect on our business, financial condition or results of operations and cash flows.
Our policy is to not accrue legal fees and directly related costs as part of potential loss contingencies. We have agreed with our Directors & Officers insurance provider that 50% of the defense costs related to both AGF claims, excluding Westwood’s counterclaim against AGF, are covered by insurance. We expense legal fees and directly related costs as incurred. We received insurance proceeds of approximately $209,000 and $928,000 during the six months ended June 30, 2017 and 2016, respectively. We had a receivable of approximately $65,000 and $186,000 as of June 30, 2017 and December 31, 2016, respectively, which represents our current minimum estimate of expenses that we expect to recover under our insurance policy. This receivable is part of “Other current assets” on our condensed consolidated balance sheets.
13. SEGMENT REPORTING
We operate two segments: Advisory and Trust. These segments are managed separately based on the types of products and services offered and their related client bases. The Company’s segment information is prepared on the same basis that management reviews the financial information for operational decision-making purposes. The Company’s chief operating decision maker, our Chief Executive Officer, evaluates the performance of our segments based primarily on fee revenues and Economic Earnings. Westwood Holdings Group, Inc., the parent company of Advisory and Trust, does not have revenues and is the entity in which we record typical holding company expenses including employee compensation and benefits for holding company employees, directors’ fees and investor relations costs. All segment accounting policies are the same as those described in the summary of significant accounting policies. Intersegment balances that eliminate in consolidation have been applied to the appropriate segment.
Advisory
Our Advisory segment provides investment advisory services to corporate retirement plans, public retirement plans, endowments, foundations, individuals, the Westwood Funds®, and the UCITS Fund, as well as investment subadvisory services to mutual funds and our Trust segment. Westwood Management Corp. and Westwood International, which provide investment advisory services to clients of similar type, are included in our Advisory segment along with Westwood Advisors, L.L.C.
Trust
Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals. Westwood Trust is included in our Trust segment.

14

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

(in thousands)
 
Advisory
 
Trust
 
Westwood
Holdings
 
Eliminations
 
Consolidated
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Net fee revenues from external sources
 
$
25,525

 
$
7,919

 
$

 
$

 
$
33,444

Net intersegment revenues
 
1,998

 
52

 

 
(2,050
)
 

Net interest and dividend revenue
 
122

 
15

 

 

 
137

Other, net
 
172

 
3

 

 

 
175

Total revenues
 
$
27,817

 
$
7,989

 
$

 
$
(2,050
)
 
$
33,756

Economic Earnings
 
$
11,800

 
$
1,519

 
$
(1,609
)
 
$

 
$
11,710

Less:   Restricted stock expense
 
 
 
 
 
 
 
 
 
4,168

Intangible amortization
 
 
 
 
 
 
 
 
 
490

Deferred taxes on goodwill
 
 
 
 
 
 
 
 
 
156

Net income
 
 
 
 
 
 
 
 
 
$
6,896

 
 
 
 
 
 
 
 
 
 
 
Segment assets
 
$
192,247

 
$
71,808

 
$
14,798

 
$
(102,921
)
 
$
175,932

Segment goodwill
 
$
5,219

 
$
21,925

 
$

 
$

 
$
27,144

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
Net fee revenues from external sources
 
$
23,075

 
$
7,643

 
$

 
$

 
$
30,718

Net intersegment revenues
 
4,786

 
41

 

 
(4,827
)
 

Net interest and dividend revenue
 
98

 
2

 

 

 
100

Other, net
 
187

 
18

 

 

 
205

Total revenues
 
$
28,146

 
$
7,704

 
$

 
$
(4,827
)
 
$
31,023

Economic Earnings
 
$
11,144

 
$
1,442

 
$
(2,199
)
 
$

 
$
10,387

Less:   Restricted stock expense
 
 
 
 
 
 
 
 
 
4,080

Intangible amortization
 
 
 
 
 
 
 
 
 
490

Deferred taxes on goodwill
 
 
 
 
 
 
 
 
 
156

Net income
 
 
 
 
 
 
 
 
 
$
5,661

 
 
 
 
 
 
 
 
 
 
 
Segment assets
 
$
152,227

 
$
68,747

 
$
36,137

 
$
(95,083
)
 
$
162,028

Segment goodwill
 
$
5,219

 
$
21,925

 
$

 
$

 
$
27,144


15

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

(in thousands)
 
Advisory
 
Trust
 
Westwood
Holdings
 
Eliminations
 
Consolidated
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Net fee revenues from external sources
 
$
49,701

 
$
15,713

 
$

 
$

 
$
65,414

Net intersegment revenues
 
4,024

 
103

 

 
(4,127
)
 

Net interest and dividend revenue
 
280

 
24

 

 

 
304

Other, net
 
654

 
7

 

 

 
661

Total revenues
 
$
54,659

 
$
15,847

 
$

 
$
(4,127
)
 
$
66,379

Economic Earnings
 
$
22,587

 
$
2,967

 
$
(3,236
)
 
$

 
$
22,318

Less:   Restricted stock expense
 
 
 
 
 
 
 
 
 
8,065

Intangible amortization
 
 
 
 
 
 
 
 
 
980

Deferred taxes on goodwill
 
 
 
 
 
 
 
 
 
313

Net income
 
 
 
 
 
 
 
 
 
$
12,960

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
Net fee revenues from external sources
 
$
44,891

 
$
15,107

 
$

 
$

 
$
59,998

Net intersegment revenues
 
9,179

 
41

 

 
(9,220
)
 

Net interest and dividend revenue
 
232

 
4

 

 

 
236

Other, net
 
183

 
(265
)
 

 

 
(82
)
Total revenues
 
$
54,485

 
$
14,887

 
$

 
$
(9,220
)
 
$
60,152

Economic Earnings
 
$
20,220

 
$
2,474

 
$
(4,214
)
 
$

 
$
18,480

Less:   Restricted stock expense
 
 
 
 
 
 
 
 
 
8,083

Intangible amortization
 
 
 
 
 
 
 
 
 
980

Deferred taxes on goodwill
 
 
 
 
 
 
 
 
 
234

Net income
 
 
 
 
 
 
 
 
 
$
9,183

We are providing a performance measure that we refer to as Economic Earnings. Both our management and Board of Directors review Economic Earnings to evaluate our ongoing performance, allocate resources and determine our dividend policy. We also believe that this performance measure is useful for management and investors when evaluating our underlying operating and financial performance and our available resources.
In calculating Economic Earnings, we add to net income the non-cash expense associated with equity-based compensation awards of restricted stock, amortization of intangible assets and the deferred taxes related to the tax-basis amortization of goodwill. Although depreciation on property and equipment is a non-cash expense, we do not add it back when calculating Economic Earnings because depreciation charges represent a decline in the value of the related assets that will ultimately require replacement.
The following tables provide a reconciliation of Net income to Economic Earnings (in thousands):
 
 
Three Months Ended June 30,
 
 
2017
 
2016
Net income
 
$
6,896

 
$
5,661

Add: Stock-based compensation expense
 
4,168

 
4,080

Add: Intangible amortization
 
490

 
490

Add: Tax benefit from goodwill amortization
 
156

 
156

Economic Earnings
 
$
11,710

 
$
10,387


16

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

 
 
Six Months Ended June 30,
 
 
2017
 
2016
Net Income
 
$
12,960

 
$
9,183

Add: Stock-based compensation expense
 
8,065

 
8,083

Add: Intangible amortization
 
980

 
980

Add: Tax benefit from goodwill amortization
 
313

 
234

Economic Earnings
 
$
22,318

 
$
18,480

14. SUBSEQUENT EVENTS
Dividend Declared
In July 2017, Westwood’s Board of Directors declared a quarterly cash dividend of $0.62 per common share payable on October 2, 2017 to stockholders of record on September 8, 2017.

17


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements in this report and the Annual Report to Stockholders that are not purely historical facts, including, without limitation, statements about our expected future financial position, results of operations or cash flows, as well as other statements including, without limitation, words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “could,” “goal,” “may,” “target,” “designed,” “on track,” “comfortable with,” “optimistic” and other similar expressions, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results and the timing of some events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, without limitation, the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC, and those risks set forth below:
the composition and market value of our assets under management;
regulations adversely affecting the financial services industry;
competition in the investment management industry;
our assets under management includes investments in foreign companies;
our ability to develop and market new investment strategies successfully;
our relationships with current and potential customers;
our ability to retain qualified personnel;
our ability to maintain effective cyber security;
our ability to maintain effective information systems;
our ability to pursue and property integrate acquired businesses;
litigation risks;
our ability to properly address conflicts of interest;
our ability to maintain adequate insurance coverage;
our ability to maintain an effective system of internal controls;
our ability to maintain our fee structure in light of competitive fee pressures;
our relationships with investment consulting firms; and
the significant concentration of our revenues in a small number of customers.
You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. We are not obligated and do not undertake an obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events or otherwise.

18


Overview
We manage investment assets and provide services for our clients through our subsidiaries, Westwood Management Corp. and Westwood Advisors, L.L.C. (each of which is an SEC-registered investment advisor and referred to hereinafter together as "Westwood Management"), Westwood International Advisors Inc. ("Westwood International") and Westwood Trust. Westwood Management provides investment advisory services to institutional investors, a family of mutual funds called the Westwood Funds®, other mutual funds, an Ireland-domiciled fund organized pursuant to the European Union’s Undertakings for Collective Investment in Transferable Securities (the “UCITS Fund”), individual investors and clients of Westwood Trust. Westwood International provides investment advisory services to institutional clients, the Westwood Funds®, other mutual funds, the UCITS Fund and clients of Westwood Trust. Westwood Trust provides trust and custodial services and participation in self-sponsored common trust funds to institutions and high net worth individuals. Our revenues are generally derived from fees based on a percentage of assets under management.
Revenues
We derive our revenues from investment advisory fees, trust fees, and other revenues. Our advisory fees are generated by Westwood Management and Westwood International, which manage client accounts under investment advisory and subadvisory agreements. Advisory fees are calculated based on a percentage of assets under management and are paid in accordance with the terms of the agreements. Advisory fees are paid quarterly in advance based on assets under management on the last day of the preceding quarter, quarterly in arrears based on assets under management on the last day of the quarter just ended, or are based on a daily or monthly analysis of assets under management for the stated period. We recognize advisory fee revenues as services are rendered. A limited number of our clients have a contractual performance-based fee component in their contracts, which generates additional revenues if we outperform a specified index over a specific period of time. We record revenues from performance-based fees at the end of the measurement period. Since our advance paying clients' billing periods coincide with the calendar quarter to which such payments relate, revenue is recognized within the quarter and our condensed consolidated financial statements contain no deferred advisory fee revenues.
Our trust fees are generated by Westwood Trust pursuant to trust or custodial agreements. Trust fees are separately negotiated with each client and are generally based on a percentage of assets under management. Westwood Trust also provides trust services to a small number of clients on a fixed fee basis. During the first quarter of 2016, Westwood Trust changed the billing terms for most of our trust clients from quarterly in advance, based on assets under management on the last day of the preceding quarter, to quarterly in arrears, based on a daily average of assets under management for the quarter. Since billing periods for most of Westwood Trust’s clients coincide with the calendar quarter, revenue is fully recognized within the quarter and our condensed consolidated financial statements do not contain a significant amount of deferred trust fee revenues.
Our other revenues generally consist of interest and investment income. Although we generally invest most of our cash in U.S. Treasury securities, we also invest in equity and fixed income instruments and money market funds, including seed money for new investment strategies.
Employee Compensation and Benefits
Employee compensation and benefits costs generally consist of salaries, incentive compensation, equity-based compensation expense and benefits.
Sales and Marketing
Sales and marketing costs relate to our marketing efforts, including travel and entertainment, direct marketing and advertising costs.
Westwood Mutual Funds
Westwood Mutual Funds expenses relate to our marketing, distribution and administration of the Westwood Funds®.



19


Information Technology
Information technology expenses are generally costs associated with proprietary investment research tools, maintenance and support, computing hardware, software licenses, telecommunications and other related costs.
Professional Services
Professional services expenses generally consist of costs associated with subadvisory fees, audit, tax, legal and other professional services.
General and Administrative
General and administrative expenses generally consist of costs associated with the lease of our office space, amortization, depreciation, insurance, custody expense, Board of Directors fees, investor relations, licenses and fees, office supplies and other miscellaneous expenses.

20


Assets Under Management
Assets under management ("AUM") increased $1.6 billion to $22.6 billion at June 30, 2017 compared with $21.0 billion at June 30, 2016 as a result of market appreciation, partially offset by net outflows, over the last twelve months. The average of beginning and ending assets under management for the second quarter of 2017 was $22.3 billion compared to $21.1 billion for the second quarter of 2016. The increase in average assets under management is due to market appreciation over the last twelve months.
The following table displays assets under management as of June 30, 2017 and 2016:
 
 
 
 
 
 
% Change
 
 
 
 
June 30, 2017
 
 
As of June 30,
 
vs.
 
 
2017
 
2016
 
June 30, 2016
 
 
(in millions)
 
 
Institutional
 
$
12,773

 
$
11,921

 
7
%
Private Wealth
 
5,685

 
5,361

 
6

Mutual Funds
 
4,092

 
3,690

 
11

Total Assets Under Management(1)
 
$
22,550

 
$
20,972

 
8
%
________________
(1)
AUM excludes $1.0 billion of assets under advisement ("AUA") as of June 30, 2017 related to our model portfolios, including approximately $692 million in a long-only convertibles fund for which we provide consulting advice but do not have direct discretionary investment authority. AUM excluded approximately $322 million of AUA as of June 30, 2016 related to model portfolios, for which we provided consulting advice but for which we did not have direct discretionary investment authority.

Institutional includes separate accounts of corporate pension and profit sharing plans, public employee retirement funds, Taft Hartley plans, endowments, foundations and individuals; subadvisory relationships where Westwood provides investment management services for funds offered by other financial institutions; pooled investment vehicles, including the UCITS Fund and collective investment trusts; and managed account relationships with brokerage firms and other registered investment advisors that offer Westwood products to their customers.
Private Wealth includes assets for which Westwood Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals pursuant to trust or agency agreements and assets for which Westwood Advisors, L.L.C. provides advisory services in ten limited liability companies to high net worth individuals. Investment subadvisory services are provided for the common trust funds by Westwood Management, Westwood International and external, unaffiliated subadvisors. For certain assets in this category, Westwood Trust currently provides limited custody services for a minimal or no fee, viewing these assets as potentially converting to fee-generating managed assets in the future. As an example, some assets in this category consist of low-basis stock currently held in custody for clients where we believe such assets may convert to fee-generating managed assets upon an inter-generational transfer of wealth.
Mutual Funds include the Westwood Funds®, a family of mutual funds for which Westwood Management serves as advisor. These funds are available to individual investors, as well as offered as part of our investment strategies for institutional and private wealth accounts.

21


Roll-Forward of Assets Under Management
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
 
2017
 
2016
 
2017
 
2016
Institutional
 
 
 
 
 
 
 
 
Beginning of period assets
 
$
12,435

 
$
12,232

 
$
11,911

 
$
11,752

Inflows
 
690

 
216

 
1,060

 
713

Outflows
 
(688
)
 
(954
)
 
(1,295
)
 
(1,296
)
Net flows
 
2

 
(738
)
 
(235
)
 
(583
)
Market appreciation
 
336

 
427

 
1,097

 
752

Net change
 
338

 
(311
)
 
862

 
169

End of period assets
 
$
12,773

 
$
11,921

 
$
12,773

 
$
11,921

 
 
 
 
 
 
 
 
 
Private Wealth
 
 
 
 
 
 
 
 
Beginning of period assets
 
$
5,675

 
$
5,305

 
$
5,520

 
$
5,393

Inflows
 
121

 
73

 
315

 
170

Outflows
 
(249
)
 
(152
)
 
(494
)
 
(381
)
Net flows
 
(128
)
 
(79
)
 
(179
)
 
(211
)
Market appreciation
 
138

 
135

 
344

 
179

Net change
 
10

 
56

 
165

 
(32
)
End of period assets
 
$
5,685

 
$
5,361

 
$
5,685

 
$
5,361

 
 
 
 
 
 
 
 
 
Mutual Funds
 
 
 
 
 
 
 
 
Beginning of period assets
 
$
3,963

 
$
3,598

 
$
3,810

 
$
3,617

Inflows
 
257

 
161

 
499

 
460

Outflows
 
(220
)
 
(204
)
 
(469
)
 
(574
)
Net flows
 
37

 
(43
)
 
30

 
(114
)
Market appreciation
 
92

 
135

 
252

 
187

Net change
 
129

 
92

 
282

 
73

End of period assets
 
$
4,092

 
$
3,690

 
$
4,092

 
$
3,690

 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
Beginning of period assets
 
$
22,073

 
$
21,135

 
$
21,241

 
$
20,762

Inflows
 
1,068

 
450

 
1,874

 
1,343

Outflows
 
(1,157
)
 
(1,310
)
 
(2,258
)
 
(2,251
)
Net flows
 
(89
)
 
(860
)
 
(384
)
 
(908
)
Market appreciation
 
566

 
697

 
1,693

 
1,118

Net change
 
477

 
(163
)
 
1,309

 
210

End of period assets
 
$
22,550

 
$
20,972

 
$
22,550

 
$
20,972


Three months ended June 30, 2017 and 2016
The $477 million increase in assets under management for the three months ended June 30, 2017 was due to market appreciation of $566 million, partially offset by net outflows of $89 million. Net outflows were primarily related to our SMidCap strategies and LargeCap Value strategy, partially offset by net inflows to our SmallCap Value, Market Neutral Income, and Emerging Markets strategies.
The $163 million decrease in assets under management for the three months ended June 30, 2016 was due to net outflows of $860 million partially offset by market appreciation of $697 million. Net outflows were primarily related to our SMidCap strategies and LargeCap Value strategy, partially offset by net inflows to our SmallCap Value, Market Neutral Income, and Emerging Markets strategies.

22


Six months ended June 30, 2017 and 2016
The $1.3 billion increase in assets under management for the six months ended June 30, 2017 was due to market appreciation of $1.7 billion, partially offset by net outflows of $384 million. Net outflows were primarily related to our LargeCap Value strategy and SMidCap strategies, partially offset by inflows to our Market Neutral Income and SmallCap Value strategies.
The $210 million increase in assets under management for the six months ended June 30, 2016 was due to market appreciation of $1.1 billion, offset by net outflows of $908 million. Net outflows were primarily related to our SMidCap, SmidCap Plus, LargeCap Value, AllCap Value and Income Opportunity strategies.
Results of Operations
The following table (dollars in thousands) and discussion of our results of operations is based upon data derived from the condensed consolidated statements of comprehensive income contained in our condensed consolidated financial statements and should be read in conjunction with those statements, included elsewhere in this report.
 
 
 
 
 
 
 
 
 
 
% Change
 
% Change
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2017
 
 
June 30,
 
June 30,
 
vs.
 
vs.
 
 
2017
 
2016
 
2017
 
2016
 
June 30, 2016
 
June 30, 2016
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Advisory fees: asset-based
 
$
24,496

 
$
22,666

 
$
48,285

 
$
44,481

 
8
 %
 
9
 %
Advisory fees: performance-based
 
1,031

 
409

 
1,417

 
409

 
152

 
246

Trust fees
 
7,917

 
7,643

 
15,712

 
15,108

 
4

 
4

Other revenues
 
312

 
305

 
965

 
154