Document
________________________________________________________________________________________________________
 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________________________________
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             .
Commission file number 1-31234
________________________________________________________________________________________________________
WESTWOOD HOLDINGS GROUP, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________________________
DELAWARE
 
75-2969997
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
200 CRESCENT COURT, SUITE 1200
DALLAS, TEXAS
 
75201
(Address of principal executive office)
 
(Zip Code)
(214) 756-6900
(Registrant’s telephone number, including area code)
________________________________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  x
Shares of common stock, par value $0.01 per share, outstanding as of October 13, 2017: 8,884,421.
________________________________________________________________________________________________________
 


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

 



WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
(Unaudited)
 
 
 
September 30,
2017
 
December 31, 2016
 
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
51,436

 
$
33,679

Accounts receivable
 
22,163

 
23,429

Investments, at fair value
 
48,093

 
56,485

Income taxes receivable
 
2,744

 
—

Other current assets
 
6,261

 
2,364

Total current assets
 
130,697

 
115,957

Goodwill
 
27,144

 
27,144

Deferred income taxes
 
9,473

 
10,903

Intangible assets, net
 
19,945

 
21,394

Property and equipment, net of accumulated depreciation of $5,354 and $4,590
 
4,103

 
4,280

Total assets
 
$
191,362

 
$
179,678

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and accrued liabilities
 
$
2,851

 
$
2,641

Accrued litigation settlement
 
8,018

 
—

Dividends payable
 
6,666

 
6,679

Compensation and benefits payable
 
14,126

 
17,200

Income taxes payable
 
722

 
3,148

Total current liabilities
 
32,383

 
29,668

Accrued dividends
 
1,495

 
1,767

Deferred rent
 
2,055

 
2,174

Total liabilities
 
35,933

 
33,609

Commitments and contingencies (Note 12)
 

 

Stockholders' Equity:
 
 
 
 
Common stock, $0.01 par value, authorized 25,000,000 shares, issued 9,986,076 and outstanding 8,884,421 shares at September 30, 2017; issued 9,801,938 and outstanding 8,810,375 shares at December 31, 2016
 
100

 
98

Additional paid-in capital
 
176,329

 
162,730

Treasury stock, at cost - 1,101,655 shares at September 30, 2017; 991,563 shares at December 31, 2016
 
(50,910
)
 
(44,353
)
Accumulated other comprehensive loss
 
(1,849
)
 
(4,287
)
Retained earnings
 
31,759

 
31,881

Total stockholders' equity
 
155,429

 
146,069

Total liabilities and stockholders' equity
 
$
191,362

 
$
179,678

 
 

See notes to condensed consolidated financial statements.

1

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data and share amounts)
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
REVENUES:
 
 
 
 
 
 
 
 
Advisory fees:
 
 
 
 
 
 
 
 
Asset-based
 
$
25,334

 
$
23,447

 
$
73,619

 
$
67,928

Performance-based
 
—

 
226

 
1,417

 
635

Trust fees
 
7,858

 
7,690

 
23,570

 
22,798

Other, net
 
300

 
414

 
1,265

 
568

Total revenues
 
33,492

 
31,777

 
99,871

 
91,929

EXPENSES:
 
 
 
 
 
 
 
 
Employee compensation and benefits
 
15,601

 
15,637

 
48,875

 
47,239

Sales and marketing
 
457

 
408

 
1,447

 
1,423

Westwood mutual funds
 
977

 
755

 
2,749

 
2,282

Information technology
 
1,855

 
1,874

 
5,494

 
6,039

Professional services
 
1,681

 
1,903

 
4,495

 
4,707

Legal settlement
 
4,009

 
—

 
4,009

 
—

General and administrative
 
3,160

 
2,147

 
8,697

 
7,028

Total expenses
 
27,740

 
22,724

 
75,766

 
68,718

Income before income taxes
 
5,752

 
9,053

 
24,105

 
23,211

Provision for income taxes
 
1,620

 
3,166

 
7,013

 
8,141

Net income
 
$
4,132

 
$
5,887

 
$
17,092

 
$
15,070

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
1,297

 
(453
)
 
2,438

 
1,007

Total comprehensive income
 
$
5,429

 
$
5,434

 
$
19,530

 
$
16,077

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.51

 
$
0.74

 
$
2.10

 
$
1.89

Diluted
 
$
0.49

 
$
0.72

 
$
2.05

 
$
1.84

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
8,171,809

 
7,995,680

 
8,136,350

 
7,952,938

Diluted
 
8,420,749

 
8,179,956

 
8,350,926

 
8,212,468

 
 
 
 
 
 
 
 
 
Cash dividends declared per share
 
$
0.62

 
$
0.57

 
$
1.86

 
$
1.71

 

See notes to condensed consolidated financial statements.

2

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

 
$
98

 
$
162,730

 
$
(44,353
)
 
$
(4,287
)
 
$
31,881

 
$
146,069

Cumulative effect of accounting change
 
—

 
—

 
711

 
—

 
—

 
(711
)
 
—

Net income
 
—

 
—

 
—

 
—

 
—

 
17,092

 
17,092

Other comprehensive income
 
—

 
—

 
—

 
—

 
2,438

 
—

 
2,438

Issuance of restricted stock, net of forfeitures
 
184,138

 
2

 
(2
)
 
—

 
—

 
—

 
—

Dividends declared
 
—

 
—

 
—

 
—

 
—

 
(16,503
)
 
(16,503
)
Stock based compensation expense
 
—

 
—

 
12,298

 
—

 
—

 
—

 
12,298

Reclassification of compensation liability to be paid in shares
 
—

 
—

 
592

 
—

 
—

 
—

 
592

Purchases of treasury stock
 
(23,822
)
 
—

 
—

 
(1,326
)
 
—

 
—

 
(1,326
)
Restricted stock returned for payment of taxes
 
(86,270
)
 
—

 
—

 
(5,231
)
 
—

 
—

 
(5,231
)
BALANCE, September 30, 2017
 
8,884,421

 
$
100

 
$
176,329

 
$
(50,910
)
 
$
(1,849
)
 
$
31,759

 
$
155,429

 


See notes to condensed consolidated financial statements.

3

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
17,092

 
$
15,070

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
722

 
732

Amortization of intangible assets
 
1,449

 
1,470

Unrealized gains on trading investments
 
(539
)
 
(676
)
Stock based compensation expense
 
12,298

 
12,164

Deferred income taxes
 
1,481

 
114

Excess tax benefits from stock based compensation
 
—

 
(165
)
Other
 
—

 
275

Change in operating assets and liabilities:
 
 
 
 
Net sales of investments - trading securities
 
8,931

 
23,147

Accounts receivable
 
1,686

 
(2,711
)
Other current assets
 
(3,881
)
 
900

Accounts payable and accrued liabilities
 
178

 
(82
)
Accrued litigation settlement
 
8,018

 
—

Compensation and benefits payable
 
(2,696
)
 
(6,758
)
Income taxes receivable/payable
 
(5,181
)
 
(4,637
)
Other liabilities
 
(111
)
 
154

Net cash provided by operating activities
 
39,447

 
38,997

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchase of property and equipment
 
(537
)
 
(1,680
)
Net cash used in investing activities
 
(537
)
 
(1,680
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Purchases of treasury stock
 
—

 
(5,629
)
Purchase of treasury stock under employee stock plans
 
(1,326
)
 
(614
)
Restricted stock returned for payment of taxes
 
(5,231
)
 
(3,710
)
Excess tax benefits from stock based compensation
 
—

 
165

Payment of contingent consideration in acquisition
 
—

 
(5,562
)
Cash dividends paid
 
(16,787
)
 
(14,827
)
Net cash used in financing activities
 
(23,344
)
 
(30,177
)
Effect of currency rate changes on cash
 
2,191

 
812

Net Change in Cash and Cash Equivalents
 
17,757

 
7,952

Cash and cash equivalents, beginning of period
 
33,679

 
22,740

Cash and cash equivalents, end of period
 
$
51,436

 
$
30,692

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid during the period for income taxes
 
$
10,245

 
$
12,632

Common stock issued for acquisition
 
$
—

 
$
3,734

Accrued dividends
 
$
8,161

 
$
7,682

Tenant allowance included in property and equipment
 
$
—

 
$
1,128


See notes to condensed consolidated financial statements.

4

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF THE BUSINESS
Westwood Holdings Group, Inc. (“Westwood”, the “Company”, “we”, “us” or “our”) was incorporated under the laws of the State of Delaware on December 12, 2001. Westwood provides investment management services to institutional investors, private wealth clients and financial intermediaries through its subsidiaries, Westwood Management Corp. and Westwood Advisors, L.L.C. (together “Westwood Management”), Westwood Trust, and Westwood International Advisors Inc. (“Westwood International”). Revenue is largely dependent on the total value and composition of assets under management (“AUM”). Accordingly, fluctuations in financial markets and in the composition of AUM impact revenues and results of operations.
Divestiture of our Omaha Operations
On September 6, 2017, 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, we do not expect to record a material gain or loss on the sale within our Consolidated Statement of Comprehensive Income. The sale will reduce our goodwill and intangible assets but is not expected to have a material impact to our Consolidated Balance Sheet. The component is reported within both our Advisory and Trust segments. The sale does not represent a major strategic shift in our business and does not qualify for discontinued operations reporting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
The accompanying Condensed Consolidated Financial Statements are unaudited and are presented in accordance with the requirements for quarterly reports on Form 10-Q and consequently do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).  The Company’s Condensed Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) necessary in the opinion of management to present fairly our interim financial position and results of operations and cash flows for the periods presented. The accompanying Condensed Consolidated Financial Statements are presented in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (“SEC”).
The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with our Consolidated Financial Statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC. Operating results for the periods in these condensed consolidated financial statements are not necessarily indicative of the results for any future period. The accompanying Condensed Consolidated Financial Statements include the accounts of Westwood and its subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.
Recent Accounting Pronouncements
Recently Adopted
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The purpose of the amendment is to simplify the accounting for share-based payment transactions, and includes changes to the accounting for the classification of awards as either equity or liabilities, classification of certain share-based payment items in the statement of cash flows, the accounting for forfeitures and certain income tax consequences. The amendment is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Amendments related to the presentation of employee taxes paid on the statement of cash flows should be applied retrospectively. The amendment related to forfeitures, where an entity may account for forfeitures as they occur, should be

5
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

applied retrospectively by means of a cumulative-effect adjustment to equity at the beginning of the period in which the guidance is adopted. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of tax benefits on the statement of cash flows using either a prospective or retrospective transition method.
We adopted ASU 2016-09 effective January 1, 2017. The following summarizes the effects of the adoption on our Condensed Consolidated Financial Statements:
Income Taxes - Upon adoption of this standard, all excess tax benefits and tax deficiencies, including tax benefits of dividends on share-based payment awards, are recognized as income tax expense or benefit in the consolidated statement of comprehensive income. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. As a result, the Company recognized discrete adjustments to income tax expense in the first nine months of 2017 of $1.0 million related to excess tax benefits, decreasing our effective tax rate for the first nine months of 2017 to 29.1%. Without the adjustment, our effective tax rate would have been 33.0%. The Company did not have any unrecognized excess tax benefits as of December 31, 2016 and therefore there was no cumulative-effect adjustment to retained earnings related to income taxes. The Company adopted the amendments related to the recognition of excess tax benefits and tax shortfalls prospectively, with no adjustments made to prior periods.
Forfeitures - Prior to adoption, stock-based compensation expense was recognized on a straight-line basis, net of estimated forfeitures, such that expense was recognized for stock-based awards that were expected to vest. A forfeiture rate was estimated annually and revised, if necessary, in subsequent periods if actual forfeitures differed from initial estimates. Upon adoption of this standard, the Company no longer applies an estimated forfeiture rate and instead accounts for forfeitures as they occur. The Company applied the modified retrospective adoption approach, resulting in a $711,000 cumulative-effect reduction to “Retained earnings” with the offset to “Additional paid-in-capital” on January 1, 2017.
Statements of Cash Flows - The Company historically accounted for excess tax benefits on the consolidated statements of cash flows as a financing activity. Upon adoption of this standard, excess tax benefits are classified along with other income tax cash flows as an operating activity. The change in cash flow classification associated with excess tax benefits was adopted prospectively, resulting in the classification of the $1.0 million excess tax benefit as an operating activity during the nine months ended September 30, 2017. No change in classification was necessary for the presentation of restricted stock returned for payment of taxes, as the Company has historically presented such payments as a financing activity. The Company adopted this portion of the standard on a prospective basis, with no adjustments made to prior periods.
Earnings Per Share - The Company uses the treasury stock method to compute diluted earnings per share, unless the effect would be anti-dilutive. Under the new standard, the Company is no longer required to estimate the tax effect of anticipated windfall benefits or shortfalls when projecting proceeds available for share repurchases in calculating dilutive shares. The Company utilized the modified retrospective adoption approach, with no adjustments made to prior periods.
Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which
resulted from a joint project by the FASB and the International Accounting Standards Board to clarify the principles for
recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards
("IFRS"). The ASU will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Retrospective application is required, with the entity either applying the change to each prior reporting period presented or applying the cumulative effect of each prior reporting period presented at the date of initial application. Management has completed a detailed review of the terms and conditions of our current contracts, including performance based fees, and we do not anticipate a significant change in the timing of revenue recognized. As part of our review we analyzed our current business process and internal controls and do not anticipate implementing new procedures to successfully adopt the standard. We expect to enhance and add additional disclosures surrounding our revenue process including disaggregation of revenue and information about performance obligations that will help provide the financial statement users a better understanding of the nature, amount, timing and potential uncertainty of the revenue being recognized.

6
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendment eliminates step two from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. Under step two, an entity had to perform procedures to determine the fair value of its assets and liabilities at the impairment testing date following procedures required to determine the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendment is effective, on a prospective basis, for annual or interim periods beginning after December 15, 2019, with early adoption permitted. We do not expect the amendment to have a material impact on our Consolidated Financial Statements and expect to adopt the standard within the required time frame.
In May 2017, the FASB issued ASU 2017-09, Compensation- Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modified accounting under ASC 718. The purpose of the amendment is to reduce diversity, cost and complexity in practice when analyzing and applying these modifications. The ASU is effective for periods beginning after December 15, 2017. We do not expect the amendment to have a material impact on our Consolidated Financial Statements and expect to adopt the standard within the required time frame.
3. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding for the applicable period. Diluted earnings per share is computed based on the weighted average number of shares outstanding plus the effect of any dilutive shares of restricted stock granted to employees and non-employee directors. There were no anti-dilutive restricted shares outstanding for the three months ended September 30, 2017. There were approximately 2,453 anti-dilutive restricted shares outstanding for the three months ended September 30, 2016, and 8,800 and 2,301 anti-dilutive restricted shares outstanding for the nine months ended September 30, 2017 and 2016, respectively.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share and share amounts):
 
 
Three Months Ended 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


7
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

4. INVESTMENTS
All investments are carried at fair value and are accounted for as trading securities. Investment balances are presented in the table below (in thousands):
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Market
Value
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

8
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):
 
 
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
)

9
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 revenue 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):
 
 
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

 
 
 
 

10
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.
The following table presents the total stock-based compensation expense recorded for stock-based compensation arrangements for the periods indicated (in thousands):
 
 
Three Months Ended 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


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






11
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.

12
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


13
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.

14
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

13. SEGMENT REPORTING
We operate two segments: Advisory and Trust. These segments are managed separately based on the types of products and services offered and their related client bases. The Company’s segment information is prepared on the same basis that management reviews the financial information for operational decision-making purposes. The Company’s chief operating decision maker, our Chief Executive Officer, evaluates the performance of our segments based primarily on fee revenues and Economic Earnings. Westwood Holdings Group, Inc., the parent company of Advisory and Trust, does not have revenues and is the entity in which we record typical holding company expenses including employee compensation and benefits for holding company employees, directors’ fees and investor relations costs. All segment accounting policies are the same as those described in the summary of significant accounting policies. Intersegment balances that eliminate in consolidation have been applied to the appropriate segment.
Advisory
Our Advisory segment provides investment advisory services to corporate retirement plans, public retirement plans, endowments, foundations, individuals, the Westwood Funds®, and the UCITS Fund, as well as investment subadvisory services to mutual funds and our Trust segment. Westwood Management Corp. and Westwood International, which provide investment advisory services to clients of similar type, are included in our Advisory segment along with Westwood Advisors, L.L.C.
Trust
Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals. Westwood Trust is included in our Trust segment.

15
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

(in thousands)
 
Advisory
 
Trust
 
Westwood
Holdings
 
Eliminations
 
Consolidated
Three Months Ended 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


16
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

We 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 decline in the value of the related assets that will ultimately require replacement.
The following tables provide a reconciliation of Net income to Economic Earnings (in thousands):
 
 
Three Months Ended 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


17
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

14. SUBSEQUENT EVENTS
Dividend Declared
In October 2017, Westwood’s Board of Directors declared a quarterly cash dividend of $0.68 per common share, an increase of 10% from the previous quarterly dividend rate, payable on January 2, 2018 to stockholders of record on December 8, 2017.
AGF Lawsuits
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.

18

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

19

Overview
We manage investment assets and provide services for our clients through our subsidiaries, Westwood Management Corp. and Westwood Advisors, L.L.C. (each of which is an SEC-registered investment advisor and referred to hereinafter together as “Westwood Management”), Westwood International Advisors Inc. (“Westwood International”) and Westwood Trust. Westwood Management provides investment advisory services to institutional investors, a family of mutual funds called the Westwood Funds®, other mutual funds, an Ireland-domiciled fund organized pursuant to the European Union’s Undertakings for Collective Investment in Transferable Securities (the “UCITS Fund”), individual investors and clients of Westwood Trust. Westwood International provides investment advisory services to institutional clients, the Westwood Funds®, other mutual funds, the UCITS Fund and clients of Westwood Trust. Westwood Trust provides trust and custodial services and participation in self-sponsored common trust funds to institutions and high net worth individuals. Our revenues are generally derived from fees based on a percentage of assets under management.
Divestiture of our Omaha Operations
On September 6, 2017, 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, we do not expect to record a material gain or loss on the sale within our Consolidated Statement of Comprehensive Income. The sale will reduce our goodwill and intangible assets but is not expected to have a material impact to our Consolidated Balance Sheet. The component is reported within both our Advisory and Trust segments. The sale does not represent a major strategic shift in our business and does not qualify for discontinued operations reporting.
Revenues
We derive our revenues from investment advisory fees, trust fees, and other revenues. Our advisory fees are generated by Westwood Management and Westwood International, which manage client accounts under investment advisory and subadvisory agreements. Advisory fees are calculated based on a percentage of assets under management and are paid in accordance with the terms of the agreements. Advisory fees are paid quarterly in advance based on assets under management on the last day of the preceding quarter, quarterly in arrears based on assets under management on the last day of the quarter just ended, or are based on a daily or monthly analysis of assets under management for the stated period. We recognize advisory fee revenues as services are rendered. A limited number of our clients have a contractual performance-based fee component in their contracts, which generates additional revenues if we outperform a specified index over a specific period of time. We record revenues from performance-based fees at the end of the measurement period. Since our advance paying clients' billing periods coincide with the calendar quarter to which such payments relate, revenue is recognized within the quarter and our Condensed Consolidated Financial Statements contain no deferred advisory fee revenues.
Our trust fees are generated by Westwood Trust pursuant to trust or custodial agreements. Trust fees are separately negotiated with each client and are generally based on a percentage of assets under management. Westwood Trust also provides trust services to a small number of clients on a fixed fee basis. During the first quarter of 2016, Westwood Trust changed the billing terms for most of our trust clients from quarterly in advance, based on assets under management on the last day of the preceding quarter, to quarterly in arrears, based on a daily average of assets under management for the quarter. Since billing periods for most of Westwood Trust’s clients coincide with the calendar quarter, revenue is fully recognized within the quarter and our Condensed Consolidated Financial Statements do not contain a significant amount of deferred trust fee revenues.
Our other revenues generally consist of interest and investment income. Although we generally invest most of our cash in U.S. Treasury securities, we also invest in equity and fixed income instruments and money market funds, including seed money for new investment strategies.
Employee Compensation and Benefits
Employee compensation and benefits costs generally consist of salaries, incentive compensation, equity-based compensation expense and benefits.
Sales and Marketing

20

Sales and marketing costs relate to our marketing efforts, including travel and entertainment, direct marketing and advertising costs.
Westwood Mutual Funds
Westwood Mutual Funds expenses relate to our marketing, distribution and administration of the Westwood Funds®.
Information Technology
Information technology expenses are generally costs associated with proprietary investment research tools, maintenance and support, computing hardware, software licenses, telecommunications and other related costs.
Professional Services
Professional services expenses generally consist of costs associated with subadvisory fees, audit, tax, legal and other professional services.
Legal Settlement
Legal settlement expenses consist of settlements related to litigation claims, net of any portions covered by our insurance policies.
General and Administrative
General and administrative expenses generally consist of costs associated with the lease of our office space, amortization, depreciation, insurance, custody expense, Board of Directors fees, investor relations, licenses and fees, office supplies and other miscellaneous expenses.

21

Assets Under Management
Assets under management (“AUM”) increased $2.3 billion to $23.6 billion at September 30, 2017 compared with $21.3 billion at September 30, 2016 as a result of market appreciation, partially offset by net outflows over the last twelve months. The average of beginning and ending assets under management for the third quarter of 2017 was $23.1 billion compared to $21.1 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.
The following table displays assets under management as of September 30, 2017 and 2016:
 
 
 
 
 
 
% 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.

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

22

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

________________
(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.

Three months ended September 30, 2017 and 2016
The $1.1 billion increase in assets under management for the three months ended September 30, 2017 was due to market appreciation of $683 million 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.

23

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 billion. Net outflows were primarily related to our SMidCap, SmidCap Plus, LargeCap Value, AllCap Value and Income Opportunity strategies.
Results of Operations
The following table (dollars in thousands) and discussion of our results of operations is based upon data derived from the condensed consolidated statements of comprehensive income contained in our condensed consolidated financial statements and should be read in conjunction with those statements, included elsewhere in this report.
 
 
 
 
 
 
 
 
 
 
% Change
 
% Change
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2017
 
 
September 30,
 
September 30,
 
vs.
 
vs.
 
 
2017
 
2016
 
2017
 
2016
 
September 30, 2016
 
September 30, 2016
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Advisory fees: asset-based
 
$
25,334

 
$
23,447

 
$
73,619

 
$
67,928

 
8
 %
 
8
 %
Advisory fees: performance-based
 
—

 
226

 
1,417

 
635

 
(100
)
 
123

Trust fees
 
7,858

 
7,690

 
23,570

 
22,798

 
2

 
3

Other revenues
 
300

 
414

 
1,265

 
568

 
NM
 
NM
Total revenues
 
33,492

 
31,777

 
99,871

 
91,929

 
5

 
9

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Employee compensation and benefits
 
15,601

 
15,637

 
48,875

 
47,239

 
—

 
3

Sales and marketing
 
457

 
408

 
1,447

 
1,423

 
12

 
2

Westwood mutual funds
 
977

 
755

 
2,749

 
2,282

 
29

 
20

Information technology
 
1,855

 
1,874

 
5,494

 
6,039

 
(1
)
 
(9
)
Professional services
 
1,681

 
1,903

 
4,495

 
4,707

 
(12
)
 
(5
)
Legal settlement
 
4,009

 
—

 
4,009

 
—

 
100

 
100

General and administrative
 
3,160

 
2,147

 
8,697

 
7,028

 
47

 
24

Total expenses
 
27,740

 
22,724

 
75,766

 
68,718

 
22

 
10

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
 %
_________________________
NM    Not meaningful

24

Three months ended September 30, 2017 compared to three months ended September 30, 2016
Total Revenues. Our Total revenues increased $1.7 million, or 5%, to $33.5 million for the three months ended September 30, 2017 compared with $31.8 million for the three months ended September 30, 2016. Asset-based advisory fees increased $1.9 million, or 8%, and Trust fees increased $0.2 million, or 2%, primarily due to higher average assets under management due to asset appreciation.
Legal Settlement. We recorded a net $4.0 million charge related to a legal settlement and associated insurance coverage recorded during the third quarter of 2017. See further discussion of the settlement in Note 12 “Commitments and Contingencies” to our Condensed Consolidated Financial Statements included in Part I. Financial Information.
General and Administrative. General and administrative costs increased $1.1 million, or 47.2%, to $3.2 million for the three months ended September 30, 2017 compared with $2.1 million for the three months ended September 30, 2016, primarily due to a $0.9 million foreign currency transaction loss recorded in the third quarter of 2017 as a result of a 4% decrease in the Canadian dollar exchange rate.
Provision for Income Taxes. The effective tax rate decreased to 28.2% for the three months ended September 30, 2017 from 35.0% for the three months ended September 30, 2016. The decrease is primarily related to the tax impact of our legal settlement with AGF in the third quarter of 2017 and adjustments to uncertain tax positions (net of federal tax benefit) recorded in the third quarter of 2016.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Total Revenues. Our Total revenues increased $8.0 million, or 9%, to $99.9 million for the nine months ended September 30, 2017 compared with $91.9 million for the nine months ended September 30, 2016. This increase was primarily related to a $5.7 million, or 8%, increase in Asset-based advisory fees and a $0.8 million, or 3%, increase in Trust fees related to higher average assets under management due to market appreciation. Performance-based advisory fees increased by $0.8 million.
Employee Compensation and Benefits. Employee compensation and benefits costs increased to $48.9 million for the nine months ended September 30, 2017 compared with $47.2 million for the nine months ended September 30, 2016. The increase is due to higher incentive compensation and performance-based restricted stock expense as a result of improved pre-tax income as compared to the prior year, as well as merit increases.
Legal Settlement. We recorded a net $4.0 million charge related to a legal settlement and associated insurance coverage recorded during the third quarter of 2017. See further discussion of the settlement in Note 12 “Commitments and Contingencies” to our Condensed Consolidated Financial Statements included in Part I. Financial Information.
General & Administrative. General and administrative expenses increased $1.7 million, or 24%, to $8.7 million
for the nine months ended September 30, 2017 compared to $7.0 million for the nine months ended September 30, 2016,
primarily due to a $1.6 million foreign currency transaction loss recorded in the first nine months of 2017 as a result of an 8% decrease in the Canadian dollar exchange rate.
Provision for Income Taxes. The effective tax rate decreased to 29.1% for the nine months ended September 30, 2017 from 35.1% for the nine months ended September 30, 2016. During the first quarter of 2017, we recorded a $1.0 million adjustment to income tax expense related to excess tax benefits as a result of the adoption of ASU 2016-09 Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which decreased our effective tax rate to 29.1%. Without the adjustment, our effective tax rate for the nine months ended September 30, 2016 would have been 33.0%. 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. The remaining decrease is related to the tax impact of our legal settlement with AGF 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.


25

Supplemental Financial Information
As supplemental information, we provide a non-U.S. generally accepted accounting principles (“non-GAAP”) performance measure that we refer to as Economic Earnings. We provide this measure in addition to, but not as a substitute for, net income reported on a U.S. generally accepted accounting principles (“GAAP”) basis. Our management and Board of Directors review Economic Earnings to evaluate our ongoing performance, allocate resources and review the dividend policy. We believe that this non-GAAP performance measure, while not a substitute for GAAP net income, is useful for management and investors when evaluating our underlying operating and financial performance and our available resources. We do not advocate that investors consider this non-GAAP measure without also considering financial information prepared in accordance with GAAP.
In calculating Economic Earnings, we add back to net income the non-cash expense associated with equity-based compensation awards of restricted stock, amortization of intangible assets and deferred taxes related to the tax-basis amortization of goodwill. Although depreciation on property and equipment is a non-cash expense, we do not add it back when calculating Economic Earnings because depreciation charges represent a decline in the value of the related assets that will ultimately require replacement.
The following tables provide a reconciliation of Net income to Economic Earnings (in thousands, except share and per share amounts):
 
 
Three Months Ended September 30,
 
%
Change
 
 
2017
 
2016
 
Net income
 
$
4,132

 
$
5,887

 
(30
)%
Add: Stock-based compensation expense
 
4,233

 
4,082

 
4

Add: Intangible amortization
 
469

 
490

 
(4
)
Add: Tax benefit from goodwill amortization
 
156

 
156

 
—

Economic Earnings
 
$
8,990

 
$
10,615

 
(15
)%
Diluted weighted average shares outstanding
 
8,420,749

 
8,179,956

 
 
Economic Earnings per share
 
$
1.07

 
$
1.30

 
 
    
 
 
Nine Months Ended September 30,
 
%
Change
 
 
2017
 
2016
 
Net Income
 
$
17,092

 
$
15,070

 
13
 %
Add: Stock-based compensation expense
 
12,298

 
12,164

 
1

Add: Intangible amortization
 
1,449

 
1,470

 
(1
)
Add: Tax benefit from goodwill amortization
 
469

 
390

 
20

Economic Earnings
 
$
31,308

 
$
29,094

 
8
 %
Diluted weighted average shares outstanding
 
8,350,926

 
8,212,468

 
 
Economic Earnings per share
 
$
3.75

 
$
3.54

 
 

26

Liquidity and Capital Resources
We fund our operations and cash requirements with cash generated from operating activities. We may also use cash from operations to pay dividends to our stockholders. As of September 30, 2017 and December 31, 2016, we had no debt. The changes in net cash provided by operating activities generally reflect the changes in earnings plus the effects of non-cash items and changes in working capital. Changes in working capital, especially accounts receivable and accounts payable, are generally the result of timing differences between collection of fees billed and payment of operating expenses.
During the nine months ended September 30, 2017, cash flow provided by operating activities, principally our investment advisory business, was $39.4 million. Cash flow used in investing activities of $537,000 during the nine months ended September 30, 2017 was related to purchases of fixed assets. Cash flow used in financing activities of $23.3 million for the nine months ended September 30, 2017 was due to the payment of dividends, purchases of restricted stock returned for payment of taxes, and purchases of treasury shares for our Canadian share award plan.
We had cash and investments of $99.5 million as of September 30, 2017 and $90.2 million as of December 31, 2016. Cash and cash equivalents as of September 30, 2017 and December 31, 2016 includes approximately $30 million and $20 million, respectively, of undistributed income from Westwood International that we consider to be permanently invested in Canada.  At September 30, 2017 and December 31, 2016, working capital aggregated $98.3 million and $86.3 million, respectively.
Westwood Trust must maintain cash and investments in an amount equal to the minimum restricted capital of $4.0 million, as required by the Texas Finance Code. Restricted capital is included in Investments in the accompanying Condensed Consolidated Balance Sheets. At September 30, 2017, Westwood Trust had approximately $20.4 million in excess of its minimum capital requirement.
Our future liquidity and capital requirements will depend upon numerous factors, including our results of operations, the timing and magnitude of capital expenditures or strategic initiatives, our dividend policy and other business and risk factors described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC. We believe that current cash and short-term investment balances and cash generated from operations will be sufficient to meet both the operating and capital requirements of our ordinary business operations through at least the next twelve months. However, there can be no assurance that we will not require additional financing within this time frame. The failure to raise needed capital on attractive terms, if at all, could have a material adverse effect on our business, financial condition and results of operations.
Contractual Obligations
As of September 30, 2017, there have been no material changes outside the ordinary course of business to our contractual obligations since December 31, 2016. For information regarding our contractual obligations, refer to “Contractual Obligations” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Critical and Significant Accounting Policies and Estimates
Effective January 1, 2017, we adopted ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. Refer to Note 2 “Summary of Accounting Policies” in our Condensed Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q for a detailed description of the adoption of ASU 2016-09.
Otherwise, there have been no significant changes in our critical or significant accounting policies and estimates since December 31, 2016. Information with respect to our critical accounting policies and estimates that we believe could have the most significant effect on our reported consolidated results and require difficult, subjective or complex judgment by management are described under “Critical Accounting Policies and Estimates” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

27

Accounting Developments
Refer to Note 2 “Summary of Significant Accounting Policies” in our condensed consolidated financial statements included in Part I, Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q for a description of recently issued accounting guidance.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our Quantitative and Qualitative Disclosures about Market Risk from those previously reported in our Annual Report on Form 10-K for the year ended December 31, 2016.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
For the quarter ended September 30, 2017, there were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
On October 13, 2017, we reached a settlement with AGF regarding their lawsuits and our related counterclaim. See additional discussion of the settlement and our legal proceedings and procedures in Note 12 “Commitments and Contingencies” in our condensed consolidated financial statements included in Part I, Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q.
ITEM 1A.
RISK FACTORS
We face a number of significant risks and uncertainties in our business, including those detailed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and summarized in this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These risks and uncertainties may affect our current position and future prospects and should be considered carefully in evaluating us, including making an investment in our common stock.

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ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table displays information with respect to the treasury shares we purchased during the three months ended September 30, 2017:
Period
 
Total
number of
shares
purchased
 
Average
price paid
per share
 
Total number
of shares
purchased as
part of publicly
announced
plans or
programs
 
Maximum number (or
approximate
dollar value)
of shares that
may yet be
purchased
under the
plans or
programs (1)
Repurchase program (1)
 
—

 
$
—

 
—

 
$
9,366,000

Canadian Plan (2)
 
—

 
$
—

 
—

CDN
$
4,296,000

Employee transactions (3)
 
 
 
 
 
 
 
 
July 1-31, 2017
 
713

 
$
59.97

 
—

 
—


(1)
On July 20, 2012, our Board of Directors authorized management to repurchase up to $10.0 million of our outstanding common stock on the open market or in privately negotiated transactions. In July 2016, Westwood's Board of Directors authorized an additional $5.0 million of repurchases under the share repurchase program. The share repurchase program has no expiration date and may be discontinued at any time by the Board of Directors.
(2)
On April 18, 2013, our stockholders approved the Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries (the “Canadian Plan”), which contemplates a trustee purchasing up to $10.0 million CDN of our outstanding common stock on the open market for the purpose of making share awards to our Canadian employees. The Canadian Plan has no expiration date and may be discontinued at any time by the Board of Directors.
(3)
Consists of shares of common stock tendered by an employee at the market close price on the date of vesting in order to satisfy the employee’s minimum tax withholding obligations from vested restricted shares. We anticipate having additional shares tendered in subsequent periods for the same purpose.


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ITEM 6.
EXHIBITS
31.1*
 
 
 
 
31.2*
 
 
 
 
32.1**
 
 
 
 
32.2**
 
 
 
 
101.INS*
 
XBRL Instance Document
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith.
**
Furnished herewith.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Dated:
October 25, 2017
WESTWOOD HOLDINGS GROUP, INC.
 
 
 
 
 
 
 
By:
 
/s/ Brian O. Casey
 
 
 
 
Brian O. Casey
 
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
By:
 
/s/ Tiffany B. Kice
 
 
 
 
Tiffany B. Kice
 
 
 
 
Chief Financial Officer and Treasurer

31