What changed in this filing

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Item 1. Financial Statements

2020-11-06 compared with 2020-08-07 · 218 added, 154 removed, 573 unchanged (39% of the section changed)

4 unchanged sentences

(In thousands, except shares data)

June 30, 2020

September 30, 2020

December 31, 2019

34 unchanged sentences

(In thousands, except per share data)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Investment management fees

13 unchanged sentences

Interest expense and other financing costs

Gain (loss) on debt extinguishment

Loss on debt extinguishment

Total other expense, net

9 unchanged sentences

(In thousands)

Three Months Ended June 30,

Six Months Ended June 30,

Other comprehensive (loss) income, net of tax

Three Months Ended September 30,

Nine Months Ended September 30,

Other comprehensive loss, net of tax

Net unrealized loss on cash flow hedges

Net unrealized gain (loss) on foreign currency translation

Total other comprehensive (loss) income, net of tax

Total other comprehensive loss, net of tax

Comprehensive income

27 unchanged sentences

Balance, June 30, 2020

Issuance of common stock

Share conversion - Class B to A

Repurchase of shares

Shares withheld related to net settlement of equity awards

Vesting of restricted share grants

Exercise of options

Other comprehensive loss

Share-based compensation

Dividends paid

Balance, September 30, 2020

See the accompanying notes to the unaudited condensed consolidated financial statements.

Victory Capital Holdings, Inc.

and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity (U naudited)

(In thousands)

Treasury Stock

21 unchanged sentences

Balance, June 30, 2019

Issuance of common stock

Share conversion - Class B to A

Repurchase of shares

Shares withheld related to net settlement of equity awards

Vesting of restricted share grants

Exercise of options

Other comprehensive income/(loss)

Share-based compensation

Dividends paid

Balance, September 30, 2019

See the accompanying notes to the unaudited condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities

6 unchanged sentences

Unrealized depreciation (appreciation) on investments

Loss on equity method investment

Net gain on equity method investment

Loss on debt extinguishment

11 unchanged sentences

Sales of available-for-sale securities

(Purchase) sale of equity method investment

Acquisition of business

Net cash used in investing activities

4 unchanged sentences

Payments of taxes related to net share settlement of equity awards

Repayment of long-term senior debt

Proceeds from long-term senior debt

Payment of debt financing fees

Repayments and repurchases of long-term senior debt

Repayment of promissory note

Payment of dividends

Receipt of consideration for acquisition

Net cash used in financing activities

Receipt (payment) of consideration for acquisition

Net cash (used in) provided by financing activities

Effect of changes of foreign exchange rate on cash and cash equivalents

11 unchanged sentences

Victory Capital Holdings, Inc., a Delaware corporation (along with its wholly-owned subsidiaries, collectively referred to as the “Company,” “Victory,” or in the first-person notations of “we,” “us,” and “our”), was formed on February 13, 2013 for the purpose of acquiring Victory Capital Management Inc.

(“VCM”) and Victory Capital Advisers, Inc.

(“VCA”), which occurred on August 1, 2013.

Effective June 30, 2020, Victory Capital Advisers, Inc.

changed its name to Victory Capital Services, Inc.

(“VCM”) and Victory Capital Services, Inc.

(“VCS”), formerly known as Victory Capital Advisers, Inc., on August 1, 2013.

On February 12, 2018, the Company completed the initial public offering (the “IPO”) of its Class A common stock, which trades on the NASDAQ under the symbol “VCTR.”

13 unchanged sentences

In the opinion of management, the consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial condition, results of operations, and cash flows for the interim periods presented.

Operating results for the three and six month periods ending June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries, after elimination of all intercompany balances and transactions.

Our involvement with non-consolidated variable interest entities (“VIEs”) include sponsored investment funds and, in 2019, an equity method investment.

For further discussion regarding VIEs, refer to Note 2, Significant Accounting Policies, in our Annual Report on Form 10-K for the year ended December 31, 2019.

On September 20, 2020, the Company acquired a 15 % equity interest in Alderwood Partners LLP (“Alderwood”).

Alderwood’s operating entity, Alderwood Capital, is a London-based investment advisory firm focused on taking minority stakes in specialist boutique asset management businesses.

The Company analyzed its investment in Alderwood under the voting interest model and determined that it would not consolidate Alderwood as it does not have a controlling financial interest.

The Company’s involvement with non-consolidated variable interest entities (“VIEs”) include sponsored investment funds and, in 2019, an equity method investment.

For further discussion regarding VIEs, refer to Note 2, Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

For further discussion regarding equity method investments, refer to Note 15, Equity Method Investment.

Use of Estimates and Assumptions

3 unchanged sentences

The global spread of COVID-19 has created significant volatility, uncertainty , and economic disruption.

COVID-19 did not have a material adverse effect on our reported results for the three and six months ended June 30, 2020.

COVID-19 did not have a material adverse effect on our reported results for the three and nine months ended September 30, 2020 .

New Accounting Pronouncements

18 unchanged sentences

Early adoption is permitted for interim or annual goodwill impairment tests.

The impact of this new guidance will depend upon the performance of our one reporting unit and the market conditions impacting the fair value.

The impact of this new guidance will depend upon the performance of the Company’s one reporting unit and the market conditions impacting the fair value.

In February 2016, the FASB issued ASU 2016‑02, Leases (Topic 842) (the “New Lease Standard”) which supersedes previous lease guidance, Accounting Standards Codification (“ASC”) Topic 840 (“ASC Topic 840”).

3 unchanged sentences

In June 2020, the FASB deferred the effective date of the New Lease Standard for private companies and other companies who had not yet been required to adopt the standard.

Due to the Company’s EGC status, we will adopt the New Lease Standard on January 1, 2022.

We have assessed and evaluated our portfolio of active real estate leases and are currently surveying our business for other leases.

As outlined in our Annual Report on Form 10-K for the year ended December 31, 2019, we have approximately $ 23 million in undiscounted, future minimum cash commitments under net operating leases.

The New Lease Standard is expected to result in a gross up on our Consolidated Balance Sheets and to have no material impact to our Consolidated Statements of Operations, our liquidity or our debt covenant compliance under our current credit agreement.

Due to the Company’s EGC status, the New Lease Standard will be adopted on January 1, 2022.

Management has assessed and evaluated the Company’s portfolio of active real estate leases and is currently surveying the business for other leases.

As outlined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company has approximately $ 23 million in undiscounted, future minimum cash commitments under net operating leases.

The New Lease Standard is expected to result in a gross up of assets and liabilities on the Consolidated Balance Sheets and to have no material impact on the Consolidated Statements of Operations or the Company’s liquidity or debt covenant compliance under the current credit agreement.

Expected Credit Losses:

5 unchanged sentences

As an EGC, the Company currently expects to adopt ASU 2016-13 on January 1, 2023.

We are currently reviewing the effect of this new standard on our consolidated financial statements.

The Company is currently reviewing the effect of this new standard on its consolidated financial statements.

Revenue RECOGNITION

In accordance with the new revenue recognition standard requirements, the following table disaggregates our revenue by type and product:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

4 unchanged sentences

Performance-based fees

Mutual funds (USAA Funds)

Separate accounts and other vehicles

12 unchanged sentences

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

15 unchanged sentences

Investment management, fund administration and fund distribution fees are generally considered variable consideration as they are typically calculated as a percentage of AUM.

Fund transfer agent fees are also considered variable consideration as they are calculated as a percentage of AUM or based on the number of accounts in the fund.

In such cases, the amount of fees earned is subject to factors outside of the Company’s control including customer or underlying investor contributions and redemptions and financial

market volatility.

Fund transfer agent fees are also considered variable consideration as they are

calculated as a percentage of AUM or based on the number of accounts in the fund.

In such cases, the amount of fees earned is subject to factors outside of the Company’s control including customer or underlying investor contributions and redemptions and financial market volatility.

These fees are considered constrained and are excluded from the transaction price until the asset values or number of accounts on which the customer is billed are calculated and the value of consideration is measurable.

15 unchanged sentences

Performance-based investment management fees are calculated as a percentage of investment performance on a client’s account versus a specified benchmark or hurdle based on the terms of the contract with the customer.

Performance-based investment management fees are variable consideration and are recognized as revenue when it is probable that a significant reversal of the cumulative revenue for the contractual performance period will not occur.

Performance-based investment management fees are variable consideration and are recognized as revenue when and to the extent that it is probable that a significant reversal of the cumulative revenue for the contractual performance period will not occur.

Performance-based investment management fees recognized as revenue in the current period may pertain to performance obligations satisfied in prior periods.

Fulcrum fee arrangements include a base investment management fee and a performance fee adjustment to the base investment management fee depending on whether the assets being managed experienced better or worse investment performance than the index specified in the customer’s contract.

The performance fee adjustment arrangement with certain equity and fixed income USAA Funds took effect on July 1, 2020 and is calculated monthly based on the investment performance of those funds relative to their specified benchmark indexes over the discrete performance period ending with that month.

Fund Administration Fees

15 unchanged sentences

Revenue is measured in an amount that reflects the consideration to which the Company expects to be entitled in exchange for providing distribution services.

Distribution fees are generally calculated as a percentage of average net assets in the

Victory Funds and USAA Funds.

Distribution fees are generally calculated as a percentage of average net assets in the Victory Funds and USAA Funds.

The Company’s performance obligation is satisfied at the point in time when control of the services is transferred to customers, which is upon investor subscription or redemption.

25 unchanged sentences

No further adjustments were recorded through the end of the measurement period on June 30, 2020.

Total consideration paid through June 30, 2020 for the USAA AMCO Acquisition was $ 949.4 million, comprised of $ 851.3 million of cash paid at closing plus the acquisition date value of contingent payments due to sellers of $ 98.8 million less $ 0.7 million in net working capital adjustments settled in the first quarter of 2020.

There has been no change in the goodwill balance from December 31, 2019 to September 30, 2020.

Total cumulative consideration paid for the USAA AMCO Acquisition was $ 949.4 million, comprised of $ 851.3 million of cash paid at closing plus the acquisition date value of contingent payments due to sellers of $ 98.8 million less $ 0.7 million in net working capital adjustments settled in the first quarter of 2020.

A maximum of $ 150.0 million ($ 37.5 million per year) in contingent payments is payable to sellers based on the annual revenue of USAA Adviser attributable to all “non-managed money”-related AUM in each of the first four years following the closing.

To receive any contingent payment in respect of “non-managed money”-related assets for a given year, annual revenue from “non-managed money”-related assets must be at least 80 % of the revenue run-rate (as calculated under the Stock Purchase Agreement) of the USAA Adviser’s “non-managed money”-related assets under management as of the closing date, and to achieve the maximum contingent

payment for a given year, such annual revenue must total at least 100 % of that closing date revenue run-rate.

Annual contingent payments in respect of “non-managed money”-related assets are subject to certain “catch-up” provisions set forth in the USAA Stock Purchase Agreement.

18 unchanged sentences

Includes $ 750.2 million for indefinite-lived investment advisory contracts, $ 19.1 million for indefinite-lived transfer agent contracts, $ 0.8 million for indefinite-lived distribution contracts, $ 38.2 million for definite-lived trade name assets and $ 0.4 million for definite-lived lease-related assets, all of which were recorded in other intangible assets, net on the unaudited Condensed Consolidated Balance Sheets.

The following table summarizes the change in the goodwill balance from December 31, 2019 to June 30, 2020:

(in thousands)

As of June 30, 2020

Balance, beginning of period

Goodwill recorded in acquisition

Balance, end of period

Contingent Consideration

The fair value of contingent consideration payable to sellers at June 30, 2020 was estimated to be $ 118.5 million as compared to $ 118.7 million at December 31, 2019.

The decrease in the liability of $ 0.2 million in the six months ended June 30, 2020 was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations.

The Company expects to pay to sellers in the fourth quarter of 2020 the maximum amount of $ 37.5 million for the first annual earnout period for the USAA AMCO Acquisition.

The fair value of contingent consideration payable to sellers at September 30, 2020 was estimated to be $ 120.5 million, which includes the $37.5 million expected to be paid for the first earnout period, as compared to $ 118.7 million at December 31, 2019.

The increase in the contingent consideration liability of $ 2.0 million and $ 1.8 million in the three and nine months ended September 30, 2020, respectively, was recorded in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations.

The fair value of the USAA AMCO Acquisition contingent consideration payable was estimated using the real options method.

1 unchanged sentence

Significant assumptions and inputs include the “non-managed money” revenue projected annual growth rate, the market price of risk, which adjusts the projected revenue growth rate to a risk-neutral expected growth rate, revenue volatility and discount rate.

As of June 30, 2020, the projected annual growth rate for “non-managed money” revenue was approximately 4 %.

As of September 30, 2020, the projected annual growth rate for “non-managed money” revenue was approximately 3 %.

The market price of risk and revenue volatility of approximately 7 % and 16 %, respectively, were based on data for comparable companies.

As the contingent consideration represents a subordinate, unsecured claim of the Company, we have assessed a discount rate of approximately 5.3 %, which incorporates adjustments for credit risk and the subordination of the contingent consideration.

the contingent consideration represents a subordinate, unsecured claim of the Company, the Company has assessed a discount rate of approximately 4.5 %, which incorporates adjustments for credit risk and the subordination of the contingent consideration.

Total estimated undiscounted earn out payments ranged from $ 128 million to $ 150 million, the maximum amount payable to sellers.

Actual and Pro Forma Results for USAA Acquired Companies

Revenue of the USAA Acquired Companies for the three and six months ended June 30, 2020, was as follows:

Three Months Ended

Six Months Ended

(in millions)

June 30, 2020

Net income attributable to the USAA Acquired Companies for the three and six months ended June 30, 2020 is impractical to determine as the Company does not prepare discrete financial information at that level.

Revenue of the USAA Acquired Companies is included in the Company’s results as from July 1, 2019.

For the six months ended June 30, 2020, revenue of the USAA Acquired Companies was $ 221.3 million.

Net income attributable to the USAA Acquired Companies for the six months ended June 30, 2020 is impractical to determine as the Company does not prepare discrete financial information at level.

The following Unaudited Pro Forma Condensed Combined Statements of Operations are provided for illustrative purposes only and assume that the acquisition occurred on January 1, 2018.

3 unchanged sentences

In addition, Victory’s and the USAA Acquired Companies’ results were adjusted to remove incentive compensation, legal fees and mutual fund proxy costs directly attributable to the acquisition.

Three Months Ended

Six Months Ended

Nine Months Ended

(in thousands, except per share amount)

June 30, 2019

September 30, 2019

Earnings per share of common stock

4 unchanged sentences

Acquisition-related costs

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

3 unchanged sentences

In connection with business combinations, asset purchases and changes in business strategy, the Company incurs costs integrating investment platforms, products and personnel into existing systems, processes and service provider arrangements and restructuring the business to capture operating expense synergies.

The following table presents the rollforward of restructuring and integration liabilities, which are recorded in accounts payable and accrued expenses in the unaudited Condensed Consolidated Balance Sheets, for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in millions)

15 unchanged sentences

The table below shows liabilities measured at fair value on a recurring basis.

As of June 30, 2020

As of September 30, 2020

(in thousands)

8 unchanged sentences

Total Financial Liabilities

The Swap liability represents amounts owed as of June 30, 2020 under a floating-to-fixed interest rate swap transaction entered into by the Company on March 27, 2020.

The Swap effectively fixes the interest rate at 3.465 % on $ 450 million of the outstanding Term Loan balance through the Term Loan’s maturity in July 2026.

The fair value of the Swap is included in other liabilities on the unaudited Condensed Consolidated Balance Sheets at June 30, 2020.

Refer to Note 4, Acquisitions, for further information regarding the Company’s contingent consideration arrangements.

The Swap liability represents amounts owed as of September 30, 2020 under a floating-to-fixed interest rate swap transaction entered into by the Company on March 27, 2020.

The Swap effectively fixed the interest rate at 3.465 % on $ 450 million of the outstanding Term Loan balance through the Term Loan’s maturity in July 2026.

The fair value of the Swap is included in other liabilities on the unaudited Condensed Consolidated Balance Sheets at September 30, 2020.

Pricing was determined based on a third party, model-derived valuation in which all significant inputs are observable in active markets (Level 2).

1 unchanged sentence

The contingent consideration arrangement liabilities represent the USAA AMCO Acquisition estimated earn-out payment liability, which is included in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets.

Significant unobservable inputs for the option pricing model used to determine the estimated fair value of the USAA AMCO Acquisition earn-out payment liability include the “non-managed money” revenue projected growth rate, revenue volatility, market

price of risk and discount rate.

An increase in market price of risk, discount rate and revenue volatility results in a lower fair value for the earn-out payment liability, while an increase in the projected growth rate for “non-managed money” revenue results in a higher fair value for the earn-out payment liability.

1 unchanged sentence

Changes in the fair value of the liability, realized or unrealized, are recorded in earnings and are included in change in value of consideration payable for acquisition of business in the unaudited Condensed Consolidated Statements of Operations.

The following table presents the balance of the contingent consideration arrangement liabilities at December 31, 2019 and June 30, 2020, respectively.

The following table presents the balance of the contingent consideration arrangement liabilities at December 31, 2019 and September 30, 2020, respectively.

(in thousands)

2 unchanged sentences

USAA AMCO change in fair value measurement

Balance, June 30, 2020

There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy from December 31, 2019 to June 30, 2020.

Balance, September 30, 2020

There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy from December 31, 2019 to September 30, 2020.

The Company recognizes transfers at the end of the reporting period.

The net carrying value of accounts receivable and accounts payable approximates fair value due to the short‑term nature of these assets and liabilities.

The fair value of our long-term debt at June 30, 2020 is considered to be its carrying value as the interest rate on the bank debt is variable and approximates current market rates.

The fair value of our long-term debt at September 30, 2020 is considered to be its carrying value as the interest rate on the bank debt is variable and approximates current market rates.

As a result, Level 2 inputs are utilized to determine the fair value of our long‑term debt.

9 unchanged sentences

Included in revenue (fund administration and distribution fees) are amounts earned for compliance services and transfer agent services.

Realized and unrealized gains and losses and dividend income on investments in the Victory Funds classified as available-for-sale securities and investments in the Victory Funds and USAA Funds classified as trading securities and dividend income on investments in the USAA Treasury Money Market Fund are recorded in interest income and other income (expense) in the unaudited Condensed Consolidated Statements of Operations.

Realized and unrealized gains and losses and dividend income on investments in the Victory Funds and USAA Funds classified as available-for-sale securities and investments in the Victory Funds and USAA Funds classified as trading securities and dividend income on investments in the USAA Treasury Money Market Fund are recorded in interest income and other income (expense) in the unaudited Condensed Consolidated Statements of Operations.

Amounts due to the Victory Funds, USAA Funds and VictoryShares for waivers of investment management fees and reimbursements of fund operating expenses are included in accounts payable and accrued expenses in the unaudited Condensed Consolidated Balance Sheets and represent consideration payable to customers.

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

7 unchanged sentences

Accounts payable and accrued expenses (fund reimbursements)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

4 unchanged sentences

Interest income and other income (expense)

As of June 30, 2020 and December 31, 2019, the Company held both available-for-sale securities and trading securities.

As of September 30, 2020 and December 31, 2019, the Company held both available-for-sale securities and trading securities.

Available-for-sale investments consist entirely of seed capital investments in certain Victory Funds and USAA Funds.

4 unchanged sentences

(in thousands)

As of June 30, 2020

As of September 30, 2020

As of December 31, 2019

Unrealized and realized gains and losses on available‑for‑sale investments are recognized in the accompanying unaudited Condensed Consolidated Statements of Operations as “Interest income and other income (expense).” Proceeds from sales and realized gains and losses from available-for-sale securities in the periods ended June 30, 2020 and 2019 were as follows:

(in thousands)

For the three months ended June 30, 2020

For the three months ended June 30, 2019

Unrealized and realized gains and losses on available‑for‑sale investments are recognized in the accompanying unaudited Condensed Consolidated Statements of Operations as “Interest income and other income (expense).” There were no proceeds from sales and realized gains and losses from available-for-sale securities for the three months ended September 30, 2020 and 2019.

For the nine month periods ended September 30, 2020 and 2019 proceeds from sales and realized gains and losses from available-for-sale securities were as follows:

(in thousands)

For the six months ended June 30, 2020

For the six months ended June 30, 2019

For the nine months ended September 30, 2020

For the nine months ended September 30, 2019

Trading Securities

2 unchanged sentences

(in thousands)

As of June 30, 2020

As of September 30, 2020

As of December 31, 2019

Unrealized and realized gains and losses on trading securities are recorded in interest income and other income (expense) in the unaudited Condensed Consolidated Statements of Operations.

Proceeds from sales and realized gains and losses from trading securities in the periods ended June 30, 2020 and 2019 were as follows:

Proceeds from sales and realized gains and losses from trading securities in the periods ended September 30, 2020 and 2019 were as follows:

(in thousands)

For the three months ended June 30, 2020

For the three months ended June 30, 2019

For the three months ended September 30, 2020

For the three months ended September 30, 2019

(in thousands)

For the six months ended June 30, 2020

For the six months ended June 30, 2019

The effective tax rate for the three and six months ended June 30, 2020 and 2019 differs from the United States federal statutory rate primarily as a result of state and local income taxes, excess tax benefits on share-based compensation and certain non-deductible expenses.

For the three months ended June 30, 2020 and 2019, the provision for income taxes was $ 14.5 million and $ 4.5 million, or 24.5 % and 23.7 %, of pre-tax income respectively.

For the six months ended June 30, 2020 and 2019, the provision for income taxes was $ 31.3 million and $ 9.3 million, or 23.5 % and 24.3 % of pre-tax income, respectively.

The effective tax rate for the three months ended June 30, 2020 was higher than the effective tax rate for the same period in 2019 due to lower excess tax benefits on share-based compensation partially offset by a lower state tax rate.

The effective tax rate for the six months ended June 30, 2020 was lower than the effective tax rate for the same period in 2019 due mainly to higher excess tax benefits on share-based compensation and a lower state tax rate.

No valuation allowance was recorded for deferred tax assets in the periods ended June 30, 2020 and 2019.

At June 30, 2020, the Company had no liability for gross unrecognized tax benefits.

For the nine months ended September 30, 2020

For the nine months ended September 30, 2019

The effective tax rate for the three and nine months ended September 30, 2020 and 2019 differs from the United States federal statutory rate primarily as a result of state and local income taxes, excess tax benefits on share-based compensation and certain non-deductible expenses and for the periods in 2019, expense related to recognizing a liability for unrecorded tax benefits.

For the three months ended September 30, 2020 and 2019, the provision for income taxes was $ 17.0 million and $ 8.1 million, or 23.4 % and 23.7 %, of pre-tax income respectively.

For the nine months ended September 30, 2020 and 2019, the provision for income taxes was $ 48.3 million and $ 17.3 million, or 23.5 % and 24.0 % of pre-tax income, respectively.

The effective tax rate for the three and nine months ended September 30, 2020 was slightly lower than the effective tax rate for the same periods in 2019 due to the combination of decreased excess tax benefits on share-based compensation and decreased expense related to state uncertain tax positions.

No valuation allowance was recorded for deferred tax assets in the periods ended September 30, 2020 and 2019.

At September 30, 2020, the Company had no liability for gross unrecognized tax benefits.

It had a $ 0.1 million liability for interest and penalties on previously unrecognized gross tax benefits, which is included in “Other liabilities” in the accompanying unaudited Condensed Consolidated Balance Sheets.

1 unchanged sentence

however, the Company does not expect the change to have a material impact on its consolidated financial statements.

The following table presents the changes in gross unrecognized tax benefits, excluding interest and penalties, for the three and six months ending June 30, 2020 and 2019.

The following table presents the changes in gross unrecognized tax benefits, excluding interest and penalties, for the three and nine months ended September 30, 2020 and 2019.

(in thousands)

6 unchanged sentences

Ending balance, June 30

Additions based on tax positions related to current period

Reductions related to settlement of tax matters

Ending balance, September 30

2020 Debt Repricing

Concurrent with the USAA AMCO Acquisition on July 1, 2019, the Company (i) entered into the 2019 Credit Agreement, (ii) repaid all indebtedness outstanding under the previous credit agreement (dated February 2018), and (iii) terminated the previous credit agreement.

On January 17, 2020, we entered into the First Amendment (the “First Amendment”) to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank.

On January 17, 2020, the Company entered into the First Amendment (the “First Amendment”) to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank.

Pursuant to the First Amendment, the Company repriced the existing term loans (the “Existing Term Loans”) with replacement term loans in an aggregate principal amount of $ 952.0 million (the “Repriced Term Loans”).

1 unchanged sentence

The applicable margin on LIBOR under the Repriced Term Loans is 2.50 %, compared to 3.25 % under the Existing Term Loans.

The following table summarizes the components of long-term debt under the 2019 Credit Agreement in the unaudited Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019:

The following table summarizes the components of long-term debt under the 2019 Credit Agreement in the unaudited Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019:

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

4 unchanged sentences

The 2019 Credit Agreement contains customary affirmative and negative covenants, including covenants that affect, among other things, the ability of the first lien leverage ratio, measured as of the last day of each fiscal quarter on which outstanding borrowings under the revolving credit facility exceed 35.0 % of the commitments thereunder (excluding certain letters of credit), of no greater than 3.80 to 1.00.

As of June 30, 2020, there were no outstanding borrowings under the revolving credit facility and we were in compliance with our financial performance covenant.

A total of $ 71.3 million of the outstanding term loans under the 2019 Credit Agreement was repaid or repurchased and retired during the first six months of 2020.

As of September 30, 2020, there were no outstanding borrowings under the revolving credit facility and the Company was in compliance with its financial performance covenant.

A total of $ 114.8 million of the outstanding term loans under the 2019 Credit Agreement was repaid or repurchased and retired during the first nine months of 2020.

The Company repaid $ 38.0 million in outstanding term loans in the first three months of 2020 and recorded a $ 1.0 million loss on debt extinguishment.

During the three months ended June 30, 2020, the Company repaid or repurchased and retired $ 33.3 million of outstanding term loans and recorded a $ 0.1 million gain on debt extinguishment.

Refer to Note 15, Subsequent Events, for information related to term loan activity subsequent to June 30, 2020.

During the three months ended September 30, 2020, the Company repaid or repurchased and retired $ 43.5 million of outstanding term loans and recorded a $ 0.8 million loss on debt extinguishment.

Refer to Note 16, Subsequent Events, for information related to term loan activity subsequent to September 30, 2020.

2020 Swap Transaction

2 unchanged sentences

Interest Expense

As of June 30, 2020, the term loans under the 2019 Credit Agreement had an interest period of three months and an interest rate of 3.94 %.

Including the impact of amortization of debt issuance costs and original issue discount described herein, the effective yield for term loans under the 2019 Credit Agreement as of June 30, 2020 was 4.37 %.

The following table summarizes the components of interest expense and other financing costs in the unaudited Condensed Consolidated Statements of Operations for the periods ended June 30, 2020 and 2019:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

As of September 30, 2020, the term loans under the 2019 Credit Agreement had an interest period of three months and an interest rate of 2.80 %.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

(in thousands)

2 unchanged sentences

Amortization of debt discount

Interest rate swap (income) expense

Interest rate swap expense

Shares Rollforward

17 unchanged sentences

Balance, June 30, 2020

Issuance of shares

Share conversion - Class B to A

Repurchase of shares

Vesting of restricted share grants

Exercise of options

Shares withheld related to net settlement of equity awards

Balance, September 30, 2020

Shares of Common Stock Issued

15 unchanged sentences

Balance, June 30, 2019

Issuance of shares

Share conversion - Class B to A

Repurchase of shares

Vesting of restricted share grants

Exercise of options

Shares withheld related to net settlement of equity awards

Balance, September 30, 2019

Share Repurchase Program

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In May 2020, the Company’s Board of Directors authorized the Company to repurchase up to an additional $ 15.0 million of the Company’s Class A common stock in the open market or in privately negotiated transactions (“2020 Share Repurchase Program”).

The amount and timing of the purchases under the 2020 Share Repurchase Program will depend on a number of factors including the price and availability of the Company’s shares, trading volume, capital availability, Company performance and general economic and market conditions.

The 2020 Share Repurchase Program can be suspended or discontinued at any time.

As of June 30, 2020, a total of 2,382,053 shares of Class A common stock had been repurchased under authorized share repurchase programs at a total cost of $ 33.1 million for an average price of $ 13.90 per share.

As of June 30, 2020, $ 11.9 million was available for future purchases.

The 2020 Share Repurchase Program expires when $ 15 million shares of Class A common stock are repurchased or on December 31, 2021.

As of September 30, 2020, a total of 2,911,402 shares of Class A common stock had been repurchased under authorized share repurchase programs at a total cost of $ 42.5 million for an average price of $ 14.59 per share.

As of September 30, 2020, $ 2.5 million was available for future purchases and on October 29, 2020, the 2020 Share Repurchase Program was completed.

On November 2, 2020, the Company’s Board of Directors authorized the Company to repurchase up to an additional $ 15.0 million of the Company’s Class A common stock through December 31, 2022 in open market or privately negotiated transactions (“Additional 2020 Share Repurchase Program”).

The amount and timing of the purchases under the 2020 Additional Share Repurchase Program will depend on a number of factors including the price and availability of the Company’s shares, trading volume, capital availability, Company performance and general economic and market conditions.

The Additional 2020 Share Repurchase Program can be suspended or discontinued at any time.

The Additional 2020 Share Repurchase Program expires when $ 15 million shares of Class A common stock are repurchased or on December 31, 2022.

Quarterly Dividends

During the three months ended June 30, 2020, the Company paid a quarterly dividend of $ 3.4 million.

Dividends paid during the six months ended June 30, 2020 included $ 6.8 million for the March and June 2020 quarterly dividends and $ 0.2 million in cash bonuses and distributions related to dividends previously declared upon vesting of restricted stock and stock option awards.

During the three months ended September 30, 2020, the Company paid a quarterly dividend of $ 4.1 million.

Dividends paid during the nine months ended September 30, 2020 totaled $ 11.5 million, comprised of $ 10.8 million in quarterly dividends and $ 0.7 million in cash bonuses and distributions related to dividends previously declared upon vesting of restricted stock and stock option awards.

Share‑Based Compensation

Current Period Activity

During the three months ended June 30, 2020, the Company issued restricted stock awards for 20,394 shares of common stock, of which awards for 15,741 shares were fully vested on the grant date and awards for 4,653 shares vest based on service over a three year period.

For the six months ended June 30, 2020, the Company issued restricted stock awards for 297,833 shares of common stock, of which awards for 18,979 shares were fully vested on the grant date and awards for 278,854 shares vest based on service over a three year period.

Stock option award and restricted stock award activity during the six months ended June 30, 2020 and 2019 was as follows:

During the three months ended September 30, 2020, the Company issued restricted stock awards for 484,010 shares of common stock, of which awards for 11,997 shares were fully vested on the grant date, awards for 57,576 shares vest based on service over a three year period, and awards for 414,437 shares vest based on service over a thirty month period.

For the nine months ended September 30, 2020, the Company issued restricted stock awards for 781,843 shares of common stock, of which awards for 30,976 shares were fully vested on the grant date, awards for 336,430 shares vest based on service over a three year period and awards for 414,437 shares vest based on service over a thirty month period.

Stock option award and restricted stock award activity during the nine months ended September 30, 2020 and 2019 was as follows:

Shares Subject to Stock Option Awards

Six Months Ended June 30,

Nine Months Ended September 30,

Outstanding at beginning of period

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Restricted Stock Awards

Six Months Ended June 30,

Nine Months Ended September 30,

Avg wtd grant-

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Dividend Payments

At June 30, 2020 and December 31, 2019, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $ 1.3 million, which was not recorded as a liability as of the balance sheet date.

At September 30, 2020 and December 31, 2019, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $ 1.0 million and $ 1.3 million, respectively, which was not recorded as a liability as of the balance sheet date.

A liability will be recorded for these cash bonuses and dividends when the restricted shares and options vest.

Share-Based Compensation Expense

The Company recorded $ 3.9 million and $ 3.8 million of share-based compensation expense in the three months ended June 30, 2020 and 2019, respectively, and $ 9.9 million and $ 5.3 million of share-based compensation in the six months ended June 30, 2020 and 2019, respectively, in personnel compensation and benefits in the unaudited Condensed Consolidated Statements of Operations.

The Company recorded $ 3.6 million and $ 4.8 million of share-based compensation expense in the three months ended September 30, 2020 and 2019, respectively, and $ 13.5 million and $ 10.1 million of share-based compensation in the nine months ended September 30, 2020 and 2019, respectively, in personnel compensation and benefits in the unaudited Condensed Consolidated Statements of Operations.

Earnings Per Share

The following table sets forth the reconciliation of basic earnings per share and diluted earnings per share from net income for the three months ended June 30, 2020 and 2019:

The following table sets forth the reconciliation of basic earnings per share and diluted earnings per share from net income for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

(in thousands except per share amounts)

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Earnings per share

Outstanding instruments excluded from the computation of weighted average shares for diluted earnings per share because the effect would be anti-dilutive totaled 0.6 million and 0.8 million for the three months ended June 30, 2020 and 2019, respectively, and 45 thousand and 1.6 million for the six months ended June 30, 2020 and 2019, respectively.

Outstanding instruments excluded from the computation of weighted average shares for diluted earnings per share because the effect would be anti-dilutive totaled 43 thousand and 0.3 million for the three months ended September 30, 2020 and 2019, respectively, and 43 thousand and 1.3 million for the nine months ended September 30, 2020 and 2019, respectively.

Holders of non-vested share-based compensation awards do not have rights to receive nonforfeitable dividends on the shares covered by the awards.

Accumulated Other Comprehensive Loss

The following table presents changes in accumulated other comprehensive loss by component for the six months ended June 30, 2020 and 2019.

The following table presents changes in accumulated other comprehensive loss by component for the nine months ended September 30, 2020 and 2019.

Available-for-

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Net current period other comprehensive loss

Balance, June 30, 2020

Balance, September 30, 2020

Balance, December 31, 2018

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Cumulative effect of adoption of ASU 2016-01 and 2018-02

Balance, June 30, 2019

Balance, September 30, 2019

Interest Rate Swaps

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Under the terms of the Swap, the Company pays interest at a fixed rate of interest and receive interest that varies with the three-month LIBOR rate.

The notional value, fixed rate of interest and expiration date of the Swap as of June 30, 2020 was $ 450 million – 3.465 % – July 1, 2026 .

The notional value, fixed rate of interest and expiration date of the Swap as of September 30, 2020 was $ 450 million – 3.465 % – July 1, 2026 .

Refer to Note 5, Fair Value Measurements, for additional disclosures regarding fair value measurements.

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The Swap is assessed for effectiveness and continued qualification for hedge accounting on a quarterly basis.

For the three months ended June 30, 2020 and since inception, the Swap was deemed to be highly effective.

For the three months ended September 30, 2020 and since inception, the Swap was deemed to be highly effective.

The Swap is designated as a cash flow hedge.

Accordingly, the Swap is measured at fair value with mark-to-market gains or losses deferred and included in accumulated other comprehensive income (loss), net of tax, to the extent the hedge is determined to be effective.

Accordingly, the Swap is measured at fair value with mark-to-market gains or losses deferred and included in accumulated other comprehensive loss, net of tax, to the extent the hedge is determined to be effective.

Gains or losses from the Swap are reclassified to interest expense in the same period during which the hedged transaction affects earnings.

The amount receivable from the Swap counterparty at June 30, 2020 of $ 0.5 million is recorded in other assets on the unaudited Condensed Consolidated Balance Sheets.

The following table summarizes the classification of the Swap in the unaudited Condensed Consolidated Balance Sheets at June 30, 2020 (in thousands):

June 30, 2020

Notional Amount

Balance Sheet Location

Interest rate swap

The amount payable to the Swap counterparty at September 30, 2020 of $ 0.7 million is recorded in other liabilities on the unaudited Condensed Consolidated Balance Sheets.

The following table summarizes the classification of the Swap in the unaudited Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019 (in thousands):

Balance Sheets

September 30, 2020

December 31, 2019

Other liabilities

The following table summarizes the effects of the Swap in the unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019 (in thousands):

Loss Recognized in AOCI, Net of Tax

Fair value of interest rate swap

Notional amount

The following tables summarize the effects of the Swap in the unaudited Condensed Consolidated Statements of Operations and unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 and (in thousands):

Three Months Ended

Six Months Ended

Interest rate swap

Gain Reclassified from AOCL into Interest Expense and Other Financing Costs

Nine Months Ended

September 30,

Statement of Operations

Interest expense and other financing costs

Loss reclassified from AOCL

Three Months Ended

Six Months Ended

Interest rate swap

Nine Months Ended

September 30,

Statements of Comprehensive Income

Other comprehensive loss

Loss recognized in AOCL, net of tax

EQUITY METHOD INVESTMENT

On September 20, 2020, the Company acquired, through a wholly owned subsidiary, a 15 % interest voting share and income share in Alderwood.

Alderwood’s operating entity, Alderwood Capital, is a London-based investment advisory firm focused on taking minority stakes in specialist boutique asset management businesses.

The Company has commitments to contribute additional capital of $ 4.5 million to Alderwood and $ 50 million to a private fund to be launched by Alderwood, subject to certain terms and conditions.

The Company analyzed its investment in Alderwood under the voting interest model and determined that it does not have a controlling financial interest over Alderwood and should not consolidate under the voting interest model.

Given the level of ownership interest in Alderwood, which is an English limited liability partnership, and the fact that Alderwood will maintain specific ownership accounts for investors, the Company accounts for its investment in Alderwood using the equity method of accounting.

For the three and nine months ended September 30, 2020, the Company recorded no gains or losses from its equity investment in Alderwood.

For the three and nine months ended September 30, 2019, the Company recognized a $ 2.9 million gain on sale of its equity investment in Cerebellum Capital, LLC (“Cerebellum”).

Gains and losses on equity method investments, including the gain on sale of the Cerebellum equity investment, are recorded in “Interest income and other income (expense)” in the unaudited Condensed Consolidated Statements of Operations.

Equity method investments are recorded in “Other assets” in the unaudited Condensed Consolidated Balance Sheets.

At September 30, 2020, the Company had a $ 1.5 million investment in Alderwood and no longer held an equity investment in Cerebellum.

SUBSEQUENT EVENTS

Subsequent to June 30, 2020, we reduced outstanding term loan principal by $ 20.5 million through repayments and open market term loan debt repurchases and retirements, for a total debt reduction of $ 239.8 million since July 1, 2019.

On August 5, 2020 , our Board of Directors declared a quarterly cash dividend of $ 0.06 per share on Victory common stock, a 20 % increase over the second quarter 2020.

The dividend is payable on September 25, 2020 , to stockholders of record on September 10, 2020 .

Subsequent to September 30, 2020, the Company repaid $ 20.0 million in term loan principal, for a total debt reduction of $ 282.8 million since July 1, 2019.

On November 4, 2020 , the Company announced that its Board of Directors declared a quarterly cash dividend of $ 0.07 per share on the Company’s common stock, an increase of 17 % and 40 %, respectively, over the third quarter 2020 and second quarter 2020 quarterly cash dividend.

The dividend is payable on December 28, 2020 , to stockholders of record on December 10, 2020 .

On November 4, 2020, the Company announced that its Board of Directors approved the Additional 2020 Share Repurchase Program authorizing the repurchase of up to $ 15 million of its Class A Common Stock through December 31, 2022 .

Under the new program, the Company may purchase its shares from time to time in the open market or in privately negotiated transactions.

The amount and timing of the purchases will depend on a number of factors including the price and availability of the Company’s shares, trading volume, capital availability, Company performance and general economic and market conditions.

The share repurchase program may be suspended or discontinued at any time.

On November 4, 2020, the Company announced the planned acquisition of THB Asset Management (“THB”), an investment management company headquartered in Norwalk, Connecticut.

THB currently manages approximately $ 435 million in the micro-cap, small-cap and mid-cap asset classes, including U.S., global and international strategies.

Aligning with the Company’s responsible

investing initiatives, all of THB’s strategies have environmental, social and governance (“ESG”) considerations fully integrated into their investment processes.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements