WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
1. DESCRIPTION OF THE BUSINESS
Westwood Holdings Group, Inc. (“Westwood”, the “Company”“the Company”, “we”, “us” or “our”) was incorporated under the laws of the State of Delaware on December 12, 2001. Westwood manages investment assets and provides services for its clients through its wholly-owned subsidiaries, Westwood Management Corp., Westwood Advisors, L.L.C. Salient Advisors, LP ("Salient") and its majority-owned subsidiary Broadmark Asset Management LLC ("Broadmark"), (referred to hereinafter together as “Westwood Management”), and Westwood Trust.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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”).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.2022. Operating results for the periods in these condensed consolidated financial statementsCondensed 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.
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income | | $ | 4,132 |
| | $ | 5,887 |
| | $ | 17,092 |
| | $ | 15,070 |
|
| | | | | | | | |
Weighted average shares outstanding - basic | | 8,171,809 |
| | 7,995,680 |
| | 8,136,350 |
| | 7,952,938 |
|
Dilutive potential shares from unvested restricted shares | | 248,940 |
| | 184,276 |
| | 214,576 |
| | 259,530 |
|
Weighted average shares outstanding - diluted | | 8,420,749 |
| | 8,179,956 |
| | 8,350,926 |
| | 8,212,468 |
|
| | | | | | | | |
Earnings per share: | | | | | | | | |
Basic | | $ | 0.51 |
| | $ | 0.74 |
| | $ | 2.10 |
| | $ | 1.89 |
|
Diluted | | $ | 0.49 |
| | $ | 0.72 |
| | $ | 2.05 |
| | $ | 1.84 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
4. INVESTMENTS
All investmentsSales taxes 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 |
September 30, 2017: | | | | | | | | |
U.S. Government and Government agency obligations | | $ | 26,093 |
| | $ | 12 |
| | $ | (14 | ) | | $ | 26,091 |
|
Money market funds | | 9,925 |
| | — |
| | — |
| | 9,925 |
|
Equity funds | | 11,510 |
| | 578 |
| | (11 | ) | | 12,077 |
|
| | $ | 47,528 |
| | $ | 590 |
| | $ | (25 | ) | | $ | 48,093 |
|
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 September 30, 2017 and December 31, 2016, $10.6 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”.
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, income taxes 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
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
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 September 30, 2017: | | | | | | | | | | |
Investments in trading securities | | $ | 45,836 |
| | $ | — |
| | $ | — |
| | $ | 2,257 |
| | $ | 48,093 |
|
Total financial instruments | | $ | 45,836 |
| | $ | — |
| | $ | — |
| | $ | 2,257 |
| | $ | 48,093 |
|
| | | | | | | | | | |
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 2017 and determined that no impairment loss was required. No impairments on goodwill were recorded during the three or nine months ended September 30, 2017 or 2016.
Other Intangible Assets
Our intangible assets represent the acquisition date fair value of acquired client relationships, trade names, 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 nine months ended September 30, 2017 or 2016.
7. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows (in thousands):
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| | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
Foreign currency translation adjustment | | $ | (1,849 | ) | | $ | (4,287 | ) |
Accumulated other comprehensive loss | | $ | (1,849 | ) | | $ | (4,287 | ) |
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
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 entities' respective boards of directors and can influence the respective entities' 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 September 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 September 30, 2017 and December 31, 2016, the Company had seed investments in aggregate of approximately $10.6 million and $11.0 million, respectively, in the 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 September 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 revenueexcluded from the Westwood VIEs and Westwood VOEs of approximately $13.2 million and $13.5 million for the three months ended September 30, 2017 and 2016, respectively. We recognized fee revenue from the Westwood VIEs and Westwood VOEs of approximately $39.1 million and $39.5 million for the nine months ended September 30, 2017 and 2016, respectively.
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):
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| | | | | | | | | | | | |
| | As of September 30, 2017 |
| | Assets Under Management | | Corporate Investment | | Amount at Risk |
VIEs/VOEs: | | | | | | |
Westwood Funds® | | $ | 4,144 |
| | $ | 6 |
| | $ | 6 |
|
Common Trust Funds | | 2,602 |
| | 2 |
| | 2 |
|
LLCs | | 113 |
| | — |
| | — |
|
UCITS Fund | | 595 |
| | 2 |
| | 2 |
|
All other assets: | | | | | | |
Private Wealth | | 3,107 |
| | | | |
Institutional | | 13,063 |
| | | | |
Total Assets Under Management | | $ | 23,624 |
| | | | |
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
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 September 30, 2017, approximately 433,000 shares remain available for issuance under the Plan.
revenues. The following table presents
our revenue disaggregated by account type (in thousands). | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Advisory Fees: | | | | | | | |
Institutional | $ | 9,319 | | | $ | 6,247 | | | $ | 28,365 | | | $ | 19,928 | |
Mutual Funds | 7,275 | | | 4,029 | | | 21,554 | | | 12,718 | |
Wealth Management | 308 | | | 198 | | | 815 | | | 598 | |
Performance-based | — | | | — | | | 555 | | | — | |
Trust Fees | 5,063 | | | 5,177 | | | 15,118 | | | 16,257 | |
| | | | | | | |
Other, net | (85) | | | (245) | | | 145 | | | (1,276) | |
Total revenues | $ | 21,880 | | | $ | 15,406 | | | $ | 66,552 | | | $ | 48,225 | |
We serve clients primarily in the total stock-based compensation expense recorded for stock-based compensation arrangements for the periods indicatedUnited States, as well as in certain international locations. The following table presents our revenue disaggregated by our clients' geographical locations (in thousands):
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Three Months Ended September 30, 2023 | Advisory | | Trust | | | | Other | | Total |
| | | | | | | | | |
| | | | | | | | | |
Canada | $ | 278 | | | $ | — | | | | | $ | — | | | $ | 278 | |
| | | | | | | | | |
United States | 16,624 | | | 5,063 | | | | | (85) | | | 21,602 | |
Total | $ | 16,902 | | | $ | 5,063 | | | | | $ | (85) | | | $ | 21,880 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2022 | Advisory | | Trust | | | | Other | | Total |
| | | | | | | | | |
| | | | | | | | | |
Canada | $ | 285 | | | $ | — | | | | | $ | — | | | $ | 285 | |
| | | | | | | | | |
United States | 10,189 | | | 5,177 | | | | | (245) | | | 15,121 | |
Total | $ | 10,474 | | | $ | 5,177 | | | | | $ | (245) | | | $ | 15,406 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2023 | Advisory | | Trust | | | | Other | | Total |
| | | | | | | | | |
| | | | | | | | | |
Canada | $ | 846 | | | $ | — | | | | | $ | — | | | $ | 846 | |
| | | | | | | | | |
United States | 50,443 | | | 15,118 | | | | | 145 | | | 65,706 | |
Total | $ | 51,289 | | | $ | 15,118 | | | | | $ | 145 | | | $ | 66,552 | |
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Service condition stock-based compensation expense | | $ | 2,591 |
| | $ | 2,679 |
| | $ | 7,828 |
| | $ | 7,978 |
|
Performance condition stock-based compensation expense | | 1,454 |
| | 1,234 | | 3,949 |
| | 3,705 |
Stock-based compensation expense under the Plan | | 4,045 |
| | 3,913 | | 11,777 |
| | 11,683 |
Canadian Plan stock-based compensation expense | | 188 |
| | 169 |
| | 521 |
| | 481 |
Total stock-based compensation expense | | $ | 4,233 |
| | $ | 4,082 |
| | $ | 12,298 |
| | $ | 12,164 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2022 | Advisory | | Trust | | | | Other | | Total |
| | | | | | | | | |
| | | | | | | | | |
Canada | $ | 879 | | | $ | — | | | | | $ | — | | | $ | 879 | |
| | | | | | | | | |
United States | 32,365 | | | 16,257 | | | | | (1,276) | | | 47,346 | |
Total | $ | 33,244 | | | $ | 16,257 | | | | | $ | (1,276) | | | $ | 48,225 | |
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 September 30, 2017, there was approximately $26.3 million of unrecognized compensation cost for restricted stock grants under the Plan, which we expect to recognize over a weighted-average period of 2.2 years. Our two types of restricted stock grants under the Plan are discussed below.
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 nine months ended September 30, 2017:
|
| | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Non-vested, January 1, 2017 | | 607,501 |
| | $ | 54.67 |
|
Granted | | 143,460 |
| | 61.20 |
|
Vested | | (182,085 | ) | | 57.43 |
|
Forfeited | | (36,579 | ) | | 55.11 |
|
Non-vested, September 30, 2017 | | 532,297 |
| | $ | 55.46 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
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 taxes of $24.0 million for 50% of their respective awards, and an Income before income taxes 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 taxes of at least $24.0 million. These performance grants allow the Compensation Committee to exclude certain items, including legal settlements, from the Income before income taxes target. At the Committee's discretion, we excluded the $4.0 million legal settlement expense recorded during the third quarter of 2017 from our forecasted Income before income taxes target and 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 continued recording expense related to the shares expected to vest.
The following table details the status and changes in our restricted stock grants subject to service and performance conditions for the nine months ended September 30, 2017:
|
| | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Non-vested, January 1, 2017 | | 153,620 |
| | $ | 55.90 |
|
Granted | | 157,877 |
| | 54.86 |
|
Vested | | (102,367 | ) | | 56.58 |
|
Forfeited | | (45,675 | ) | | 55.86 |
|
Non-vested, September 30, 2017 | | 163,455 |
| | $ | 55.87 |
|
The above amounts as of September 30, 2017 do not include 16,313 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.
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 ($8.0 million in U.S. Dollars using the exchange rate on September 30, 2017) may be funded to the plan trustee for purchases of common stock with respect to awards granted under the Canadian Plan. At September 30, 2017, approximately $4.3 million CDN ($3.4 million in U.S. Dollars using the exchange rate on September 30, 2017) remains available for issuance under the Canadian Plan, or approximately 51,200 shares based on the closing share price of our stock of $67.27 as of September 30, 2017. During the first nine 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 September 30, 2017, the trust holds 55,418 shares of Westwood common stock. As of September 30, 2017, unrecognized compensation cost related to restricted stock grants under the Canadian Plan totaled $864,000, which we expect to recognize over a weighted-average period of 1.8 years.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
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 either 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 September 30, 2017 and 2016, we recorded expense of approximately $281,000 and $313,000, respectively, related to mutual fund share incentive awards. For the nine months ended September 30, 2017 and 2016, we recorded expense of approximately $819,000 and $933,000, respectively, related to mutual fund share incentive awards. As of September 30, 2017 and December 31, 2016, we had an accrued liability of approximately $1.5 million and $1.7 million, respectively, related to mutual fund share incentive awards.
10. INCOME TAXES
Our effective income tax rate was 28.2% for the third quarter of 2017, compared with 35.0% for the third quarter of 2016. The decrease is primarily related to the tax impact of our legal settlement with AGF (see further discussion in Note 12 “Commitments and Contingencies”) in the third quarter of 2017 and adjustments to uncertain tax positions (net of federal tax benefit) recorded in the third quarter of 2016. Our effective income tax rate was 29.1% for the first nine months of 2017, compared with 35.1% for the first nine 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.” The remaining decrease is related to the tax impact of our legal settlement with AGF (see further discussion in Note 12 “Commitments and Contingencies”) in the third quarter of 2017 and adjustments to uncertain tax positions (net of federal tax benefit) recorded in the first and third quarters of 2016.
As of September 30, 2017 and December 31, 2016, the Company's gross liability related to uncertain tax positions was $196,000 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 nine months ended September 30, 2017 is as follows (in thousands):
|
| | | | |
Balance at January 1, 2017 | | $ | 2,462 |
|
Additions for tax positions related to the current year | | 68 |
|
Additions for tax positions related to prior years | | — |
|
Reductions for tax positions related to prior years | | (768 | ) |
Payments for tax positions related to prior years | | (1,566 | ) |
Balance at September 30, 2017 | | $ | 196 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Within the next twelve months, it is reasonably possible that the liability for uncertain tax positions could decrease by as much as $196,000 as a result of settlements with certain taxing authorities, which, if recognized, would decrease our provision for income taxes by $130,000.
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 September 30, 2017 and 2016, we recorded trust fees from these accounts of $92,000 and $108,000, respectively. For the nine months ended September 30, 2017 and 2016, we recorded trust fees from these accounts of $277,000 and $305,000, respectively. There was $92,000 and $97,000 due from these accounts as of September 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 by the funds directly. 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 September 30, 2017 and 2016, the Company earned approximately $1.1 million and $370,000, respectively, in fees from the affiliated funds. For the nine months ended September 30, 2017 and 2016, the Company earned approximately $2.8 million and $1.0 million, 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 September 30, 2017 and December 31, 2016, $398,000 and $270,000, respectively, of these fees were unpaid and included in “Accounts receivable” on our Condensed Consolidated Balance Sheets.
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 related to the hiring of certain members of Westwood’s global and emerging markets investment team previously employed by AGF. AGF alleged that the former employees breached certain obligations when they resigned from AGF and that Westwood and Warren induced such breaches. AGF was 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 was 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 was seeking $5 million CDN in general damages, $1 million CDN per defendant in punitive damages, unspecified special damages, interest and costs.
On October 13, 2017, we reached a settlement with AGF that provides for the dismissal of all claims, with prejudice and without any admission of liability. We have agreed to pay AGF a one-time payment of $10 million CDN, half of which is expected to be covered by our insurance. During the third quarter of 2017, we recorded a net $4.0 million ($5 million CDN) charge related to the settlement and associated insurance coverage, with an $8.0 million ($10 million CDN) settlement liability recorded in “Accrued lawsuit settlement” and a $4.0 million ($5 million CDN) receivable from our insurance provider included in “Other current assets” on our Condensed Consolidated Balance Sheets at September 30, 2017.
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 $276,000 and $928,000 during the nine months ended September 30, 2017 and 2016, respectively. We had a receivable of approximately $113,000 and $186,000 as of September 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.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
13.5. 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
Westwood’s chief operating decision maker, our Chief Executive Officer, evaluates the performance of our segments based primarily on fee revenues and Economic Earnings. Earnings, a non-GAAP measurement. We define Economic Earnings as net income (loss) plus non-cash equity-based compensation expense, amortization of intangible assets and deferred taxes related to goodwill. Although depreciation on fixed assets is a non-cash expense, we do not add it back when calculating Economic Earnings because depreciation charges represent an allocation of the decline in the value of the related assets that will
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
ultimately require replacement. In addition, we do not adjust Economic Earnings for tax deductions related to restricted stock expense or amortization of intangible assets.
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 (i) corporate retirementpension and profit sharing plans, public employee retirement funds, Taft-Hartley plans, endowments, foundations and individuals, (ii) sub-advisory relationships where Westwood provides investment management services to the Westwood Funds®Funds®, funds offered by other financial institutions and the UCITS Fund, as well as investment subadvisory services to mutual funds andoffered by our Trust segment.segment and (iii) pooled investment vehicles, including collective investment trusts. Westwood Management, Corp.Salient and Westwood International, whichBroadmark provide investment advisory services to similar clients of similar type,and are included in our Advisory segment along with Westwood Advisors, L.L.C.segment.
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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Advisory | | Trust | | Westwood Holdings | | Eliminations | | Consolidated |
Three Months Ended September 30, 2023 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 16,902 | | | $ | 5,063 | | | $ | — | | | $ | — | | | $ | 21,965 | |
Net intersegment revenues | | 1,564 | | | 66 | | | — | | | (1,630) | | | — | |
| | | | | | | | | | |
Other, net | | (85) | | | — | | | — | | | — | | | (85) | |
Total revenues | | $ | 18,381 | | | $ | 5,129 | | | $ | — | | | $ | (1,630) | | | $ | 21,880 | |
| | | | | | | | | | |
September 30, 2023 segment assets | | $ | 278,466 | | | $ | 47,897 | | | $ | 14,536 | | | $ | (190,148) | | | $ | 150,751 | |
September 30, 2023 segment goodwill | | $ | 23,100 | | | $ | 16,401 | | | $ | — | | | $ | — | | | $ | 39,501 | |
| | | | | | | | | | |
Three Months Ended September 30, 2022 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 10,474 | | | $ | 5,177 | | | $ | — | | | $ | — | | | $ | 15,651 | |
Net intersegment revenues | | 450 | | | 83 | | | — | | | (533) | | | — | |
| | | | | | | | | | |
Other, net | | (245) | | | — | | | — | | | — | | | (245) | |
Total revenues | | $ | 10,679 | | | $ | 5,260 | | | $ | — | | | $ | (533) | | | $ | 15,406 | |
| | | | | | | | | | |
September 30, 2022 segment assets | | $ | 227,781 | | | $ | 48,600 | | | $ | 28,676 | | | $ | (174,070) | | | $ | 130,987 | |
September 30, 2022 segment goodwill | | $ | — | | | $ | 16,401 | | | $ | — | | | $ | — | | | $ | 16,401 | |
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Advisory | | Trust | | Westwood Holdings | | Eliminations | | Consolidated |
Nine Months Ended September 30, 2023 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 51,289 | | | $ | 15,118 | | | $ | — | | | $ | — | | | $ | 66,407 | |
Net intersegment revenues | | 4,813 | | | 220 | | | — | | | (5,033) | | | — | |
| | | | | | | | | | |
Other, net | | 145 | | | — | | | — | | | — | | | 145 | |
Total revenues | | $ | 56,247 | | | $ | 15,338 | | | $ | — | | | $ | (5,033) | | | $ | 66,552 | |
| | | | | | | | | | |
Nine Months Ended September 30, 2022 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 33,244 | | | $ | 16,257 | | | $ | — | | | $ | — | | | $ | 49,501 | |
Net intersegment revenues | | 1,563 | | | 261 | | | — | | | (1,824) | | | — | |
| | | | | | | | | | |
Other, net | | (1,276) | | | — | | | — | | | — | | | (1,276) | |
Total revenues | | $ | 33,531 | | | $ | 16,518 | | | $ | — | | | $ | (1,824) | | | $ | 48,225 | |
6. INVESTMENTS
The Company has made strategic investments to enhance the services we provide to our customers.Each of these investments is discussed below.
InvestCloud. We made a strategic investment during 2018 in InvestCloud, which is included in “Investments” on our Condensed Consolidated Balance Sheets. This investment represents an equity interest in a private company without a readily determinable fair value. The Company has elected to apply the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes. Following InvestCloud's recapitalization in the first quarter of 2021, we re-invested $4.4 million of our proceeds into newly-issued shares of InvestCloud.
Charis. Our investment in Charis was included in “Noncurrent investments at fair value” on our December 31, 2022 Condensed Consolidated Balance Sheets and was measured at fair value on a recurring basis. On April 3, 2023, Charis was acquired by Vista Bank ("Vista") in a transaction in which the Company traded its shares in Charis for shares in Vista.
Vista. Our investment in Vista is included in “Investments” on our Condensed Consolidated Balance Sheets. This investment represents an equity interest in a private company without a readily determinable fair value. The Company has elected to apply the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes.
Private Equity Funding. In 2019, we made a $0.3 million investment in Westwood Hospitality. Our investment is included in “Noncurrent investments at fair value” on our Condensed Consolidated Balance Sheets and is measured at fair value on a recurring basis using net asset value ("NAV") as a practical expedient.
Zarvona Energy Fund GP, L.P. and Zarvona Energy Fund II-A, L.P. These investments represent ownership interests in non-controlled partnerships. These investments are included in “Equity method investments” on our Condensed Consolidated Balance Sheets and are measured based on our share of the net earnings or losses of the investees.
Broadmark Asset Management LLC. This investment represented a 47.5% ownership interest in a non-controlled corporation prior to the Broadmark Acquisition in 2023. This investment is included in “Equity method investments” on our Condensed Consolidated Balance Sheets at December 31, 2022. In January 2023, as a result of the Broadmark Acquisition, we acquired additional equity interests in Broadmark and subsequently have accounted for that investment as a consolidated subsidiary.
All other investments are carried at fair value on a recurring basis and are accounted for as trading securities.
|
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Advisory | | Trust | | Westwood Holdings | | Eliminations | | Consolidated |
Three Months Ended September 30, 2017 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 25,334 |
| | $ | 7,858 |
| | $ | — |
| | $ | — |
| | $ | 33,192 |
|
Net intersegment revenues | | 2,026 |
| | 57 |
| | — |
| | (2,083 | ) | | — |
|
Net interest and dividend revenue | | 111 |
| | 43 |
| | — |
| | — |
| | 154 |
|
Other, net | | 157 |
| | (11 | ) | | — |
| | — |
| | 146 |
|
Total revenues | | $ | 27,628 |
| | $ | 7,947 |
| | $ | — |
| | $ | (2,083 | ) | | $ | 33,492 |
|
Economic Earnings | | $ | 8,786 |
| | $ | 1,560 |
| | $ | (1,356 | ) | | $ | — |
| | $ | 8,990 |
|
Less: Restricted stock expense | | | | | | | | | | 4,233 |
|
Intangible amortization | | | | | | | | | | 469 |
|
Deferred taxes on goodwill | | | | | | | | | | 156 |
|
Net income | | | | | | | | | | $ | 4,132 |
|
| | | | | | | | | | |
Segment assets | | $ | 208,444 |
| | $ | 73,170 |
| | $ | 18,388 |
| | $ | (108,640 | ) | | $ | 191,362 |
|
Segment goodwill | | $ | 5,219 |
| | $ | 21,925 |
| | $ | — |
| | $ | — |
| | $ | 27,144 |
|
| | | | | | | | | | |
Three Months Ended September 30, 2016 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 23,673 |
| | $ | 7,690 |
| | $ | — |
| | $ | — |
| | $ | 31,363 |
|
Net intersegment revenues | | 5,275 |
| | 41 |
| | — |
| | (5,316 | ) | | — |
|
Net interest and dividend revenue | | 128 |
| | 5 |
| | — |
| | — |
| | 133 |
|
Other, net | | 279 |
| | 2 |
| | — |
| | — |
| | 281 |
|
Total revenues | | $ | 29,355 |
| | $ | 7,738 |
| | $ | — |
| | $ | (5,316 | ) | | $ | 31,777 |
|
Economic Earnings | | $ | 10,270 |
| | $ | 1,690 |
| | $ | (1,345 | ) | | $ | — |
| | $ | 10,615 |
|
Less: Restricted stock expense | | | | | | | | | | 4,082 |
|
Intangible amortization | | | | | | | | | | 490 |
|
Deferred taxes on goodwill | | | | | | | | | | 156 |
|
Net income | | | | | | | | | | $ | 5,887 |
|
| | | | | | | | | | |
Segment assets | | $ | 163,826 |
| | $ | 65,986 |
| | $ | 13,046 |
| | $ | (73,160 | ) | | $ | 169,698 |
|
Segment goodwill | | $ | 5,219 |
| | $ | 21,925 |
| | $ | — |
| | $ | — |
| | $ | 27,144 |
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Advisory | | Trust | | Westwood Holdings | | Eliminations | | Consolidated |
Nine Months Ended September 30, 2017 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 75,036 |
| | $ | 23,570 |
| | $ | — |
| | $ | — |
| | $ | 98,606 |
|
Net intersegment revenues | | 6,050 |
| | 160 |
| | — |
| | (6,210 | ) | | — |
|
Net interest and dividend revenue | | 391 |
| | 67 |
| | — |
| | — |
| | 458 |
|
Other, net | | 811 |
| | (4 | ) | | — |
| | — |
| | 807 |
|
Total revenues | | $ | 82,288 |
| | $ | 23,793 |
| | $ | — |
| | $ | (6,210 | ) | | $ | 99,871 |
|
Economic Earnings | | $ | 31,372 |
| | $ | 4,528 |
| | $ | (4,592 | ) | | $ | — |
| | $ | 31,308 |
|
Less: Restricted stock expense | | | | | | | | | | 12,298 |
|
Intangible amortization | | | | | | | | | | 1,449 |
|
Deferred taxes on goodwill | | | | | | | | | | 469 |
|
Net income | | | | | | | | | | $ | 17,092 |
|
| | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | | |
Net fee revenues from external sources | | $ | 68,563 |
| | $ | 22,798 |
| | $ | — |
| | $ | — |
| | $ | 91,361 |
|
Net intersegment revenues | | 14,455 |
| | 82 |
| | — |
| | (14,537 | ) | | — |
|
Net interest and dividend revenue | | 360 |
| | 9 |
| | — |
| | — |
| | 369 |
|
Other, net | | 462 |
| | (263 | ) | | — |
| | — |
| | 199 |
|
Total revenues | | $ | 83,840 |
| | $ | 22,626 |
| | $ | — |
| | $ | (14,537 | ) | | $ | 91,929 |
|
Economic Earnings | | $ | 30,493 |
| | $ | 4,160 |
| | $ | (5,559 | ) | | $ | — |
| | $ | 29,094 |
|
Less: Restricted stock expense | | | | | | | | | | 12,164 |
|
Intangible amortization | | | | | | | | | | 1,470 |
|
Deferred taxes on goodwill | | | | | | | | | | 390 |
|
Net income | | | | | | | | | | $ | 15,070 |
|
WeInvestments carried at fair value are providing a performance measure that we refer to as Economic Earnings. Our management and the 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 declinepresented in the
value of the related assets that will ultimately require replacement.table below (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
September 30, 2023: | | | | | | | | |
U.S. Government and Government agency obligations | | $ | 23,429 | | | $ | — | | | $ | (254) | | | $ | 23,175 | |
Money market funds | | 4,259 | | | 111 | | | — | | | 4,370 | |
Equity funds | | 3,580 | | | 83 | | | (371) | | | 3,292 | |
Equities | | 371 | | | — | | | (43) | | | 328 | |
Exchange-traded bond funds | | 164 | | | — | | | (17) | | | 147 | |
Total trading securities | | 31,803 | | | 194 | | | (685) | | | 31,312 | |
Private investment fund | | 265 | | | 7 | | | (13) | | | 259 | |
| | | | | | | | |
Total investments carried at fair value | | $ | 32,068 | | | $ | 201 | | | $ | (698) | | | $ | 31,571 | |
| | | | | | | | |
December 31, 2022: | | | | | | | | |
U.S. Government and Government agency obligations | | $ | 5,728 | | | $ | — | | | $ | (389) | | | $ | 5,339 | |
Money market funds | | 4,093 | | | 111 | | | — | | | 4,204 | |
Equity funds | | 4,863 | | | 32 | | | (446) | | | 4,449 | |
Equities | | 1,278 | | | — | | | (65) | | | 1,213 | |
Exchange-traded bond funds | | 159 | | | — | | | (22) | | | 137 | |
Total trading securities | | 16,121 | | | 143 | | | (922) | | | 15,342 | |
Private investment fund | | 265 | | | — | | | (30) | | | 235 | |
Private equity | | 3,475 | | | — | | | (683) | | | 2,792 | |
Total investments carried at fair value | | $ | 19,861 | | | $ | 143 | | | $ | (1,635) | | | $ | 18,369 | |
The following tables provide a reconciliation of Net income to Economic Earningsinvestments shown below are included in our Condensed Consolidated Balance Sheets as Equity method investments, as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Carrying value | Ownership | | Carrying value | Ownership |
Zarvona Energy Fund GP, L.P. | $ | 3,537 | | 50.0 | % | | $ | 3,438 | | 50.0 | % |
Zarvona Energy Fund II-A, L.P. | 700 | | 0.5 | % | | 700 | | 0.5 | % |
Broadmark Asset Management LLC | — | | — | % | | 2,417 | | 47.5 | % |
Salient MLP Total Return Fund, L.P. | 11 | | — | % | | 11 | | — | % |
Salient MLP Total Return TE Fund, L.P. | 8 | | 0.2 | % | | 8 | | 0.2 | % |
Total | $ | 4,256 | | | | $ | 6,574 | | |
7. FAIR VALUE MEASUREMENTS
|
| | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
Net income | | $ | 4,132 |
| | $ | 5,887 |
|
Add: Stock-based compensation expense | | 4,233 |
| | 4,082 |
|
Add: Intangible amortization | | 469 |
| | 490 |
|
Add: Tax benefit from goodwill amortization | | 156 |
| | 156 |
|
Economic Earnings | | $ | 8,990 |
| | $ | 10,615 |
|
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
Our strategic investments in InvestCloud and Vista, discussed in Note 6 “Investments,” are excluded from the recurring fair value table shown below because we have elected to apply the measurement alternative for those investments.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
The following table summarizes the values of our investments measured at fair value on a recurring basis within the fair value hierarchy as of the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Investments Measured at NAV (1) | | Total |
As of September 30, 2023: | | | | | | | | | |
Investments in trading securities | $ | 31,312 | | | $ | — | | | $ | — | | | $ | — | | | $ | 31,312 | |
Private investment fund | — | | | — | | | — | | | 259 | | | 259 | |
| | | | | | | | | |
Total assets measured at fair value | $ | 31,312 | | | $ | — | | | $ | — | | | $ | 259 | | | $ | 31,571 | |
Salient Acquisition contingent consideration | — | | | — | | | 10,246 | | | — | | | 10,246 | |
Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 10,246 | | | $ | — | | | $ | 10,246 | |
| | | | | | | | | |
As of December 31, 2022: | | | | | | | | | |
Investments in trading securities | $ | 15,342 | | | $ | — | | | $ | — | | | $ | — | | | $ | 15,342 | |
Private investment fund | — | | | — | | | — | | | 235 | | | 235 | |
Private equity | — | | | — | | | 2,792 | | | — | | | 2,792 | |
Total assets measured at fair value | $ | 15,342 | | | $ | — | | | $ | 2,792 | | | $ | 235 | | | $ | 18,369 | |
Salient Acquisition contingent consideration | — | | | — | | | 12,901 | | | — | | | 12,901 | |
Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 12,901 | | | $ | — | | | $ | 12,901 | |
(1) Comprised of certain investments measured at fair value using NAV as a practical expedient. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on our Condensed Consolidated Balance Sheets. |
Prior to our exchange of Charis shares for shares in Vista, our investment in Charis was included within Level 3 of the fair value hierarchy as we valued it utilizing inputs not observable in the market. Historically, our investment was measured at fair value on a recurring basis using a market approach based on either a price to tangible book value multiple range determined to be reasonable in the current environment, or on market transactions. On April 3, 2023, Charis was acquired by Vista in a transaction in which the Company exchanged its shares in Charis for shares in Vista.
The following table summarizes the changes in Level 3 investments measured at fair value on a recurring basis for the periods presented (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value using Significant Unobservable Inputs (Level 3) |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Beginning balance | $ | — | | | $ | 4,024 | | | $ | 2,792 | | | $ | 4,369 | |
| | | | | | | |
Exchange of shares | — | | | — | | | (2,792) | | | — | |
| | | | | | | |
| | | | | | | |
Unrealized gains (losses) on private investments | — | | | (248) | | | — | | | (593) | |
Ending balance | $ | — | | | $ | 3,776 | | | $ | — | | | $ | 3,776 | |
The following table summarizes the changes in Level 3 liabilities measured at fair value on a recurring basis for the periods presented (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value using Significant Unobservable Inputs (Level 3) |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Beginning balance | $ | 7,763 | | | $ | — | | | $ | 12,901 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total (gains) losses included in earnings | 2,483 | | | — | | | (2,655) | | | — | |
Ending balance | $ | 10,246 | | | $ | — | | | $ | 10,246 | | | $ | — | |
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Net Income | | $ | 17,092 |
| | $ | 15,070 |
|
Add: Stock-based compensation expense | | 12,298 |
| | 12,164 |
|
Add: Intangible amortization | | 1,449 |
| | 1,470 |
|
Add: Tax benefit from goodwill amortization | | 469 |
| | 390 |
|
Economic Earnings | | $ | 31,308 |
| | $ | 29,094 |
|
The September 30, 2023 contingent consideration fair value of $10.2 million was valued based upon updated revenue growth projections and financial inputs. The fair value of contingent consideration related to both the revenue retention earn-out and the growth earn-out is measured using the Monte Carlo simulation model, which considered assumptions including revenue growth projections, revenue volatility, risk free rates and discount rates. The projected contingent payment is discounted to the current period using a discounted cash flow model. Increases or decreases in projected revenues, probabilities of payment, discount rates, projected payment dates and other inputs may result in significantly higher or lower fair value measurements. The following table represents the range of the unobservable inputs utilized in the fair value measurement of the contingent consideration classified as level 3:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Range | | |
Earn-out | | Unobservable Input | | Low | | High | | Weighted Average Rate |
Revenue Retention earn-out | | Discount rate | | 13.5% | | 14.5% | | 14.00% |
| | Volatility | | 15.0% | | 25.0% | | 20.00% |
| | | | | | | | |
Growth earn-out | | Discount rate | | 13.5% | | 14.5% | | 14.00% |
| | Volatility | | 15.0% | | 25.0% | | 20.00% |
8. INCOME TAXES
Our effective income tax rate differed from the 21% statutory rate for the three and nine months ended September 30, 2023 and 2022 due to permanent differences between book and tax restricted stock expense based on a decrease in our stock price between the restricted stock grant and vesting dates and, for 2023, the discrete impact of life insurance proceeds received in the third quarter of 2023.
9. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing comprehensive income (loss) attributable to Westwood Holdings Group, Inc. by the weighted average number of shares outstanding for the applicable period. Diluted earnings (loss) 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 56,000 and 150,000 anti-dilutive restricted shares outstanding for the three months ended September 30, 2023 and September 30, 2022, respectively. There were approximately 90,000 and 108,000 anti-dilutive restricted shares outstanding for the nine months ended September 30, 2023 and September 30, 2022, respectively.
The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share and share amounts): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Comprehensive income (loss) attributable to Westwood Holdings Group, Inc. | $ | 3,356 | | | $ | (1,175) | | | $ | 6,944 | | | $ | (1,503) | |
Weighted average shares outstanding - basic | 8,002,537 | | | 7,794,060 | | | 7,949,773 | | | 7,867,555 | |
Dilutive potential shares from unvested restricted shares | 114,210 | | | — | | | 122,966 | | | — | |
| | | | | | | |
Weighted average shares outstanding - diluted | 8,116,747 | | | 7,794,060 | | | 8,072,739 | | | 7,867,555 | |
Earnings (loss) per share: | | | | | | | |
Basic | $ | 0.42 | | | $ | (0.15) | | | $ | 0.87 | | | $ | (0.19) | |
Diluted | $ | 0.41 | | | $ | (0.15) | | | $ | 0.86 | | | $ | (0.19) | |
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
10. 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 reviewed for impairment annually, or between annual assessments if a triggering event occurs or circumstances change that would more likely than not result in the fair value of a reporting unit below its carrying amount. We completed our most recent annual goodwill impairment assessment during the third quarter of 2023 and determined that no goodwill impairment related to the Advisory or Trust segment was required. There was no goodwill impairment during the three and nine months ended September 30, 2023 or September 30, 2022.
Changes in goodwill were as follows (in thousands): | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 |
Beginning balance | $ | 39,501 | | | $ | 35,732 | |
Broadmark Acquisition1 | — | | | 4,197 | |
Salient Acquisition Adjustment2 | — | | | (428) | |
Ending balance | $ | 39,501 | | | $ | 39,501 | |
1 The $4.2 million of acquired goodwill is attributable to the Advisory segment.
2 Represents subsequent purchase price adjustments for the 2022 Salient Acquisition.
Other Intangible Assets
Our intangible assets represent the acquisition date fair value of acquired client relationships, trade names, 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 intangible asset impairments were recorded during the three and nine months ended September 30, 2023 or September 30, 2022.
11. LEASES
As of September 30, 2023 there have been no material changes outside the ordinary course of business to our leases since December 31, 2022. For information regarding our leases, refer to Note 12 “Leases” in Part IV, Item 15. “Exhibits, Financial Statement Schedules” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
12. STOCKHOLDERS' EQUITY
Share Repurchase Program
As of September 30, 2023, there are $1.9 million of shares that may yet be repurchased under our plan.
During the three and nine months ended September 30, 2023, the Company did not repurchase any shares of our common stock.
During the three months ended September 30, 2022, the Company repurchased 99,444 shares of our common stock at an average price of $12.64 per share, including commissions, for an aggregate purchase price of $1.3 million under our share repurchase plan. During the nine months ended September 30, 2022, the Company repurchased 169,630 shares of our common stock at an average price of $13.47 per share, including commissions, for an aggregate purchase price of $2.3 million under our share repurchase plan, and 35,891 shares of our common stock at an average price of $15.75 per share, including commissions, for an aggregate purchase price of $0.6 million on the open market.
13. VARIABLE INTEREST ENTITIES
We evaluated (i) our relationship as sponsor of the Common Trust Funds (“CTFs”) and managing member of the private equity funds Westwood Hospitality and Westwood Technology Opportunities Fund I, LP (collectively the “Private Funds”), (ii) our advisory relationships with the Westwood Funds® and (iii) our investments in InvestCloud, Vista, Zarvona Energy Fund GP and Zarvona Energy Fund II-A as discussed in Note 6 “Investments” (“Private Equity”) to determine whether each of these entities is a variable interest entity (“VIE”) or voting ownership entity (“VOE”).
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Based on our analyses, we determined that the CTFs, Private Funds and Zarvona Energy Fund II-A were VIEs, as the at-risk equity holders do not have the ability to direct the activities that most significantly impact the entities' economic performance, and the Company and its representatives have a majority control of the entities' respective boards of directors and can influence the respective entities' management and affairs. As we do not qualify as primary beneficiaries for those entities, we have not consolidated our investments in those entities for the periods ending September 30, 2023 and December 31, 2022.
Based on our analyses, we determined the Westwood Funds®, InvestCloud, Vista and Zarvona Energy Fund GP (i) have sufficient equity at risk to finance the entities' activities independently, (ii) have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entities that most significantly impact the entities' economic performance and (iii) are not structured with disproportionate voting rights and are VOEs. As we do not own controlling financial interests in those entities, we have not consolidated our investments in those entities for the periods ending September 30, 2023 and December 31, 2022.
We recognized fee revenue from the Westwood VIEs and Westwood VOEs as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Fee Revenues | $ | 8.1 | | | $ | 4.9 | | | $ | 24.0 | | | $ | 15.7 | |
The following table displays the AUM and the risk of loss in each vehicle (in millions): | | | | | | | | | | | | | | | | | |
| As of September 30, 2023 |
| Assets Under Management | | Corporate Investment | | Amount at Risk |
VIEs/VOEs: | | | | | |
Westwood Funds® | $ | 3,924 | | | $ | — | | | $ | — | |
Common Trust Funds | 644 | | | — | | | — | |
| | | | | |
Private Funds | 21 | | | 11.5 | | | 11.5 | |
Private Equity | — | | | 0.3 | | | 0.3 | |
All other assets: | | | | | |
Wealth Management | 3,126 | | | | | |
Institutional | 6,697 | | | | | |
Total Assets Under Management | $ | 14,412 | | | | | |
14. RELATED PARTY TRANSACTIONS
The Company engages in transactions with its affiliates in the ordinary course of business. Westwood Management provides investment advisory services to the Westwood Funds®. Under the terms of the investment advisory agreements, the Company earns quarterly fees paid by clients of the fund or by the funds directly. The fees are based on negotiated fee schedules applied to AUM. For the three and nine months ended September 30, 2023 and September 30, 2022, the Company earned immaterial fees from the affiliated funds.
One of our directors serves as a consultant to the Company under a consulting agreement. We recorded immaterial expenses related to this agreement for the three and nine months ended September 30, 2023 and September 30, 2022.
15. SUBSEQUENT EVENTS
Dividend Declared
InOn October 2017, Westwood’s31, 2023, the Board of Directors declared a quarterly cash dividend of $0.68$0.15 per share of common share, an increase of 10% from the previous quarterly dividend rate,stock payable on January 2, 20183, 2024 to stockholders of record on December 8, 2017.1, 2023.
On October 13, 2017, we reached a settlement with AGF regarding their lawsuits and our related counterclaim. See Note 12 “Commitments and Contingencies” for additional discussion of the settlement.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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,” “potentially,” “may,” “target,” “designed,” “on track,” “comfortable with,” “optimistic”“designed” 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,2022 and those risks set forth below:
•the composition and market value of our assets under management;AUM and AUA;
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 properly 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;
•risks associated with actions of activist stockholders;
•distributions to our common stockholders have included and may in the future include a return of capital;
•inclusion of foreign company investments in our AUM;
•regulations adversely affecting the financial services industry;
•our ability to maintain effective cyber security;
•litigation risks;
•our ability to develop and market new investment strategies successfully;
•our reputation and our relationships with current and potential customers;
•our ability to attract and retain qualified personnel;
•our ability to perform operational tasks;
•our ability to select and oversee third-party vendors;
•our dependence on the operations and funds of our subsidiaries;
•our ability to maintain effective information systems;
•our ability to prevent misuse of assets and information in the possession of our employees and third-party vendors, which could damage our reputation and result in costly litigation and liability for our clients and us;
•our stock is thinly traded and may be subject to volatility;
•competition in the investment consulting firms;management industry;
•our ability to avoid termination of client agreements and the related investment redemptions;
•the significant concentration of our revenues in a small number of customers.customers;
•we have made and may continue to make business combinations as a part of our business strategy, which may present certain risks and uncertainties;
•our relationships with investment consulting firms;
•our ability to identify and execute on our strategic initiatives;
•our ability to declare and pay dividends;
•our ability to fund future capital requirements on favorable terms;
•our ability to properly address conflicts of interest;
•our ability to maintain adequate insurance coverage; and
•our ability to maintain an effective system of internal controls.
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.
Overview
We manage investment assets and provide services for our clients through our subsidiaries, Westwood Management Corp. and, Westwood Advisors, L.L.C., Salient Advisors, LP and Broadmark Asset Management LLC (each of which is an SEC-registered investment advisor ("RIA") 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 Fundindividuals 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.
In January 2023 we acquired an additional 32% interest in Broadmark for $1.6 million, increasing our ownership of Broadmark to approximately 80%. Broadmark's tactical absolute return strategies offer us an established client base and provide future growth potential. Prior to the Broadmark acquisition, we had a $2.4 million equity method investment in Broadmark, which we derecognized upon acquiring a controlling interest in January 2023.
Our revenues are generally derived from fees based on a percentage of assets under management.AUM and AUA, and Westwood Management and Westwood Trust collectively had AUM of approximately $14.4 billion and AUA of approximately $1.1 billion at September 30, 2023. We have established a track record of delivering competitive, risk-adjusted returns for our clients.
DivestitureWith respect to most of our Omaha Operationsclient AUM, we utilize a “value” investment style focused on achieving superior long-term, risk-adjusted returns by investing in companies with high levels of free cash flow, improving returns on equity and strengthening balance sheets that are well positioned for growth but whose value is not fully recognized in the marketplace. This investment approach is designed to limit downside during unfavorable periods and provide superior real returns over the long term. Our investment teams have significant industry experience, with an average of over twenty years of investment experience among members.
On September 6, 2017,We have built a foundation in terms of personnel and infrastructure to support a much larger business and we entered into an agreement to sell the Omaha-based component of our Private Wealth business. The sale is expected to close on December 31, 2017, subject to usual and customary closing conditions and the receipt of regulatory approval from the Nebraska Department of Banking. We expect to receive proceeds of $7 million to $10.5 million, subject to client consents and net working capital requirements; however,have developed investment strategies that we do not expect to record a material gain or loss on the salebelieve will be sought after within our Consolidated Statement of Comprehensive Income. The sale will reduce our goodwilltarget institutional, wealth management and intangible assets but is not expected to have a material impact to our Consolidated Balance Sheet. The component is reported within both our Advisoryintermediary markets. Developing new products and Trust segments. The sale does not represent a major strategic shiftgrowing the organization has resulted in our businessincurring expenses that, in some cases, have not yet generated significant offsetting revenues. We believe that investors will recognize the potential for new revenue streams inherent in these products and does not qualify for discontinued operations reporting.services; however, there is no guarantee that they will occur.
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 managemanages client accounts under investment advisory and subadvisorysub-advisory agreements. Advisory fees are typically calculated based on a percentage of assets under managementAUM and AUA and are paid in accordance with the terms of the agreements. Advisory fees are paid quarterly in advance based on assets under managementAUM on the last day of the preceding quarter, quarterly in arrears based on assets under managementAUM on the last day of the quarter just ended or are based on a daily or monthly analysis of assets under managementAUM for the stated period. We recognize advisory fee revenues as services are rendered. A limited numberCertain 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 fromrevenue for performance-based fees at the end of the measurement period. Since our advance paying clients'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.AUM. 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, tofees are primarily calculated quarterly in arrears based on a daily average of assets under managementAUM for the quarter. Since billing periods for most of Westwood Trust’sTrust'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 ofno deferred trustadvisory fee revenues.
Our other revenues generallyprimarily 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, includingfrom seed money forinvestments into new investment strategies.
Employee Compensationcompensation and Benefitsbenefits
Employee compensation and benefits costs generally consist of salaries, sales commissions, incentive compensation, equity-basedstock-based compensation expense and benefits.
Sales and Marketing
marketing
Sales and marketing costs relate to our marketing efforts, including travel and entertainment, direct marketing and advertising costs.
Westwood Mutual Fundsmutual funds
Expenses for Westwood Mutual Funds expensesmutual funds relate to our marketing, distribution and administration of the Westwood Funds®.
Information Technologytechnology
Information technology expenses are generallyinclude costs associated with proprietary investment research tools, maintenance and support, computing hardware, software licenses, telecommunications and other related costs.
Professional Servicesservices
Professional services expenses generally consist of costs associated with subadvisorysub-advisory fees, audit, tax, legal and other professional services.
Legal Settlement
Legal settlement expenses consist of settlements related to litigation claims, net of any portions covered by our insurance policies.
General and Administrativeadministrative
General and administrative expenses generally consist of costs associated with the lease of our office space, amortization, depreciation, insurance, custody expense, Board of DirectorsDirectors' fees, investor relations, licenses and fees, office supplies and other miscellaneous expenses.
(Gain) loss from change in fair value of contingent consideration
(Gain) loss from change in fair value of contingent consideration consists of fair value adjustments related to contingent consideration from our 2022 acquisition of Salient.
Acquisition expense
Acquisition expense consists of costs related to our 2022 acquisition of Salient.
Net change in unrealized appreciation (depreciation) on private investments
Net change in unrealized appreciation (depreciation) on private investments includes changes in the value of our private equity investments.
Investment income
Investment income primarily includes interest and dividend income on fixed income securities and money market funds.
Other income
Other income primarily consists of income from the sublease of a portion of our corporate offices and the receipt of insurance proceeds.
Firm-wide Assets Under Management
AssetsFirm-wide assets under management (“AUM”) increased $2.3 billion to $23.6of $15.5 billion at September 30, 2017 compared with $21.32023 consisted of $14.4 billion of AUM and $1.1 billion of AUA.
AUM increased $2.9 billion to $14.4 billion at September 30, 2016 as a result of market appreciation, partially offset by net outflows over the last twelve months.2023 compared with $11.5 billion at September 30, 2022. The average of beginning and ending assets under managementAUM for the third quarter of 20172023 was $23.1$14.7 billion compared to $21.1$11.8 billion for the third quarter of 2016. The increase in average assets under management is due to market appreciation over the last twelve months and $713 million in a long-only convertibles fund that transitioned from assets under advisement (“AUA”) to AUM during the third quarter of 2017.2022.
The following tabletable displays assets under managementAUM as of September 30, 20172023 and 2016:2022 (in millions): | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | As of September 30, | | |
| | 2023 | | 2022 | | Change |
Institutional(1) | | $ | 6,697 | | | $ | 5,510 | | | 22 | % |
Wealth Management(2) | | 3,791 | | | 3,528 | | | 7 | |
Mutual Funds(3) | | 3,924 | | | 2,428 | | | 62 | |
Total AUM(4) | | $ | 14,412 | | | $ | 11,466 | | | 26 | % |
|
| | | | | | | | | | | |
| | | | | | % Change |
| | | | September 30, 2017 |
| | As of September 30, | | vs. |
| | 2017 | | 2016 | | September 30, 2016 |
| | (in millions) | | |
Institutional | | $ | 13,658 |
| | $ | 12,192 |
| | 12 | % |
Private Wealth | | 5,822 |
| | 5,327 |
| | 9 |
|
Mutual Funds | | 4,144 |
| | 3,753 |
| | 10 |
|
Total Assets Under Management(1) | | $ | 23,624 |
| | $ | 21,272 |
| | 11 | % |
________________
| |
(1) | AUM excludes $362 million of AUA as of September 30, 2017 related to our model portfolios, for which we provided consulting advice but for which we did not have direct discretionary investment authority. During the third quarter of 2017, approximately $713 million related to a long-only convertibles fund transitioned from AUA to AUM. AUM excluded approximately $1.1 billion of AUA as of September 30, 2016 related to model portfolios, including the long-only convertibles fund, for which we provided consulting advice but for which we did not have direct discretionary investment authority. |
(1)Institutional includes (i) separate accounts of corporate pension and profit sharing plans, public employee retirement funds, Taft HartleyTaft-Hartley plans, endowments, foundations and individuals; subadvisory(ii) sub-advisory relationships where Westwood provides investment management services for funds offered by other financial institutions; (iii) pooled investment vehicles, including the UCITS Fund and collective investment trusts; and (iv) managed account relationships with brokerage firms and other registered investment advisorsRIAs that offer Westwood products to their customers.
Private (2)Wealth Management 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 subadvisorysub-advisory services are provided for the common trust funds by Westwood Management Westwood International and external, unaffiliated subadvisors.sub-advisors. For certain assets in this category Westwood Trust currently provides limited custodycustodial 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.
(3)Mutual Funds include the Westwood Funds®Funds®, a family of mutual funds for which Westwood Management serves as advisor. These funds are available to individual investors, institutional investors and wealth management accounts.
(4)AUM excludes $1.1 billion and $298 million of AUA as well as offered as part of September 30, 2023 and 2022, respectively, related to our model portfolios for which we provide investment strategies for institutional and private wealth accounts.advice on a fee basis without having investment management authority.
Roll-Forward of Assets Under Management
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
Institutional | | | | | | | | |
Beginning of period assets | | $ | 12,773 |
| | $ | 11,921 |
| | $ | 11,911 |
| | $ | 11,752 |
|
Inflows(1) | | 1,113 |
| | 420 |
| | 2,173 |
| | 1,133 |
|
Outflows | | (659 | ) | | (606 | ) | | (1,954 | ) | | (1,902 | ) |
Net flows | | 454 |
| | (186 | ) | | 219 |
| | (769 | ) |
Market appreciation | | 431 |
| | 457 |
| | 1,528 |
| | 1,209 |
|
Net change | | 885 |
| | 271 |
| | 1,747 |
| | 440 |
|
End of period assets | | $ | 13,658 |
| | $ | 12,192 |
| | $ | 13,658 |
| | $ | 12,192 |
|
| | | | | | | | |
Private Wealth | | | | | | | | |
Beginning of period assets | | $ | 5,685 |
| | $ | 5,361 |
| | $ | 5,520 |
| | $ | 5,393 |
|
Inflows | | 194 |
| | 104 |
| | 509 |
| | 274 |
|
Outflows | | (216 | ) | | (245 | ) | | (710 | ) | | (626 | ) |
Net flows | | (22 | ) | | (141 | ) | | (201 | ) | | (352 | ) |
Market appreciation | | 159 |
| | 107 |
| | 503 |
| | 286 |
|
Net change | | 137 |
| | (34 | ) | | 302 |
| | (66 | ) |
End of period assets | | $ | 5,822 |
| | $ | 5,327 |
| | $ | 5,822 |
| | $ | 5,327 |
|
| | | | | | | | |
Mutual Funds | | | | | | | | |
Beginning of period assets | | $ | 4,092 |
| | $ | 3,690 |
| | $ | 3,810 |
| | $ | 3,617 |
|
Inflows | | 293 |
| | 214 |
| | 792 |
| | 674 |
|
Outflows | | (334 | ) | | (224 | ) | | (803 | ) | | (798 | ) |
Net flows | | (41 | ) | | (10 | ) | | (11 | ) | | (124 | ) |
Market appreciation | | 93 |
| | 73 |
| | 345 |
| | 260 |
|
Net change | | 52 |
| | 63 |
| | 334 |
| | 136 |
|
End of period assets | | $ | 4,144 |
| | $ | 3,753 |
| | $ | 4,144 |
| | $ | 3,753 |
|
| | | | | | | | |
Total | | | | | | | | |
Beginning of period assets | | $ | 22,550 |
| | $ | 20,972 |
| | $ | 21,241 |
| | $ | 20,762 |
|
Inflows | | 1,600 |
| | 738 |
| | 3,474 |
| | 2,081 |
|
Outflows | | (1,209 | ) | | (1,075 | ) | | (3,467 | ) | | (3,326 | ) |
Net flows | | 391 |
| | (337 | ) | | 7 |
| | (1,245 | ) |
Market appreciation | | 683 |
| | 637 |
| | 2,376 |
| | 1,755 |
|
Net change | | 1,074 |
| | 300 |
| | 2,383 |
| | 510 |
|
End of period assets | | $ | 23,624 |
| | $ | 21,272 |
| | $ | 23,624 |
| | $ | 21,272 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2023 | | 2022 | | 2023 | | 2022 |
Institutional | | | | | | | |
Beginning of period assets* | $ | 6,969 | | | $ | 5,889 | | | $ | 6,968 | | | $ | 7,037 | |
Inflows | 57 | | | 60 | | | 296 | | | 175 | |
Outflows | (173) | | | (216) | | | (749) | | | (476) | |
Net client flows | (116) | | | (156) | | | (453) | | | (301) | |
| | | | | | | |
Market appreciation (depreciation) | (156) | | | (223) | | | 182 | | | (1,226) | |
Net change | (272) | | | (379) | | | (271) | | | (1,527) | |
End of period assets | $ | 6,697 | | | $ | 5,510 | | | $ | 6,697 | | | $ | 5,510 | |
| | | | | | | |
Wealth Management | | | | | | | |
Beginning of period assets | $ | 3,851 | | | $ | 3,676 | | | $ | 3,666 | | | $ | 4,420 | |
Inflows | 145 | | | 145 | | | 323 | | | 341 | |
Outflows | (140) | | | (177) | | | (416) | | | (466) | |
Net client flows | 5 | | | (32) | | | (93) | | | (125) | |
Market appreciation (depreciation) | (65) | | | (116) | | | 218 | | | (767) | |
Net change | (60) | | | (148) | | | 125 | | | (892) | |
End of period assets | $ | 3,791 | | | $ | 3,528 | | | $ | 3,791 | | | $ | 3,528 | |
| | | | | | | |
Mutual Funds | | | | | | | |
Beginning of period assets* | $ | 4,169 | | | $ | 2,570 | | | $ | 4,145 | | | $ | 3,046 | |
Inflows | 141 | | | 182 | | | 663 | | | 592 | |
Outflows | (319) | | | (219) | | | (1,033) | | | (637) | |
Net client flows | (178) | | | (37) | | | (370) | | | (45) | |
Market appreciation (depreciation) | (67) | | | (105) | | | 149 | | | (573) | |
Net change | (245) | | | (142) | | | (221) | | | (618) | |
End of period assets | $ | 3,924 | | | $ | 2,428 | | | $ | 3,924 | | | $ | 2,428 | |
| | | | | | | |
Total AUM | | | | | | | |
Beginning of period assets | $ | 14,989 | | | $ | 12,135 | | | $ | 14,779 | | | $ | 14,503 | |
Inflows | 343 | | | 387 | | | 1,282 | | | 1,108 | |
Outflows | (632) | | | (612) | | | (2,198) | | | (1,579) | |
Net client flows | (289) | | | (225) | | | (916) | | | (471) | |
| | | | | | | |
Market appreciation (depreciation) | (288) | | | (444) | | | 549 | | | (2,566) | |
Net change | (577) | | | (669) | | | (367) | | | (3,037) | |
End of period assets | $ | 14,412 | | | $ | 11,466 | | | $ | 14,412 | | | $ | 11,466 | |
________________
| |
(1) | Institutional inflows include approximately $713 million of assets related to a long-only convertibles fund, which transitioned from AUA to AUM during the third quarter of 2017. |
* Certain assets under management acquired from Salient were reclassified from Mutual Funds to Institutional as of December 31, 2022 to be consistent with the classification of existing assets.
Three months ended September 30, 2017 and 20162023 compared to the three months ended September 30, 2022
The $1.1 billion increasechange in assets under managementAUM for the three months ended September 30, 20172023 was due to market appreciationdepreciation of $683 million$0.3 billion and net inflows of $391 million. Net inflows were primarily related to approximately $713 million in our Strategic Global Convertibles strategy that transitioned from AUA to AUM in the third quarter of 2017, as well as net inflows to our Market Neutral Income and Emerging Markets strategies. Inflows were partially offset by net outflows to our SMidCap strategies, Income Opportunity strategy and LargeCap Value strategy.
The $300 million increase in assets under management for the three months ended September 30, 2016 was due to net outflows of $337 million partially offset by market appreciation of $637 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.
Nine months ended September 30, 2017 and 2016
The $2.4 billion increase in assets under management for the nine months ended September 30, 2017 was due to market appreciation of $2.4 billion and net inflows of of $7 million. Net inflows were primarily related to approximately $713 million in our Strategic Global Convertibles strategy that transitioned from AUA to AUM in the third quarter of 2017 and net inflows to our SmallCap Value, Market Neutral Income, and Emerging Markets strategies, partially offset by net outflows to our SMidCap strategies and LargeCap Value strategy.
The $510 million increase in assets under management for the nine months ended September 30, 2016 was due to market appreciation of $1.8 billion, offset by net outflows of $1.2$0.3 billion. Net outflows were primarily related to our SMidCap, SmidCap Plus,SmallCap strategy.
The $0.7 billion decrease in AUM for the three months ended September 30, 2022 was due to market depreciation of $0.4 billion and net outflows of $0.2 billion. Net outflows were primarily related to our LargeCap Value AllCapstrategy.
Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022
The $0.4 billion decrease in AUM for the nine months ended September 30, 2023 was due to net outflows of $0.9 billion offset by market appreciation of $0.5 billion. Net outflows were primarily related to our Income Opportunity and MLP strategies.
The $3.0 billion decrease in AUM for the nine months ended September 30, 2022 was due to market depreciation of $2.6 billion and net outflows of $0.5 billion. Net outflows were primarily related to our LargeCap Value and Income Opportunity strategies.
Roll-Forward of Assets Under Advisement
AUA has historically been disclosed in total due to its relative insignificance to our business. However, following our 2022 acquisition of Salient's asset management business, AUA has become a more meaningful component of our business. Accordingly, we will present further AUA details going forward:
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2023 | | 2023 |
Assets Under Advisement | | | |
Beginning of period assets | $ | 1,170 | | | $ | 1,255 | |
Inflows | 33 | | | 117 | |
Outflows | (96) | | | (285) | |
Net client flows | (63) | | | (168) | |
Market appreciation (depreciation) | 2 | | | 22 | |
Net change | (61) | | | (146) | |
End of period assets | $ | 1,109 | | | $ | 1,109 | |
Results of Operations
The following table (dollars in thousands) and discussion of our results of operations isare based upon data derived from the condensed consolidated statementsCondensed Consolidated Statements of comprehensive incomeComprehensive Income (Loss) contained in our condensed consolidated financial statementsCondensed Consolidated Financial Statements and should be read in conjunction with those statements included elsewhere in this report.
| | | | | | | | | | | | % Change | | % Change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Three Months Ended | | Nine Months Ended | |
| | Three Months Ended | | Nine Months Ended | | September 30, 2017 | | September 30, 2017 | | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | | vs. | | vs. | | September 30, | | September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | | September 30, 2016 | | September 30, 2016 | | 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change |
Revenues: | | | | | | | | | | | | | Revenues: | | | | | | | | | | | |
Advisory fees: asset-based | | $ | 25,334 |
| | $ | 23,447 |
| | $ | 73,619 |
| | $ | 67,928 |
| | 8 | % | | 8 | % | Advisory fees: asset-based | $ | 16,902 | | | $ | 10,474 | | | 61 | % | | $ | 50,734 | | | $ | 33,244 | | | 53 | % |
Advisory fees: performance-based | | — |
| | 226 |
| | 1,417 |
| | 635 |
| | (100 | ) | | 123 |
| Advisory fees: performance-based | — | | | — | | | NM | | 555 | | | — | | | NM |
Trust fees | | 7,858 |
| | 7,690 |
| | 23,570 |
| | 22,798 |
| | 2 |
| | 3 |
| |
Other revenues | | 300 |
| | 414 |
| | 1,265 |
| | 568 |
| | NM | | NM | |
Trust fees: asset-based | | Trust fees: asset-based | 5,063 | | | 5,177 | | | (2) | | | 15,118 | | | 16,257 | | | (7) | |
| Other, net | | Other, net | (85) | | | (245) | | | (65) | | | 145 | | | (1,276) | | | (111) | |
Total revenues | | 33,492 |
| | 31,777 |
| | 99,871 |
| | 91,929 |
| | 5 |
| | 9 |
| Total revenues | 21,880 | | | 15,406 | | | 42 | | | 66,552 | | | 48,225 | | | 38 | |
Expenses: | | | | | | | | | | | | | Expenses: | |
Employee compensation and benefits | | 15,601 |
| | 15,637 |
| | 48,875 |
| | 47,239 |
| | — |
| | 3 |
| Employee compensation and benefits | 12,661 | | | 9,526 | | | 33 | | | 40,551 | | | 28,993 | | | 40 | |
Sales and marketing | | 457 |
| | 408 |
| | 1,447 |
| | 1,423 |
| | 12 |
| | 2 |
| Sales and marketing | 676 | | | 335 | | | 102 | | | 2,180 | | | 1,326 | | | 64 | |
Westwood mutual funds | | 977 |
| | 755 |
| | 2,749 |
| | 2,282 |
| | 29 |
| | 20 |
| Westwood mutual funds | 872 | | | 270 | | | 223 | | | 2,350 | | | 1,311 | | | 79 | |
Information technology | | 1,855 |
| | 1,874 |
| | 5,494 |
| | 6,039 |
| | (1 | ) | | (9 | ) | Information technology | 2,334 | | | 1,939 | | | 20 | | | 7,283 | | | 5,615 | | | 30 | |
Professional services | | 1,681 |
| | 1,903 |
| | 4,495 |
| | 4,707 |
| | (12 | ) | | (5 | ) | Professional services | 1,009 | | | 1,536 | | | (34) | | | 3,893 | | | 3,888 | | | 0 | |
Legal settlement | | 4,009 |
| | — |
| | 4,009 |
| | — |
| | 100 |
| | 100 |
| |
General and administrative | | 3,160 |
| | 2,147 |
| | 8,697 |
| | 7,028 |
| | 47 |
| | 24 |
| General and administrative | 3,298 | | | 2,181 | | | 51 | | | 9,579 | | | 6,569 | | | 46 | |
(Gain) loss from change in fair value of contingent consideration | | (Gain) loss from change in fair value of contingent consideration | 2,483 | | | — | | | NM | | (2,655) | | | — | | | NM |
Acquisition expenses | | Acquisition expenses | — | | | 701 | | | NM | | 209 | | | 1,588 | | | (87) | |
| Total expenses | | 27,740 |
| | 22,724 |
| | 75,766 |
| | 68,718 |
| | 22 |
| | 10 |
| Total expenses | 23,333 | | | 16,488 | | | 42 | | | 63,390 | | | 49,290 | | | 29 | |
Income before income taxes | | 5,752 |
| | 9,053 |
| | 24,105 |
| | 23,211 |
| | (36 | ) | | 4 |
| |
Provision for income taxes | | 1,620 |
| | 3,166 |
| | 7,013 |
| | 8,141 |
| | (49 | ) | | (14 | ) | |
Net income | | $ | 4,132 |
| | $ | 5,887 |
| | $ | 17,092 |
| | $ | 15,070 |
| | (30 | )% | | 13 | % | |
Net operating income (loss) | | Net operating income (loss) | (1,453) | | | (1,082) | | | 3,162 | | | (1,065) | | |
| Net change in unrealized appreciation (depreciation) on private investments | | Net change in unrealized appreciation (depreciation) on private investments | — | | | (249) | | | (100) | | | 24 | | | (511) | | | (105) | |
Net investment income | | Net investment income | 247 | | | 104 | | | 138 | | | 630 | | | 93 | | | 577 | |
Other income | | Other income | 5,265 | | | 206 | | | 2456 | | | 5,876 | | | 598 | | | 883 | |
| Income (loss) before income taxes | | Income (loss) before income taxes | 4,059 | | | (1,021) | | | 9,692 | | | (885) | | |
Income tax provision | | Income tax provision | (316) | | | 154 | | | (305) | | | 1,704 | | | 618 | | | 176 | |
Net income (loss) | | Net income (loss) | $ | 4,375 | | | $ | (1,175) | | | (472) | % | | $ | 7,988 | | | $ | (1,503) | | | (631) | % |
Less: Comprehensive income (loss) attributable to noncontrolling interest | | Less: Comprehensive income (loss) attributable to noncontrolling interest | 1,019 | | | — | | | NM | | 1,044 | | | — | | | NM |
Comprehensive income (loss) attributable to Westwood Holdings Group, Inc. | | Comprehensive income (loss) attributable to Westwood Holdings Group, Inc. | $ | 3,356 | | | $ | (1,175) | | | (386) | % | | $ | 6,944 | | | $ | (1,503) | | | (562) | % |