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~~June 30, ~~2017~~2018



¨	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”,~~filer,” “accelerated ~~filer” and~~filer,” “smaller reporting ~~company”,~~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.~~July 20, 2018: 9,026,806.

WESTWOOD HOLDINGS GROUP, INC.

INDEX



PART I	FINANCIAL INFORMATION	PAGE

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017	1

	Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017	2

	Condensed Consolidated Statement of Stockholders’ Equity for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018	3

	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1921

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2830

Item 4.	Controls and Procedures	2830

PART II	OTHER INFORMATION	2831

Item 1.	Legal Proceedings	2831

Item 1A.	Risk Factors	2831

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2931

Item 6.	Exhibits	3032

Signatures		3133

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			June 30, 2018			December 31, 2017

ASSETS
Current assets:
Cash and cash equivalents	$	51,436		$	33,679		$	47,301		$	54,249
Accounts receivable	22,163			23,429			22,903			21,660
Investments, at fair value	48,093			56,485			61,513			51,324
Income taxes receivable	2,744			—
Prepaid income taxes							—			4,269
Other current assets	6,261			2,364			1,853			6,612
Total current assets	130,697			115,957			133,570			138,114
Investments							5,000			—
Goodwill	27,144			27,144			19,804			27,144
Deferred income taxes	9,473			10,903			5,007			3,407
Intangible assets, net	19,945			21,394			16,798			19,804
Property and equipment, net of accumulated depreciation of $5,354 and $4,590	4,103			4,280
Property and equipment, net of accumulated depreciation of $6,055 and $5,673							4,088			4,190
Total assets	$	191,362		$	179,678		$	184,267		$	192,659
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	2,851		$	2,641		$	2,724		$	3,501
Accrued litigation settlement	8,018			—
Dividends payable	6,666			6,679			7,144			7,357
Compensation and benefits payable	14,126			17,200			9,000			19,075
Income taxes payable	722			3,148			1,232			1,598
Total current liabilities	32,383			29,668			20,100			31,531
Accrued dividends	1,495			1,767			1,116			1,717
Noncurrent income taxes payable							—			1,017
Deferred rent	2,055			2,174			1,910			1,998
Total liabilities	35,933			33,609			23,126			36,263
Commitments and contingencies (Note 12)
Commitments and contingencies (Note 13)
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
Common stock, $0.01 par value, authorized 25,000,000 shares, issued 10,204,887 and outstanding 9,026,806 shares at June 30, 2018; issued 9,980,827 and outstanding 8,899,587 shares at December 31, 2017							102			100
Additional paid-in capital	176,329			162,730			187,367			179,241
Treasury stock, at cost - 1,101,655 shares at September 30, 2017; 991,563 shares at December 31, 2016	(50,910		)	(44,353		)
Treasury stock, at cost - 1,178,081 shares at June 30, 2018; 1,081,240 shares at December 31, 2017							(55,201		)	(49,788		)
Accumulated other comprehensive loss	(1,849		)	(4,287		)	(3,442		)	(1,764		)
Retained earnings	31,759			31,881			32,315			28,607
Total stockholders' equity	155,429			146,069			161,141			156,396
Total liabilities and stockholders' equity	$	191,362		$	179,678		$	184,267		$	192,659

See ~~notes~~Notes to ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

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,				Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017		2016		2018			2017		2018			2017
REVENUES:
Advisory fees:
Asset-based	$	25,334	$	23,447		$	73,619	$	67,928	$	23,473		$	24,496	$	47,956		$	48,285
Performance-based	—		226			1,417		635		1,649			1,031		2,984			1,417
Trust fees	7,858		7,690			23,570		22,798		7,465			7,917		15,074			15,712
Other, net	300		414			1,265		568		173			312		313			965
Total revenues	33,492		31,777			99,871		91,929		32,760			33,756		66,327			66,379
EXPENSES:
Employee compensation and benefits	15,601		15,637			48,875		47,239		14,654			15,557		32,413			33,274
Sales and marketing	457		408			1,447		1,423		409			513		852			990
Westwood mutual funds	977		755			2,749		2,282		1,002			909		1,987			1,772
Information technology	1,855		1,874			5,494		6,039		2,383			1,883		4,421			3,639
Professional services	1,681		1,903			4,495		4,707		1,277			1,318		2,305			2,814
Legal settlement	4,009		—			4,009		—
General and administrative	3,160		2,147			8,697		7,028		2,099			2,993		3,450			5,537
Total expenses	27,740		22,724			75,766		68,718		21,824			23,173		45,428			48,026
Net operating income										10,936			10,583		20,899			18,353
Gain on sale of operations										—			—		524			—
Income before income taxes	5,752		9,053			24,105		23,211		10,936			10,583		21,423			18,353
Provision for income taxes	1,620		3,166			7,013		8,141		2,944			3,687		5,453			5,393
Net income	$	4,132	$	5,887		$	17,092	$	15,070	$	7,992		$	6,896	$	15,970		$	12,960
Other comprehensive income (loss):
Foreign currency translation adjustments	1,297		(453		)	2,438		1,007		(479		)	934		(1,678		)	1,141
Total comprehensive income	$	5,429	$	5,434		$	19,530	$	16,077	$	7,513		$	7,830	$	14,292		$	14,101

Earnings per share:
Basic	$	0.51	$	0.74		$	2.10	$	1.89	$	0.95		$	0.84	$	1.92		$	1.60
Diluted	$	0.49	$	0.72		$	2.05	$	1.84	$	0.94		$	0.83	$	1.87		$	1.56
Weighted average shares outstanding:
Basic	8,171,809		7,995,680			8,136,350		7,952,938		8,399,148			8,167,277		8,336,923			8,118,327
Diluted	8,420,749		8,179,956			8,350,926		8,212,468		8,543,353			8,316,508		8,543,401			8,315,722

Cash dividends declared per share	$	0.62	$	0.57		$	1.86	$	1.71	$	0.68		$	0.62	$	1.36		$	1.24

See ~~notes~~Notes to ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018

(In thousands, except share amounts)

(Unaudited)


	Common Stock, Par				Additional Paid-In Capital				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Retained Earnings			Total				Common Stock, Par				Additional Paid-In Capital			Treasury Stock			Accumulated Other Comprehensive Loss			Retained Earnings			Total
	Shares		Amount						Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Shares				Total			Amount					Additional Paid-In Capital			Treasury Stock			Accumulated Other Comprehensive Loss			Retained Earnings			Total
BALANCE, December 31, 2016	8,810,375		$	98	Additional Paid-In Capital			$	162,730			$	(44,353	)		$	Retained Earnings	(4,287	)	$	31,881			$	146,069
Cumulative effect of accounting change	—		—		711				—				—				(711		)	—
BALANCE, December 31, 2017																								8,899,587		$	100	$	179,241		$	(49,788	)	$	(1,764	)	$	28,607		$	156,396
Net income	—		—		—				—				—				17,092			17,092				—		—		—			—			—			15,970			15,970
Other comprehensive income	—		—		—				—				2,438				—			2,438				—		—		—			—			(1,678		)	—			(1,678		)
Issuance of restricted stock, net of forfeitures	184,138		2		(2		)		—				—				—			—				224,060		2		(2		)	—			—			—			—
Dividends declared	—		—		—				—				—				(16,503		)	(16,503		)		—		—		—			—			—			(12,262		)	(12,262		)
Stock based compensation expense	—		—		12,298				—				—				—			12,298				—		—		7,963			—			—			—			7,963
Reclassification of compensation liability to be paid in shares	—		—		592				—				—				—			592				—		—		165			—			—			—			165
Purchases of treasury stock	(23,822	)	—		—				(1,326		)		—				—			(1,326		)		(13,031	)	—		—			(726		)	—			—			(726		)
Restricted stock returned for payment of taxes	(86,270	)	—		—				(5,231		)		—				—			(5,231		)		(83,810	)	—		—			(4,687		)	—			—			(4,687		)
BALANCE, September 30, 2017	8,884,421		$	100	$	176,329			$	(50,910	)		$	(1,849	)		$	31,759		$	155,429
BALANCE, June 30, 2018																								9,026,806		$	102	$	187,367		$	(55,201	)	$	(3,442	)	$	32,315		$	161,141

See ~~notes~~Notes to ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,						Six Months Ended June 30,
	2017			2016			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	17,092		$	15,070		$	15,970		$	12,960
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	722			732			434			479
Amortization of intangible assets	1,449			1,470			836			980
Unrealized gains on trading investments	(539		)	(676		)
Unrealized (gains) losses on trading investments							256			(378		)
Stock based compensation expense	12,298			12,164			7,963			8,065
Deferred income taxes	1,481			114			(1,631		)	437
Excess tax benefits from stock based compensation	—			(165		)
Other	—			275
Gain on sale of operations							(524		)	—
Change in operating assets and liabilities:
Net sales of investments - trading securities	8,931			23,147
Net sales (purchases) of investments - trading securities							(10,445		)	11,198
Accounts receivable	1,686			(2,711		)	(1,616		)	531
Other current assets	(3,881		)	900			4,637			455
Accounts payable and accrued liabilities	178			(82		)	(442		)	266
Accrued litigation settlement	8,018			—
Compensation and benefits payable	(2,696		)	(6,758		)	(9,844		)	(6,940		)
Income taxes receivable/payable	(5,181		)	(4,637		)
Income taxes payable							2,881			(1,178		)
Other liabilities	(111		)	154			(74		)	(53		)
Net cash provided by operating activities	39,447			38,997			8,401			26,822
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(537		)	(1,680		)	(426		)	(245		)
Net cash used in investing activities	(537		)	(1,680		)
Proceeds from Omaha divestiture							10,013			��
Purchase of investments							(5,000		)	—
Net cash provided by (used in) investing activities							4,587			(245		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock	—			(5,629		)
Purchase of treasury stock under employee stock plans	(1,326		)	(614		)	(726		)	(1,326		)
Restricted stock returned for payment of taxes	(5,231		)	(3,710		)	(4,687		)	(5,189		)
Excess tax benefits from stock based compensation	—			165
Payment of contingent consideration in acquisition	—			(5,562		)
Cash dividends paid	(16,787		)	(14,827		)	(13,075		)	(11,674		)
Net cash used in financing activities	(23,344		)	(30,177		)	(18,488		)	(18,189		)
Effect of currency rate changes on cash	2,191			812			(1,448		)	1,076
Net Change in Cash and Cash Equivalents	17,757			7,952			(6,948		)	9,464
Cash and cash equivalents, beginning of period	33,679			22,740			54,249			33,679
Cash and cash equivalents, end of period	$	51,436		$	30,692		$	47,301		$	43,143

Supplemental cash flow information:
Cash paid during the period for income taxes	$	10,245		$	12,632		$	4,169		$	5,539
Common stock issued for acquisition	$	—		$	3,734
Accrued dividends	$	8,161		$	7,682		$	8,260		$	7,760
Tenant allowance included in property and equipment	$	—		$	1,128
Accrued purchase of property and equipment							$	—		$	52

See ~~notes~~Notes to ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

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~~closed on ~~December 31, 2017, subject to usual and customary closing conditions and the receipt of regulatory approval from the Nebraska Department of Banking.~~January 12, 2018. We ~~expect to receive~~received proceeds of $~~7 million~~ to ~~$10.5~~10.0 million, ~~subject to client consents and~~ net of working capital ~~requirements; however, we do not expect to record~~requirements, and recorded a ~~material~~$524,000 gain ~~or loss~~ on the sale, ~~within~~which is included as “Gain on sale of operations” on our Consolidated ~~Statement~~Statements of Comprehensive Income. The sale ~~will reduce our~~reduced goodwill and intangible assets but isdid not ~~expected to~~ have a material impact toon our Condensed Consolidated Balance Sheet. The following table presents cash proceeds received and net assets sold (in thousands):



Cash Proceeds	$	10,013
Net assets sold:
Accounts receivable	99
Other current assets	112
Goodwill	7,340
Intangible assets, net	2,170
Property and equipment, net	18
Accounts payable and accrued liabilities	(241		)
Other liabilities	(9		)
Gain on sale of operations	$	524

The component is reported within both our Advisory and Trust segments. The sale ~~does~~did not represent a major strategic shift in our business and ~~does~~did 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”).

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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,~~2017, filed with the SEC. Operating results for the periods in these ~~condensed consolidated financial statements~~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,~~May 2014, the Financial Accounting Standards Board ~~(“FASB”~~("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

~~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~~("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"~~ (“IFRS”). The ASU ~~will be~~is 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~~We adopted ASU 2014-09 effective January 1, 2018. See further discussion in Note 9 “Revenue.”

In March 2018, the FASB issued ASU 2018-05, Income Taxes: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, to address the application of U.S. GAAP in situations when a ~~detailed review~~registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the ~~terms~~Tax Cuts and ~~conditions~~Jobs Act (“Tax Reform Act”). See further discussion in Note 11 “Income Taxes.”

Not Yet Adopted

In June 2018, the FASB issued ASU 218-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The purpose of this amendment is to simplify the accounting for share-based payments granted to nonemployees for goods and services by aligning it with the accounting used for arrangements with employees. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We do not expect the amendment to have a material impact on our ~~current contracts, including performance based fees,~~Consolidated Financial Statements, 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 proceduresplan 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~~standard within the ~~financial statement users a better understanding of the nature, amount, timing and potential uncertainty of the revenue being recognized.~~required time frame.

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~~June 30, ~~2017. There~~2018, and there were approximately ~~2,453~~7,000 anti-dilutive restricted shares outstanding for the three months ended ~~September~~June 30, ~~2016,~~2017. There were approximately 5,000 and ~~8,800 and 2,301~~13,000 anti-dilutive restricted shares outstanding for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, 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,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Net income	$	4,132	$	5,887	$	17,092	$	15,070	$	7,992	$	6,896	$	15,970	$	12,960

Weighted average shares outstanding - basic	8,171,809		7,995,680		8,136,350		7,952,938		8,399,148		8,167,277		8,336,923		8,118,327
Dilutive potential shares from unvested restricted shares	248,940		184,276		214,576		259,530		144,205		149,231		206,478		197,395
Weighted average shares outstanding - diluted	8,420,749		8,179,956		8,350,926		8,212,468		8,543,353		8,316,508		8,543,401		8,315,722

Earnings per share:
Basic	$	0.51	$	0.74	$	2.10	$	1.89	$	0.95	$	0.84	$	1.92	$	1.60
Diluted	$	0.49	$	0.72	$	2.05	$	1.84	$	0.94	$	0.83	$	1.87	$	1.56

4. INVESTMENTS

In May 2018, we entered into a $5.0 million strategic investment in an equity position of a private company. As this investment represents a private company without a readily determinable fair value, the Company has elected to apply the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes. The Company will reassess whether our investment qualifies for the measurement alternative at each reporting period. In evaluating the investment for impairment or observable price changes, we will use inputs including recent financing events, as well as other available information regarding the private company's historical and forecasted performance. As of June 30, 2018, there were no observable price changes or indicators of impairment for this investment. See further discussion regarding our investment in Note 13 “Commitments and Contingencies.”

All other investments are carried at fair value on a recurring basis and are accounted for as trading securities. Trading securities are presented in the table below (in thousands):



	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
June 30, 2018:
U.S. Government and Government agency obligations	$	40,081	$	72	$	—		$	40,153
Money market funds	9,736		—		—			9,736
Equity funds	11,309		524		(209		)	11,624
Total trading securities	$	61,126	$	596	$	(209	)	$	61,513
December 31, 2017:
U.S. Government and Government agency obligations	$	29,367	$	21	$	(15	)	$	29,373
Money market funds	9,736		—		—			9,736
Equity funds	11,578		657		(20		)	12,215
Total trading securities	$	50,681	$	678	$	(35	)	$	51,324

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~~June 30, ~~2017~~2018 and December 31, ~~2016, $10.6 million and $11.0~~2017, approximately $10.7 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”.~~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, prepaid 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. Our strategic investment in a private company discussed in Note 4 “Investments” is excluded from the below recurring fair value table, as we have elected to apply the measurement alternative for this investment.

ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value and requires disclosures regarding certain fair value measurements. ASC 820 establishes a three-tier hierarchy for measuring fair value, as follows:

level 1 – quoted market prices in active markets for identical assets

level 2 – inputs other than quoted prices that are directly or indirectly observable

level 3 – significant unobservable inputs where there is little or no market activity

The following table summarizes the values of our investments measured at fair value on a recurring basis within the fair value hierarchy as of the dates indicated (in thousands):



	Level 1		Level 2		Level 3		Investments Measured at NAV ⁽¹⁾		Total
As of June 30, 2018:
Investments in trading securities	$	59,214	$	—	$	—	$	2,299	$	61,513
Total assets measured at fair value	$	59,214	$	—	$	—	$	2,299	$	61,513

As of December 31, 2017:
Investments in trading securities	$	48,998	$	—	$	—	$	2,326	$	51,324
Total assets measured at fair value	$	48,998	$	—	$	—	$	2,326	$	51,324

(1) Comprised of certain investments measured at fair value using net asset value (“NAV”) as a practical expedient. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on our Condensed Consolidated Balance Sheets.

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~~six months ended ~~September~~June 30, ~~2017~~2018 or ~~2016.~~2017.

Changes in the balance of Goodwill for the periods presented are as follows (in thousands):



	Goodwill
Balance as of December 31, 2017	$	27,144
Omaha divestiture	(7,340		)
Balance as of June 30, 2018	$	19,804

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~~six months ended ~~September~~June 30, ~~2017~~2018 or ~~2016.~~2017.

Changes in the balance of Intangible assets, net for the periods presented are as follows (in thousands):



	Intangible assets, net
Balance as of December 31, 2017	$	19,804
Amortization	(836		)
Omaha divestiture ⁽¹⁾	(2,170		)
Balance as of June 30, 2018	$	16,798

_____________________

(1) Related to client relationships

7. STOCKHOLDERS' EQUITY

Accumulated Other Comprehensive Loss

The components of ~~accumulated~~Accumulated other comprehensive loss were as follows (in thousands):


	As of September 30, 2017			As of December 31, 2016			As of June 30, 2018			As of December 31, 2017
Foreign currency translation adjustment	$	(1,849	)	$	(4,287	)	$	(3,442	)	$	(1,764	)
Accumulated other comprehensive loss	$	(1,849	)	$	(4,287	)	$	(3,442	)	$	(1,764	)

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

8. VARIABLE INTEREST ENTITIES

We have evaluated ~~all of~~(i) our advisory relationships with the UCITS Fund and the Westwood Funds®, ~~limited liability companies (“LLCs”) and~~(ii) our relationship as sponsor of the Common Trust Funds (“CTFs”) and managing member of the private equity fund Westwood Hospitality Fund I, LLC (“WHF”) and (iii) the private company discussed in Note 4 “Investments” (“Private Equity”) 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~~CTFs and ~~CTFs~~WHF 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. Prior to the sale of our Omaha-based operations, we also considered our advisory relationship with ten limited liability companies (“LLCs”) as VIEs, but as of June 30, 2018, we no longer serve as the managing member of the funds and do not control the activities that most significantly impact the entities' economic performance. Therefore, the LLCs are no longer considered VIEs. 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 and so we determined that the UCITS Fund is not a VIE. As the Company and its representatives do not have representation on the Westwood Funds® or the Private Equity independent ~~board~~boards of directors, which ~~directs~~direct the activities that most significantly impact the ~~entity's~~entities' economic performance, we determined that the Westwood Funds® and the Private Equity were not VIEs. Therefore, the UCITS Fund, ~~and the~~ Westwood Funds® and Private Equity should be analyzed under the VOE consolidation method. Based on our analysis of our ~~seed~~ investments in these entities for the periods ending ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, we have not consolidated the ~~LLCs~~CTFs, WHF or ~~CTFs~~LLCs under the VIE method or the UCITS Fund, ~~or the~~ Westwood Funds® or Private Equity 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~~June 30, ~~2017~~2018 and December 31, ~~2016, the Company had~~2017, our seed investments ~~in aggregate of~~aggregated approximately ~~$10.6~~$10.7 million ~~and $11.0 million, respectively,~~ in the CTFs, the Westwood Funds, and the UCITS Fund. ~~These~~The 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.~~Sheets.

~~Otherwise, we~~We have not otherwise 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~~$12.0 million and ~~$13.5~~$13.1 million for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. We recognized fee revenue from the Westwood VIEs and Westwood VOEs of approximately ~~$39.1~~$24.6 million and ~~$39.5~~$25.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

The following table displays the assets under management, the amounts of our seed investments ~~that are~~ included in ~~“Investments, at fair value”~~“Investments” on our consolidated balance sheets, and the risk of loss in each vehicle (in millions):


	As of September 30, 2017						As of June 30, 2018
	Assets Under Management		Corporate Investment		Amount at Risk		Assets Under Management		Corporate Investment		Amount at Risk
VIEs/VOEs:
Westwood Funds®	$	4,144	$	6	$	6	$	4,199	$	6	$	6
Common Trust Funds	2,602		2		2		2,311		2		2
LLCs	113		—		—
UCITS Fund	595		2		2		411		2		2
Westwood Hospitality Fund I, LLC							3		—		—
Private Equity							—		5		5
All other assets:
Private Wealth	3,107						2,621
Institutional	13,063						12,046
Total Assets Under Management	$	23,624					$	21,591

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

9. REVENUE

Adoption of ASC 2014-09 Revenue from Contracts with Customers (Topic 606)

On January 1, 2018, we adopted ASU 2016-10 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606 while prior period amounts continue to be reported in accordance with our historic accounting under Topic 605.

We analyzed the revenue from prior periods and determined no material adjustments to opening retained earnings were necessary as the updated guidance is consistent with our historical revenue recognition methodology.

Revenue Recognition

Revenues are recognized when the performance obligation (the investment management and advisory or trust services provided to the client) defined by the investment advisory or sub-advisory agreement is satisfied. For each performance obligation, we determine at contract inception whether the revenue satisfies over time or at a point in time. We derive our revenues from investment advisory fees, trust fees and other sources of revenues. Advisory and Trust fees are calculated based on a percentage of assets under management and the performance obligation is realized over the current calendar quarter. Once clients receive our investment advisory services we have an enforceable right to payment.

Advisory Fee Revenues

Our advisory fees are generated by Westwood Management and Westwood International, which manage client accounts under investment advisory and sub-advisory agreements. Advisory fees are typically 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. 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. Advisory clients typically consist of institutional and mutual fund accounts.

Institutional investors includes separate accounts of (i) corporate pension and profit sharing plans, public employee retirement funds, Taft Hartley plans, endowments, foundations and individuals; (ii) subadvisory relationships where Westwood provides investment management services for funds offered by other financial institutions; (iii) pooled investment vehicles, including the UCITS Fund and collective investment trusts; and (iv) managed account relationships with brokerage firms and other registered investment advisors that offer Westwood products to their customers.

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 investors and private wealth accounts.

Arrangements with Performance Based Obligations

A limited number of our advisory 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. The revenue is based on future market performance and is susceptible to factors outside our control. We cannot conclude that a significant reversal in the cumulative amount of revenue recognized will not occur during the measurement period, and therefore the revenue is recorded at the end of the measurement period when the performance obligation has been satisfied.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Trust 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. The fees for most of our trust clients are calculated 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.

Revenue Disaggregated

Sales taxes are excluded from revenues. The following table presents our revenue disaggregated by account type (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Advisory Fees:
Institutional	$	15,684	$	17,043	$	32,389	$	33,652
Mutual Funds	7,753		7,452		15,503		14,632
Private Wealth	36		—		64		—
Performance-based	1,649		1,031		2,984		1,417
Trust Fees	7,465		7,917		15,074		15,713
Other	173		313		313		965
Total revenues	$	32,760	$	33,756	$	66,327	$	66,379

We have clients in various locations around the world. The following table presents our revenue disaggregated by our clients' geographical locations (in thousands):



Three Months Ended June 30, 2018	Advisory		Trust		Performance-based		Other		Total
Asia	$	1,236	$	—	$	—	$	—	$	1,236
Australia	974		—		—		—		974
Canada	1,640		—		—		37		1,677
Europe	1,347		—		—		—		1,347
United States	18,276		7,465		1,649		136		27,526
Total	$	23,473	$	7,465	$	1,649	$	173	$	32,760

Six Months Ended June 30, 2018
Asia	$	2,667	$	—	$	—	$	—	$	2,667
Australia	1,996		—		—		—		1,996
Canada	3,470		—		—		86		3,556
Europe	2,590		—		—		—		2,590
United States	37,233		15,074		2,984		227		55,518
Total	$	47,956	$	15,074	$	2,984	$	313	$	66,327

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)



Three Months Ended June 30, 2017	Advisory		Trust		Performance-based		Other		Total
Asia	$	1,508	$	—	$	—	$	—	$	1,508
Australia	786		—		—		—		786
Canada	2,118		—		—		139		2,257
Europe	1,061		—		—		—		1,061
United States	19,023		7,917		1,031		173		28,144
Total	$	24,496	$	7,917	$	1,031	$	312	$	33,756

Six Months Ended June 30, 2017
Asia	$	3,047	$	—	$	—	$	—	$	3,047
Australia	1,427		—		—		—		1,427
Canada	4,132		—		—		222		4,354
Europe	2,119		—		—		—		2,119
United States	37,560		15,712		1,417		743		55,432
Total	$	48,285	$	15,712	$	1,417	$	965	$	66,379

10. LONG-TERM INCENTIVE COMPENSATION

Restricted Stock Awards

We have issued restricted shares to our employees and non-employee directors. The ~~Fourth~~Fifth 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,~~2018, stockholders approved an additional ~~250,000~~200,000 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~~4,848,100 shares. At ~~September~~June 30, ~~2017,~~2018, approximately ~~433,000~~401,000 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,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Service condition stock-based compensation expense	$	2,591	$	2,679	$	7,828	$	7,978	$	2,535	$	2,608	$	5,325	$	5,237
Performance condition stock-based compensation expense	1,454		1,234		3,949		3,705		1,088		1,372		2,364		2,495
Stock-based compensation expense under the Plan	4,045		3,913		11,777		11,683		3,623		3,980		7,689		7,732
Canadian Plan stock-based compensation expense	188		169		521		481		153		188		274		333
Total stock-based compensation expense	$	4,233	$	4,082	$	12,298	$	12,164	$	3,776	$	4,168	$	7,963	$	8,065

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~~June 30, ~~2017,~~2018, there was approximately ~~$26.3~~$27.8 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~~2.4 years. Our two types of restricted stock grants under the Plan are discussed below.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Restricted Stock Subject Only to a Service Condition

We calculate compensation cost for restricted stock grants by using the fair market value of our common stock at the date of grant, the number of shares issued and an adjustment for restrictions on dividends. This compensation cost is amortized on a straight-line basis over the applicable vesting ~~period. As discussed in Note 2 “Summary of Significant Accounting Policies,” the Company made an accounting policy election to account~~period, with adjustments for forfeitures recorded as they ~~occur effective upon the adoption of ASU 2016-09 on January 1, 2017.~~occur.

The following table details the status and changes in our restricted stock grants subject only to a service condition for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2018:

Shares Weighted Average
Grant Date Fair Value
Non-vested, January 1, 2017 607,501
$ 54.67
Granted 143,460
61.20
Vested (182,085 ) 57.43
Forfeited (36,579 ) 55.11
Non-vested, September 30, 2017 532,297
$ 55.46

~~WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~(Unaudited)~~



	Shares		Weighted Average Grant Date Fair Value
Non-vested, January 1, 2018	519,375		$	55.44
Granted	172,366		55.92
Vested	(203,020	)	53.49
Forfeited	(20,977	)	56.42
Non-vested, June 30, 2018	467,744		$	56.42

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~~goals 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~~goals 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~~specific performance goals 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,~~2018, the Compensation Committee established the fiscal ~~2017~~2018 goal for our Chief Executive Officer and Chief Investment Officer as Income before income taxes of ~~$24.0~~$20.0 million for 50% of their respective awards and an Income before income taxes target of ~~$34.0~~$36.0 million (ranging from 25% of target for threshold performance of ~~$30.3~~$32.0 million to 185% of target for maximum performance of ~~$42.5~~$44.5 million) for the remaining 50% of their respective awards. For ~~all~~certain other ~~restricted stock grants subject to performance conditions,~~key employees, the Compensation Committee established ~~the~~ fiscal ~~2017 goal as~~2018 goals based on various departmental and company-wide performance goals, including Income before income taxes of at least ~~$24.0~~$20.0 million. ~~These performance grants allow~~During the ~~Compensation Committee~~first six months of 2018, we recorded expense related 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.~~meet or exceed the performance goals needed to earn the shares.

The following table details the status and changes in our restricted stock grants subject to service and performance conditions for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2018:


	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Non-vested, January 1, 2017	153,620		$	55.90
Non-vested, January 1, 2018					165,918		$	55.85
Granted	157,877		54.86		84,829		55.46
Vested	(102,367	)	56.58		(98,281	)	55.81
Forfeited	(45,675	)	55.86		—		—
Non-vested, September 30, 2017	163,455		$	55.87
Non-vested, June 30, 2018					152,466		$	55.66

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.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Canadian Plan

The Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries (the “Canadian Plan”) provides compensation in the form of common stock for services performed by employees of Westwood International. Under the Canadian Plan, no more than $10 million CDN ($~~8.0~~7.6 million in U.S. Dollars using the exchange rate on ~~September~~June 30, ~~2017)~~2018) may be funded to the plan trustee for purchases of common stock with respect to awards granted under the Canadian Plan. At ~~September~~June 30, ~~2017,~~2018, approximately ~~$4.3~~$3.4 million CDN ($~~3.4~~2.6 million in U.S. Dollars using the exchange rate on ~~September~~June 30, ~~2017)~~2018) remains available for issuance under the Canadian Plan, or approximately ~~51,200~~44,099 shares based on the closing share price of our stock of ~~$67.27~~$59.54 as of ~~September~~June 30, ~~2017.~~2018. During the first ~~nine~~six months of ~~2017,~~2018, the trust formed pursuant to the Canadian Plan purchased in the open market ~~23,822~~13,031 Westwood common shares for approximately ~~$1.3 million.~~$726,000. As of ~~September~~June 30, ~~2017,~~2018, the trust holds ~~55,418~~46,358 shares of Westwood common stock. As of ~~September~~June 30, ~~2017,~~2018, unrecognized compensation cost related to restricted stock grants under the Canadian Plan totaled ~~$864,000,~~$1.0 million, which we expect to recognize over a weighted-average period of ~~1.8~~1.9 years.

~~WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~(Unaudited)~~

Mutual Fund Share Incentive Awards

We grant annually to certain employees mutual fund incentive awards, which are bonus awards based on our mutual funds achieving specific performance goals. Awards granted are notionally credited to a participant account maintained by us that contains a number of mutual fund shares equal to the award amount divided by the net closing value of a fund share on the date the amount is credited to the account.

~~For awards earned prior to 2017,~~ We maintain the award ~~vested after approximately one year~~in a corporate investment account until vesting. The investment may increase or decrease based on changes in the value of ~~service following~~ the ~~year in which~~mutual fund shares awarded, including reinvested income from the ~~participant earned~~mutual funds during the ~~award. Beginning in 2017, the award vests after~~vesting period. Unvested mutual fund awards are included under “Investments, at fair value” on our Condensed Consolidated Balance Sheets.

Awards vest over 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~~3 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~~June 30, ~~2017~~2018 and ~~2016,~~2017, we recorded expense of approximately ~~$281,000~~$11,000 and ~~$313,000,~~$250,000, respectively, related to mutual fund share incentive awards. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, we recorded expense of approximately ~~$819,000~~$185,000 and ~~$933,000,~~$538,000, respectively, related to mutual fund share incentive awards. As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, we had an accrued liability of approximately ~~$1.5 million~~$517,000 and ~~$1.7~~$1.8 million, respectively, related to mutual fund share incentive awards.

~~10.~~11. INCOME TAXES

Our effective income tax rate was ~~28.2%~~26.9% for the ~~third~~second quarter of ~~2017,~~2018, compared with ~~35.0%~~34.8% for the ~~third~~second 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 2016.2017. Our effective income tax rate was ~~29.1%~~25.5% for the six months ended June 30, 2018, compared with 29.4% for the six months ended June 30, 2017. The current quarter and year-to-date rates benefited from the decrease in the U.S. corporate income tax rate under the Tax Cuts and Jobs Act signed into law in December 2017, while the first ~~nine~~six months of 2017 ~~compared with 35.1% for the first nine months of 2016. The decrease is primarily~~included a $1.0 million tax benefit related to the adoption of ASU 2016-09 ~~Compensation-Stock~~Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting~~, which requires recognition of excess~~. Excluding this discrete 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 thebenefit, our 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~~would have been 34.5% for 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 ninesix months ended ~~September~~June 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
2017.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

~~Within~~Tax Reform Act

On December 22, 2017, the ~~next twelve~~SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. During 2017, we provisionally recognized the incremental tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in our Consolidated Financial Statements for the year ended December 31, 2017. During the first six months itof 2018, we did not make any changes to the amounts provisionally recognized. The ultimate impact may differ, possibly materially, from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued and actions we may take as a result of the Tax Reform Act. The accounting is expected to be complete when our 2017 U.S. corporate income tax return is filed in the third quarter of 2018.

Tax Audit

The Company is subject to taxation in the United States and various state and foreign jurisdictions, and our 2014 tax return is currently under audit in a state jurisdiction in which we operate. It is reasonably possible that the ~~liability for uncertain tax positions could decrease by as much as $196,000 as a~~audit may be completed during the next twelve months, and we do not expect the result of ~~settlements with certain taxing authorities, which, if recognized, would decrease~~this audit to have a material impact on our ~~provision for income taxes by $130,000.~~consolidated financial statements.

~~11.~~12. 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~~June 30, ~~2017~~2018 and ~~2016,~~2017, we recorded trust fees from these accounts of $92,000 and ~~$108,000,~~$90,000, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, we recorded trust fees from these accounts of ~~$277,000~~$187,000 and ~~$305,000,~~$185,000, respectively. There was $92,000 and ~~$97,000~~$98,000 due from these accounts as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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~~June 30, ~~2017~~2018 and ~~2016,~~2017, the Company earned approximately $1.1 million and ~~$370,000,~~$900,000, respectively, in fees from the affiliated funds. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, the Company earned approximately ~~$2.8~~$2.3 million and ~~$1.0~~$1.7 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~~June 30, ~~2017~~2018 and December 31, ~~2016, $398,000~~2017, $342,000 and ~~$270,000,~~$423,000, respectively, of these fees were ~~unpaid~~outstanding and included in “Accounts receivable” on our Condensed Consolidated Balance Sheets.

As discussed in Note 4 “Investments,” the Company made a strategic investment in an equity position of a private company during the second quarter of 2018. We previously entered into a separate agreement with this private company to implement a portfolio management product. For the three and six months ended June 30, 2018, we incurred approximately $530,000 and $605,000, respectively, in expenses to this company, which are included in “Information technology expenses” on our Condensed Consolidated Statements of Comprehensive Income. The Company did not incur any similar expenses during the three or six months ended June 30, 2017.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

~~12.~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

13. COMMITMENTS AND CONTINGENCIES

Strategic Investment

As discussed in Note 4 “Investments,” the Company made an initial strategic investment of $5.0 million in a private company during the second quarter of 2018. As part of the agreement, we committed to an additional $5.0 million purchase of equity securities to be invested no later than August 31, 2018. Our intent is to offer this investment opportunity to our current and prospective clients, Board of Directors and employees, but to the extent these parties do not invest the full $5.0 million, we are obligated to make an additional investment to cover any shortfall.

Litigation

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~~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.International.

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~~$10.0 million CDN, half of which ~~is expected to be~~was covered by our insurance. During ~~the third quarter of~~ 2017, we recorded a net $4.0 million ($55.0 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 ($55.0 million CDN) receivable from our insurance provider included in “Other current assets” on our Condensed Consolidated Balance Sheets at ~~September~~December 31, 2017. We received the insurance proceeds of $4.0 million during the six months ended June 30, ~~2017.~~2018 and had no receivable related to the settlement at June 30, 2018.

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 the remaining insurance proceeds ~~of approximately $276,000 and $928,000~~related to AGF legal expenses during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016, respectively.~~had no receivable at quarter-end. We had a receivable of approximately ~~$113,000 and $186,000~~$212,000 as of ~~September 30, 2017 and~~ December 31, ~~2016, respectively,~~2017, which ~~represents~~represented our current minimum estimate of expenses that we ~~expect~~expected to recover under our insurance policy. This receivable is ~~part of~~included in “Other current assets” on our Condensed Consolidated Balance Sheets.

~~WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~(Unaudited)~~

~~13.~~14. 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.

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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.

~~WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~(Unaudited)~~



(in thousands)	Advisory			Trust			Westwood Holdings			Eliminations			Consolidated
Three Months Ended June 30, 2018
Net fee revenues from external sources	$	25,122		$	7,465		$	—		$	—		$	32,587
Net intersegment revenues	1,846			57			—			(1,903		)	—
Net interest and dividend revenue	135			55			—			—			190
Other, net	(16		)	(1		)	—			—			(17		)
Total revenues	$	27,087		$	7,576		$	—		$	(1,903	)	$	32,760
Economic Earnings	$	13,111		$	1,457		$	(2,323	)	$	—		$	12,245
Less: Restricted stock expense													3,776
Intangible amortization													418
Deferred taxes on goodwill													59
Net income													$	7,992

Segment assets	$	214,051		$	59,605		$	16,056		$	(105,445	)	$	184,267
Segment goodwill	$	3,403		$	16,401		$	—		$	—		$	19,804

Three Months Ended June 30, 2017
Net fee revenues from external sources	$	25,525		$	7,919		$	—		$	—		$	33,444
Net intersegment revenues	1,998			52			—			(2,050		)	—
Net interest and dividend revenue	122			15			—			—			137
Other, net	172			3			—			—			175
Total revenues	$	27,817		$	7,989		$	—		$	(2,050	)	$	33,756
Economic Earnings	$	11,800		$	1,519		$	(1,609	)	$	—		$	11,710
Less: Restricted stock expense													4,168
Intangible amortization													490
Deferred taxes on goodwill													156
Net income													$	6,896

Segment assets	$	192,247		$	71,808		$	14,798		$	(102,921	)	$	175,932
Segment goodwill	$	5,219		$	21,925		$	—		$	—		$	27,144

(in thousands) Advisory Trust Westwood
Holdings Eliminations Consolidated
Three Months Ended September 30, 2017
Net fee revenues from external sources $ 25,334
$ 7,858
$ —
$ —
$ 33,192
Net intersegment revenues 2,026
57
—
(2,083 ) —
Net interest and dividend revenue 111
43
—
—
154
Other, net 157
(11 ) —
—
146
Total revenues $ 27,628
$ 7,947
$ —
$ (2,083 ) $ 33,492
Economic Earnings $ 8,786
$ 1,560
$ (1,356 ) $ —
$ 8,990
Less: Restricted stock expense 4,233
Intangible amortization 469
Deferred taxes on goodwill 156
Net income $ 4,132

Segment assets $ 208,444
$ 73,170
$ 18,388
$ (108,640 ) $ 191,362
Segment goodwill $ 5,219
$ 21,925
$ —
$ —
$ 27,144

Three Months Ended September 30, 2016
Net fee revenues from external sources $ 23,673
$ 7,690
$ —
$ —
$ 31,363
Net intersegment revenues 5,275
41
—
(5,316 ) —
Net interest and dividend revenue 128
5
—
—
133
Other, net 279
2
—
—
281
Total revenues $ 29,355
$ 7,738
$ —
$ (5,316 ) $ 31,777
Economic Earnings $ 10,270
$ 1,690
$ (1,345 ) $ —
$ 10,615
Less: Restricted stock expense 4,082
Intangible amortization 490
Deferred taxes on goodwill 156
Net income $ 5,887

Segment assets $ 163,826
$ 65,986
$ 13,046
$ (73,160 ) $ 169,698
Segment goodwill $ 5,219
$ 21,925
$ —
$ —
$ 27,144

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


(in thousands)	Advisory		Trust			Westwood Holdings			Eliminations			Consolidated		Advisory			Trust			Westwood Holdings			Eliminations			Consolidated
Nine Months Ended September 30, 2017
Six Months Ended June 30, 2018
Net fee revenues from external sources	$	75,036	$	23,570		$	—		$	—		$	98,606	$	50,940		$	15,074		$	—		$	—		$	66,014
Net intersegment revenues	6,050		160			—			(6,210		)	—		3,883			112			—			(3,995		)	—
Net interest and dividend revenue	391		67			—			—			458		276			100			—			—			376
Other, net	811		(4		)	—			—			807
Other														(58		)	(5		)	—			—			(63		)
Total revenues	$	82,288	$	23,793		$	—		$	(6,210	)	$	99,871	$	55,041		$	15,281		$	—		$	(3,995	)	$	66,327
Economic Earnings	$	31,372	$	4,528		$	(4,592	)	$	—		$	31,308	$	26,910		$	2,677		$	(4,700	)	$	—		$	24,887
Less: Restricted stock expense												12,298														7,963
Intangible amortization												1,449														836
Deferred taxes on goodwill												469														118
Net income												$	17,092													$	15,970

Nine Months Ended September 30, 2016
Six Months Ended June 30, 2017
Net fee revenues from external sources	$	68,563	$	22,798		$	—		$	—		$	91,361	$	49,701		$	15,713		$	—		$	—		$	65,414
Net intersegment revenues	14,455		82			—			(14,537		)	—		4,024			103			—			(4,127		)	—
Net interest and dividend revenue	360		9			—			—			369		280			24			—			—			304
Other, net	462		(263		)	—			—			199
Other														654			7			—			—			661
Total revenues	$	83,840	$	22,626		$	—		$	(14,537	)	$	91,929	$	54,659		$	15,847		$	—		$	(4,127	)	$	66,379
Economic Earnings	$	30,493	$	4,160		$	(5,559	)	$	—		$	29,094	$	22,587		$	2,967		$	(3,236	)	$	—		$	22,318
Less: Restricted stock expense												12,164														8,065
Intangible amortization												1,470														980
Deferred taxes on goodwill												390														313
Net income												$	15,070													$	12,960

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,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2018		2017		2018		2017
Net income	$	4,132	$	5,887	$	7,992	$	6,896	$	15,970	$	12,960
Add: Stock-based compensation expense	4,233		4,082		3,776		4,168		7,963		8,065
Add: Intangible amortization	469		490		418		490		836		980
Add: Tax benefit from goodwill amortization	156		156		59		156		118		313
Economic Earnings	$	8,990	$	10,615	$	12,245	$	11,710	$	24,887	$	22,318

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.~~15. SUBSEQUENT EVENTS

Dividend Declared

In ~~October 2017,~~July 2018, 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,~~October 1, 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.September 7, 2018.


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,~~2017, 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 reputation and our relationships with current and potential customers;

our ability to attract and retain qualified personnel;

our ability to perform operational tasks;

our ability to maintain effective cyber security;

our ability to ~~maintain effective information systems;~~identify and execute on our strategic initiatives;

our ability to ~~pursue~~select and ~~properly integrate acquired businesses;~~oversee third-party vendors;

our ability to maintain effective information systems;

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.

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~~closed on ~~December 31, 2017, subject to usual and customary closing conditions and the receipt of regulatory approval from the Nebraska Department of Banking.~~January 12, 2018. We ~~expect to receive~~received proceeds of $7$10.0 million, ~~to $10.5 million, subject to client consents and~~ net of working capital ~~requirements; however, we do not expect to record~~requirements, and recorded a ~~material~~ gain ~~or loss~~ on the sale ~~within~~of $524,000, which is included as “Gain on sale of operations” on 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~~did not represent a major strategic shift in our business and ~~does~~did 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 typically 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~~fees for most of our trust clients ~~from quarterly in advance, based on assets under management on the last day of the preceding quarter, to~~are calculated 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~~expenses generally consist of salaries, incentive compensation, equity-based compensation ~~expense~~ and benefits.

Sales and Marketing

Sales and marketing ~~costs~~expenses 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~~Directors' fees, investor relations, licenses and fees, office supplies, foreign currency transaction gains/losses and other miscellaneous expenses.

Gain on Sale of Operations

Gain on sale of operations includes the gain on the sale of our Omaha-based component of our Private Wealth business.

Assets Under Management

Assets under management (“AUM”) ~~increased $2.3~~decreased $1.0 billion to ~~$23.6~~$21.6 billion at ~~September~~June 30, ~~2017~~2018 compared with ~~$21.3~~$22.6 billion at ~~September~~June 30, ~~2016 as a result of market appreciation, partially offset by net outflows over the last twelve months.~~2017. The average of beginning and ending assets under management for the ~~third~~second quarter of ~~2017~~2018 was ~~$23.1~~$22.1 billion compared to ~~$21.1~~$22.3 billion for the ~~third~~second quarter of ~~2016. The increase in average assets under management is~~2017. These decreases are due to net outflows, including $928 million of outflows related to the sale of the Omaha-based component of our Private Wealth business, partially offset by 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.~~months.

The following table displays assets under management as of ~~September~~June 30, ~~2017~~2018 and ~~2016:~~2017:


					% Change						% Change
					September 30, 2017						June 30, 2018
	As of September 30,				vs.		As of June 30,				vs.
	2017		2016		September 30, 2016		2018		2017		June 30, 2017
	(in millions)						(in millions)
Institutional	$	13,658	$	12,192	12	%	$	12,457	$	12,773	(2	)%
Private Wealth	5,822		5,327		9		4,935		5,685		(13	)
Mutual Funds	4,144		3,753		10		4,199		4,092		3
Total Assets Under Management⁽¹⁾	$	23,624	$	21,272	11	%	$	21,591	$	22,550	(4	)%

________________

(1)

AUM excludes ~~$362~~$259 million of assets under advisement (“AUA”) as of ~~September~~June 30, ~~2017~~2018 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~~$1.0 billion of AUA as of ~~September~~June 30, ~~2016~~2017 related to model portfolios, including ~~the~~approximately $692 million in a long-only convertibles fund for which we provided consulting advice but for which we did not have direct discretionary investment authority. The long-only convertibles fund transitioned to AUM during the third quarter of 2017.

Institutional includes (i) separate accounts of corporate pension and profit sharing plans, public employee retirement funds, Taft Hartley plans, endowments, foundations and individuals; (ii) subadvisory relationships where Westwood provides investment management services for funds offered by other financial institutions; (iii) pooled investment vehicles, including the UCITS Fund and collective investment trusts; and (iv) managed account relationships with brokerage firms and other registered investment 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~~custodial 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.

Roll-Forward of Assets Under Management


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2017			2016			2017			2016			2018			2017			2018			2017
Institutional
Beginning of period assets	$	12,773		$	11,921		$	11,911		$	11,752		$	13,377		$	12,435		$	14,421		$	11,911
Inflows⁽¹⁾	1,113			420			2,173			1,133
Inflows													392			690			785			1,060
Outflows	(659		)	(606		)	(1,954		)	(1,902		)	(1,204		)	(688		)	(2,593		)	(1,295		)
Net flows	454			(186		)	219			(769		)	(812		)	2			(1,808		)	(235		)
Market appreciation	431			457			1,528			1,209
Market appreciation (depreciation)													(108		)	336			(156		)	1,097
Net change	885			271			1,747			440			(920		)	338			(1,964		)	862
End of period assets	$	13,658		$	12,192		$	13,658		$	12,192		$	12,457		$	12,773		$	12,457		$	12,773

Private Wealth
Beginning of period assets	$	5,685		$	5,361		$	5,520		$	5,393		$	5,001		$	5,675		$	5,566		$	5,520
Inflows	194			104			509			274			122			121			187			315
Outflows(1)	(216		)	(245		)	(710		)	(626		)	(236		)	(249		)	(820		)	(494		)
Net flows	(22		)	(141		)	(201		)	(352		)	(114		)	(128		)	(633		)	(179		)
Market appreciation	159			107			503			286			48			138			2			344
Net change	137			(34		)	302			(66		)	(66		)	10			(631		)	165
End of period assets	$	5,822		$	5,327		$	5,822		$	5,327		$	4,935		$	5,685		$	4,935		$	5,685

Mutual Funds
Beginning of period assets	$	4,092		$	3,690		$	3,810		$	3,617		$	4,244		$	3,963		$	4,242		$	3,810
Inflows	293			214			792			674			209			257			552			499
Outflows	(334		)	(224		)	(803		)	(798		)	(283		)	(220		)	(568		)	(469		)
Net flows	(41		)	(10		)	(11		)	(124		)	(74		)	37			(16		)	30
Market appreciation	93			73			345			260
Market appreciation (depreciation)													29			92			(27		)	252
Net change	52			63			334			136			(45		)	129			(43		)	282
End of period assets	$	4,144		$	3,753		$	4,144		$	3,753		$	4,199		$	4,092		$	4,199		$	4,092

Total
Total AUM
Beginning of period assets	$	22,550		$	20,972		$	21,241		$	20,762		$	22,622		$	22,073		$	24,229		$	21,241
Inflows	1,600			738			3,474			2,081			723			1,068			1,524			1,874
Outflows	(1,209		)	(1,075		)	(3,467		)	(3,326		)	(1,723		)	(1,157		)	(3,981		)	(2,258		)
Net flows	391			(337		)	7			(1,245		)	(1,000		)	(89		)	(2,457		)	(384		)
Market appreciation	683			637			2,376			1,755
Market appreciation (depreciation)													(31		)	566			(181		)	1,693
Net change	1,074			300			2,383			510			(1,031		)	477			(2,638		)	1,309
End of period assets	$	23,624		$	21,272		$	23,624		$	21,272		$	21,591		$	22,550		$	21,591		$	22,550

________________


(1)	~~Institutional inflows~~Private Wealth outflows include approximately ~~$713~~$78 million and $531 million of assets related to ~~a long-only convertibles fund, which transitioned from AUA to AUM during~~ the ~~third quarter~~sale of ~~2017.~~the Omaha-based component of our Private Wealth business for the three and six months ended June 30, 2018, respectively.

Three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017

The ~~$1.1~~$1.0 billion ~~increase~~decrease in assets under management for the three months ended ~~September~~June 30, ~~2017~~2018 was due to market ~~appreciation~~depreciation of ~~$683~~$31 million and net ~~inflows~~outflows of ~~$391 million.~~$1.0 billion. Net ~~inflows~~outflows 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,~~LargeCap Value and Income Opportunity ~~strategy~~strategies and ~~LargeCap Value strategy.~~

outflows related to the divestiture of our Omaha operations.

The ~~$300~~$477 million increase in assets under management for the three months ended ~~September~~June 30, ~~2016~~2017 was due to ~~net outflows~~market appreciation of ~~$337~~$566 million, partially offset by ~~market appreciation~~net outflows of ~~$637~~$89 million. Net outflows were primarily related to our SMidCap strategies and LargeCap Value strategy, partially offset by net inflows to our SmallCap Value, Market Neutral Income, and Emerging Markets strategies.

~~Nine~~Six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017

The ~~$2.4~~$2.6 billion decrease in assets under management for the six months ended June 30, 2018 was due to net outflows of $2.5 billion and market depreciation of $181 million. Net outflows were primarily related to our Emerging Markets, SMidCap and LargeCap Value strategies and outflows related to the divestiture of our Omaha operations, partially offset by net inflows to our SmallCap Value strategy.

The $1.3 billion increase in assets under management for the ~~nine~~six months ended ~~September~~June 30, 2017 was due to market appreciation of ~~$2.4~~$1.7 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.~~$384 million. Net outflows were primarily related to our ~~SMidCap, SmidCap Plus,~~ LargeCap Value ~~AllCap~~strategy and SMidCap strategies and were partially offset by inflows to our Market Neutral Income and SmallCap Value ~~and Income Opportunity~~ strategies.

Results of Operations

The following table (dollars in thousands) and discussion of our results of operations isare based upon data derived from the condensed consolidated 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										% Change		% Change
									Three Months Ended		Nine Months Ended										Three Months Ended		Six Months Ended
	Three Months Ended				Nine Months Ended				September 30, 2017		September 30, 2017		Three Months Ended				Six Months Ended				June 30, 2018		June 30, 2018
	September 30,				September 30,				vs.		vs.		June 30,				June 30,				vs.		vs.
	2017		2016		2017		2016		September 30, 2016		September 30, 2016		2018		2017		2018		2017		June 30, 2017		June 30, 2017
Revenues:
Advisory fees: asset-based	$	25,334	$	23,447	$	73,619	$	67,928	8	%	8	%	$	23,473	$	24,496	$	47,956	$	48,285	(4	)%	(1	)%
Advisory fees: performance-based	—		226		1,417		635		(100	)	123		1,649		1,031		2,984		1,417		60		111
Trust fees	7,858		7,690		23,570		22,798		2		3		7,465		7,917		15,074		15,712		(6	)	(4	)
Other revenues	300		414		1,265		568		NM		NM		173		312		313		965		NM		NM
Total revenues	33,492		31,777		99,871		91,929		5		9		32,760		33,756		66,327		66,379		(3	)	—
Expenses:
Employee compensation and benefits	15,601		15,637		48,875		47,239		—		3		14,654		15,557		32,413		33,274		(6	)	(3	)
Sales and marketing	457		408		1,447		1,423		12		2		409		513		852		990		(20	)	(14	)
Westwood mutual funds	977		755		2,749		2,282		29		20		1,002		909		1,987		1,772		10		12
Information technology	1,855		1,874		5,494		6,039		(1	)	(9	)	2,383		1,883		4,421		3,639		27		21
Professional services	1,681		1,903		4,495		4,707		(12	)	(5	)	1,277		1,318		2,305		2,814		(3	)	(18	)
Legal settlement	4,009		—		4,009		—		100		100
General and administrative	3,160		2,147		8,697		7,028		47		24		2,099		2,993		3,450		5,537		(30	)	(38	)
Total expenses	27,740		22,724		75,766		68,718		22		10		21,824		23,173		45,428		48,026		(6	)	(5	)
Net operating income													10,936		10,583		20,899		18,353		3		14
Gain on sale of operations													—		—		524		—		NM		NM
Income before income taxes	5,752		9,053		24,105		23,211		(36	)	4		10,936		10,583		21,423		18,353		3		17
Provision for income taxes	1,620		3,166		7,013		8,141		(49	)	(14	)	2,944		3,687		5,453		5,393		(20	)	1
Net income	$	4,132	$	5,887	$	17,092	$	15,070	(30	)%	13	%	$	7,992	$	6,896	$	15,970	$	12,960	16	%	23	%

_________________________

NM Not meaningful

Three months ended ~~September~~June 30, ~~2017~~2018 compared to three months ended ~~September~~June 30, ~~2016~~2017

Total Revenues. Our Total revenues ~~increased $1.7~~decreased $1.0 million, or 5%3%, to ~~$33.5~~$32.8 million for the three months ended ~~September~~June 30, ~~2017~~2018 compared with ~~$31.8~~$33.8 million for the three months ended ~~September~~June 30, ~~2016.~~2017. Asset-based advisory fees ~~increased $1.9~~decreased $1.0 million, or ~~8%, and Trust fees increased $0.2 million, or 2%~~4%, primarily due to ~~higher~~lower average assets under ~~management~~management. Trust fees decreased $0.4 million, or 6%, primarily due to ~~asset appreciation.~~the sale of the Omaha-based component of our Private Wealth business. Performance-based advisory fees increased by $0.6 million.

~~Legal Settlement~~Employee Compensation and Benefits. ~~. We recorded a net $4.0~~Employee compensation and benefits decreased$0.9 million ~~charge related~~, or 6%, to ~~a legal settlement and associated insurance coverage recorded during~~$14.7 million for the ~~third quarter of~~three months ended June 30, 2018 compared with $15.6 million for the three months ended June 30, 2017. ~~See further discussion~~The decrease was due to reductions in compensation from the sale of the ~~settlement~~Omaha-based component of our Private Wealth business and short- and long-term incentive compensation as a result of lower asset-based revenues as compared to the prior year quarter.

Information Technology. Information technology costs increased $0.5 million, or 27%, to $2.4 million for the three months ended June 30, 2018 compared with $1.9 million for the three months ended June 30, 2017 primarily due to implementation costs as we continue to invest in ~~Note 12 “Commitments~~our technology infrastructure and ~~Contingencies” to our Condensed Consolidated Financial Statements included in Part I. Financial Information.~~increased research expenses.

General and Administrative. General and administrative costs ~~increased $1.1~~decreased $0.9 million, or ~~47.2%~~30%, to ~~$3.2 million for the three months ended September 30, 2017 compared with~~ $2.1 million for the three months ended ~~September~~June 30, ~~2016,~~2018 compared with $3.0 million for the three months ended June 30, 2017 primarily due to a ~~$0.9~~$0.3 million foreign currency transaction gain recorded in the second quarter of 2018 as compared to a $0.6 million foreign currency transaction loss recorded in the ~~third~~second quarter of ~~2017 as a result of a 4% decrease in the Canadian dollar exchange rate.~~2017.

Provision for Income Taxes. The effective tax rate decreased to ~~28.2%~~26.9% for the three months ended ~~September~~June 30, ~~2017~~2018 from ~~35.0%~~34.8% for the three months ended ~~September~~June 30, ~~2016.~~2017. The ~~decrease is primarily related to~~current quarter rate benefited from the ~~tax impact of our legal settlement with AGF~~decrease in the ~~third quarter of 2017~~U.S. corporate income tax rate under the Tax Cuts and ~~adjustments to uncertain tax positions (net of federal tax benefit) recorded~~Jobs Act signed into law in ~~the third quarter of 2016.~~December 2017.

~~Nine~~Six months ended ~~September~~June 30, ~~2017~~2018 compared to ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017

Total Revenues. Our Total revenues ~~increased $8.0 million, or 9%, to $99.9~~of $66.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017 compared~~2018 were essentially flat with ~~$91.9 million for~~ the ~~nine~~six months ended ~~September~~June 30, ~~2016. This increase was primarily related to a $5.7 million, or 8%, increase in~~2017. Asset-based advisory fees ~~and a $0.8~~decreased $0.3 million, or 3%1%, ~~increase in Trust fees~~ related to ~~higher~~lower average assets under management, and Trust fees decreased $0.6 million, or 4%, due to ~~market appreciation. Performance-based~~the sale of the Omaha-based component of our Private Wealth business. These decreases were offset by a $1.6 million increase in performance-based advisory ~~fees increased by $0.8 million.~~fees.

Employee Compensation and Benefits. Employee compensation and benefits costs ~~increased~~decreased $0.9 million, or 2.6%, to ~~$48.9~~$32.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared with ~~$47.2~~$33.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The ~~increase~~decrease is due to ~~higher~~reductions in compensation from the sale of the Omaha-based component of our Private Wealth business and short- and long-term incentive compensation ~~and performance-based restricted stock expense~~ as a result of ~~improved pre-tax income~~lower asset-based revenues as compared to the prior ~~year, as well as merit increases.~~year.

~~Legal Settlement~~Information Technology. ~~. We recorded a net $4.0~~Information technology costs increased $0.8 million, ~~charge related~~or 21%, to ~~a legal settlement~~$4.4 million for the six months ended June 30, 2018 compared with $3.6 million for the six months ended June 30, 2017 primarily due to implementation costs as we continue to invest in our technology infrastructure 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.increased research expenses.

General & Administrative. General and administrative expenses ~~increased $1.7~~decreased $2.0 million, or ~~24%~~38%, to ~~$8.7 million~~

~~for the nine months ended September 30, 2017 compared to $7.0~~$3.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~

2018 compared to $5.5 million for the six months ended June 30, 2017 primarily due to a ~~$1.6~~$1.4 million foreign currency transaction gain recorded in the first six months of 2018 as compared to a $0.7 million foreign currency transaction loss recorded in the first ~~nine~~six months of ~~2017 as~~2017.

Gain on Sale of Operations. The six months ended June 30, 2018 includes a ~~result~~$0.5 million gain on the sale of ~~an 8% decrease in the Canadian dollar exchange rate.~~our Omaha-based component of our Private Wealth business.

Provision for Income Taxes. The effective tax rate decreased to ~~29.1%~~25.5% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 from ~~35.1%~~29.4% for the ~~nine~~six months ended ~~September~~June 30, ~~2016. During~~2017. The current year-to-date rate benefited from the decrease in the U.S. corporate income tax rate under the Tax Cuts and Jobs Act signed into law in December 2017, while the first quarter of 2017 ~~we recorded~~included a $1.0 million ~~adjustment to income~~ tax ~~expense~~benefit related to ~~excess tax benefits as a result of~~ the adoption of ASU 2016-09 ~~Compensation-Stock~~Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting~~, which decreased our effective~~. Excluding this discrete tax ~~rate to 29.1%. Without the adjustment,~~benefit, our effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 would have been ~~33.0%~~34.5%. 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.

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 June 30,				% Change
	2018		2017		% Change
Net income	$	7,992	$	6,896	16	%
Add: Stock-based compensation expense	3,776		4,168		(9	)
Add: Intangible amortization	418		490		(15	)
Add: Tax benefit from goodwill amortization	59		156		(62	)
Economic Earnings	$	12,245	$	11,710	5	%
Diluted weighted average shares outstanding	8,543,353		8,316,508
Economic Earnings per share	$	1.43	$	1.41

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		Six Months Ended June 30,				% Change
	2017		2016		% Change		2018		2017		% Change
Net Income	$	17,092	$	15,070	13	%	$	15,970	$	12,960	23	%
Add: Stock-based compensation expense	12,298		12,164		1		7,963		8,065		(1	)
Add: Intangible amortization	1,449		1,470		(1	)	836		980		(15	)
Add: Tax benefit from goodwill amortization	469		390		20		118		313		(62	)
Economic Earnings	$	31,308	$	29,094	8	%	$	24,887	$	22,318	12	%
Diluted weighted average shares outstanding	8,350,926		8,212,468				8,543,401		8,315,722
Economic Earnings per share	$	3.75	$	3.54			$	2.91	$	2.68

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~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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~~six months ended ~~September~~June 30, ~~2017,~~2018, cash flow provided by operating activities, principally our investment advisory business, was ~~$39.4~~$8.4 million. Cash flow ~~used in~~provided by investing activities of ~~$537,000~~$4.6 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was primarily related to ~~purchases~~the sale of ~~fixed assets.~~the Omaha-based component of our private wealth business, partially offset by our strategic investment in a private company. Cash flow used in financing activities of ~~$23.3~~$18.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017 was due to~~2018 reflected 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 short-term investments of ~~$99.5~~$108.8 million as of ~~September~~June 30, ~~2017~~2018 and ~~$90.2~~$105.6 million as of December 31, ~~2016.~~2017. Cash and cash equivalents as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016 includes~~2017 included approximately ~~$30~~$29 million and ~~$20~~$33 million, respectively, of undistributed income from Westwood ~~International that~~International. If these funds were needed for our U.S. operations, we ~~consider~~would be required to beaccrue and pay incremental Canadian withholding taxes to repatriate a portion of these funds. Our current intention is to permanently ~~invested in Canada.~~reinvest the funds subject to withholding taxes outside of the U.S., and our current forecasts do not demonstrate a need to repatriate them to fund our U.S. operations. At ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, working capital aggregated ~~$98.3~~$113.5 million and ~~$86.3~~$106.6 million, respectively.

As discussed in Note 4 “Investments” in our Condensed Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q, we entered into a strategic investment in a private company during the second quarter of 2018. As part of the agreement, we committed to an additional $5.0 million purchase of equity securities to be invested no later than August 31, 2018. Our intent is to offer this investment opportunity to our current and prospective clients, Board of Directors and employees, but to the extent these parties do not invest the full $5.0 million, we are obligated to make an additional investment to cover any shortfall.

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~~June 30, ~~2017,~~2018, Westwood Trust had approximately ~~$20.4~~$15.5 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,~~2017, filed with the SEC. We believe that current cash and short-term investment balances ~~and~~plus 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 discussed in Note 4 “Investments” in our Condensed Consolidated Financial Statements included in Part I, Item 1. “Financial Statements” of ~~September 30, 2017, there~~this Quarterly Report on Form 10-Q, we entered into a strategic investment in a private company during the second quarter of 2018. As part of the agreement, we committed to an additional $5.0 million purchase of equity securities to be invested no later than August 31, 2018. Our intent is to offer this investment opportunity to our current and prospective clients, Board of Directors and employees, but to the extent these parties do not invest the full $5.0 million, we are obligated to make an additional investment to cover any shortfall.

There have been no other material changes outside the ordinary course of business to our contractual obligations since December 31, ~~2016.~~2017. 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.~~2017.

Critical and Significant Accounting Policies and Estimates

Effective January 1, ~~2017,~~2018, we adopted ASU ~~2016-09,~~2014-09, ~~Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting.~~Revenue from Contracts with Customers (Topic 606). Refer to Note ~~2 “Summary of Accounting Policies”~~9 “Revenue” 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.~~2014-09.

~~Otherwise, there~~There have been no other significant changes in our critical or significant accounting policies and estimates since December 31, ~~2016.~~2017. 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~~is 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.~~2017.

Accounting Developments

Refer to Note 2 “Summary of Significant Accounting Policies” in our ~~condensed consolidated financial statements~~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.~~2017.


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~~June 30, ~~2017,~~2018, 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.None.


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~~2017 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.


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~~June 30, ~~2017:~~2018:


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)		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	—	$	—	—		$	9,366,000
Canadian Plan ⁽²⁾	—	$	—	—	CDN	$	4,296,000	—	$	—	—	CDN	$	3,448,000
Employee transactions ⁽³⁾								—	$	—	—		—
July 1-31, 2017	713	$	59.97	—		—
May 1-31, 2018								139	$	57.05	—		—

(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.


ITEM 6.	EXHIBITS



10.1*		Exit Letter, dated June 27, 2018, between the Company and Mark R. Freeman

31.1*		Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a)

31.2*		Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a)

32.1**		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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.

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~~July 25, ~~2017~~2018	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

3133



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