Victory Capital Holdings, Inc. 10-Q

Item 1. Financial Statements Victory Capital Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (U naudited) (In thousands, except shares data) September 30, 2021 December 31, 2020 Assets Cash and cash equivalents $ 64,740 $ 22,744 Receivables 103,180 88,182 Prepaid expenses 5,569 6,082 Investments, at fair value 29,801 23,493 Property and equipment, net 23,686 18,747 Goodwill 404,750 404,750 Other intangible assets, net 1,154,235 1,162,641 Other assets 5,069 4,090 Total assets $ 1,791,030 $ 1,730,729 Liabilities and stockholders' equity Accounts payable and accrued expenses $ 54,058 $ 42,144 Accrued compensation and benefits 44,536 47,278 Consideration payable for acquisition of business 103,100 92,500 Deferred tax liability, net 56,914 37,684 Other liabilities 30,858 34,573 Long-term debt, net 633,897 769,009 Total liabilities 923,363 1,023,188 Stockholders' equity Class A common stock, $ 0.01 par value per share: 2021 - 400,000,000 shares authorized, 20,149,558 shares issued and 16,203,371 shares outstanding; 2020 - 400,000,000 shares authorized, 19,388,671 shares issued and 16,205,689 shares outstanding 201 194 Class B common stock, $ 0.01 par value per share: 2021 - 200,000,000 shares authorized, 56,343,339 shares issued and 51,929,173 shares outstanding; 2020 - 200,000,000 shares authorized, 54,766,934 shares issued and 51,336,177 shares outstanding 563 548 Additional paid-in capital 665,898 647,602 Class A treasury stock, at cost: 2021 - 3,946,187 shares; 2020 - 3,182,982 shares ( 69,565 ) ( 47,844 ) Class B treasury stock, at cost: 2021 - 4,414,166 shares; 2020 - 3,430,757 shares ( 75,749 ) ( 47,080 ) Accumulated other comprehensive income (loss) 1,571 ( 7,460 ) Retained earnings 344,748 161,581 Total stockholders' equity 867,667 707,541 Total liabilities and stockholders' equity $ 1,791,030 $ 1,730,729 See the accompanying notes to the unaudited condensed consolidated financial statements. 3 Table of Contents Victory Capital Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue Investment management fees $ 171,355 $ 137,240 $ 499,672 $ 414,153 Fund administration and distribution fees 54,935 51,416 161,471 160,810 Total revenue 226,290 188,656 661,143 574,963 Expenses Personnel compensation and benefits 55,837 47,375 172,305 144,051 Distribution and other asset-based expenses 44,859 39,123 131,185 135,613 General and administrative 13,795 13,196 40,818 38,373 Depreciation and amortization 4,377 3,936 13,456 12,152 Change in value of consideration payable for acquisition of business 2,400 2,000 10,600 1,800 Acquisition-related costs 6,007 1,148 6,265 1,056 Restructuring and integration costs 18 1,285 2,493 4,888 Total operating expenses 127,293 108,063 377,122 337,933 Income from operations 98,997 80,593 284,021 237,030 Other (expense) income Interest income and other (expense) income ( 119 ) 1,120 4,547 ( 86 ) Interest expense and other financing costs ( 5,853 ) ( 8,187 ) ( 18,853 ) ( 29,305 ) Loss on debt extinguishment ( 669 ) ( 758 ) ( 4,596 ) ( 1,675 ) Total other expense, net ( 6,641 ) ( 7,825 ) ( 18,902 ) ( 31,066 ) Income before income taxes 92,356 72,768 265,119 205,964 Income tax expense ( 18,181 ) ( 17,027 ) ( 56,472 ) ( 48,337 ) Net income $ 74,175 $ 55,741 $ 208,647 $ 157,627 Earnings per share of common stock Basic $ 1.09 $ 0.82 $ 3.08 $ 2.33 Diluted $ 1.00 $ 0.76 $ 2.81 $ 2.14 Weighted average number of shares outstanding Basic 67,980 67,743 67,840 67,785 Diluted 74,053 73,437 74,162 73,703 Dividends declared per share of common stock $ 0.15 $ 0.06 $ 0.36 $ 0.16 See the accompanying notes to the unaudited condensed consolidated financial statements. 4 Table of Contents Victory Capital Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (U naudited) (In thousands) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income $ 74,175 $ 55,741 $ 208,647 $ 157,627 Other comprehensive income (loss), net of tax Net unrealized income (loss) on cash flow hedges 1,276 ( 621 ) 9,078 ( 8,970 ) Net unrealized income (loss) on foreign currency translation ( 56 ) 37 ( 47 ) ( 17 ) Total other comprehensive income (loss), net of tax 1,220 ( 584 ) 9,031 ( 8,987 ) Comprehensive income $ 75,395 $ 55,157 $ 217,678 $ 148,640 See the accompanying notes to the unaudited condensed consolidated financial statements. 5 Table of Contents Victory Capital Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (U naudited) (In thousands) Accumulated Additional Other Common Stock Treasury Stock Paid-In Comprehensive Retained Class A Class B Class A Class B Capital (Loss) Income Earnings Total Balance, December 31, 2020 $ 194 $ 548 $ ( 47,844 ) $ ( 47,080 ) $ 647,602 $ ( 7,460 ) $ 161,581 $ 707,541 Issuance of common stock — — — — 44 — — 44 Share conversion - Class B to A 2 ( 2 ) — — — — — — Repurchase of shares — — ( 7,122 ) — — — — ( 7,122 ) Shares withheld related to net settlement of equity awards — — — ( 10,916 ) — — — ( 10,916 ) Vesting of restricted share grants — 9 — — ( 9 ) — — — Exercise of options — 1 — — 789 — — 790 Other comprehensive income — — — — — 10,771 — 10,771 Share-based compensation — — — — 5,547 — — 5,547 Dividends paid — — — — — — ( 6,481 ) ( 6,481 ) Net income — — — — — — 65,202 65,202 Balance, March 31, 2021 196 556 ( 54,966 ) ( 57,996 ) 653,973 3,311 220,302 765,376 Issuance of common stock — — — — 53 — — 53 Share conversion - Class B to A 2 ( 2 ) — — — — — — Repurchase of shares — — ( 8,324 ) — — — — ( 8,324 ) Shares withheld related to net settlement of equity awards — — — ( 4,929 ) — — — ( 4,929 ) Vesting of restricted share grants — 2 — — ( 2 ) — — — Exercise of options — 2 — — 1,551 — — 1,553 Other comprehensive loss — — — — — ( 2,960 ) — ( 2,960 ) Share-based compensation — — — — 4,345 — — 4,345 Dividends paid — — — — — — ( 8,228 ) ( 8,228 ) Net income — — — — — — 69,270 69,270 Balance, June 30, 2021 198 558 ( 63,290 ) ( 62,925 ) 659,920 351 281,344 816,156 Issuance of common stock — — — — 73 — — 73 Share conversion - Class B to A 3 ( 3 ) — — — — — — Repurchase of shares — — ( 6,275 ) — — — — ( 6,275 ) Shares withheld related to net settlement of equity awards — — — ( 12,824 ) — — — ( 12,824 ) Vesting of restricted share grants — 5 ( 5 ) — — — Exercise of options — 3 — — 1,889 — — 1,892 Other comprehensive income — — — — — 1,220 — 1,220 Share-based compensation — — — — 4,021 — — 4,021 Dividends paid — — — — — — ( 10,771 ) ( 10,771 ) Net income — — — — — — 74,175 74,175 Balance, September 30, 2021 $ 201 $ 563 $ ( 69,565 ) $ ( 75,749 ) $ 665,898 $ 1,571 $ 344,748 $ 867,667 6 Table of Contents Accumulated Additional Other Retained Common Stock Treasury Stock Paid-In Comprehensive (Deficit) Class A Class B Class A Class B Capital (Loss) Income Earnings Total Balance, December 31, 2019 $ 181 $ 539 $ ( 21,524 ) $ ( 31,386 ) $ 624,766 $ — $ ( 34,705 ) $ 537,871 Issuance of common stock — — — — 26 — — 26 Share conversion - Class B to A 4 ( 4 ) — — — — — — Repurchase of shares — — ( 4,394 ) — — — — ( 4,394 ) Shares withheld related to net settlement of equity awards — — — ( 8,787 ) — — — ( 8,787 ) Vesting of restricted share grants — 7 — — ( 7 ) — — Exercise of options — 3 — — 1,690 — — 1,693 Other comprehensive loss — — — — — ( 4,887 ) — ( 4,887 ) Share-based compensation — — — — 5,993 — — 5,993 Dividends paid — — — — — — ( 3,601 ) ( 3,601 ) Net income — — — — — — 57,166 57,166 Balance, March 31, 2020 185 545 ( 25,918 ) ( 40,173 ) 632,468 ( 4,887 ) 18,860 581,080 Issuance of common stock — — — — 32 — — 32 Share conversion - Class B to A 2 ( 2 ) — — — — — — Repurchase of shares — — ( 7,186 ) — — — — ( 7,186 ) Shares withheld related to net settlement of equity awards — — — ( 739 ) — — — ( 739 ) Vesting of restricted share grants — 2 — — ( 2 ) — — Exercise of options — — — — 1 — — 1 Other comprehensive loss — — — — — ( 3,516 ) — ( 3,516 ) Share-based compensation — — — — 3,887 — — 3,887 Dividends paid — — — — — — ( 3,439 ) ( 3,439 ) Net income — — — — — — 44,720 44,720 Balance, June 30, 2020 187 545 ( 33,104 ) ( 40,912 ) 636,386 ( 8,403 ) 60,141 614,840 Issuance of common stock — — — — 35 — — 35 Share conversion - Class B to A 6 ( 6 ) — — — — — — Repurchase of shares — — ( 9,384 ) — — — — ( 9,384 ) Shares withheld related to net settlement of equity awards — — — ( 1,664 ) — — — ( 1,664 ) Vesting of restricted share grants — 2 — — ( 2 ) — — Exercise of options — 3 — — 1,425 — 1,428 Other comprehensive loss — — — — — ( 584 ) — ( 584 ) Share-based compensation — — — — 3,623 — — 3,623 Dividends paid — — — — — — ( 4,478 ) ( 4,478 ) Net income — — — — — — 55,741 55,741 Balance, September 30, 2020 $ 193 $ 544 $ ( 42,488 ) $ ( 42,576 ) $ 641,467 $ ( 8,987 ) $ 111,404 $ 659,557 See the accompanying notes to the unaudited condensed consolidated financial statements. 7 Table of Contents Victory Capital Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Nine Months Ended September 30, 2021 2020 Cash flows from operating activities Net income $ 208,647 $ 157,627 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes 16,116 25,439 Depreciation and amortization 13,456 12,152 Deferred financing costs and derivative and accretion expense 2,655 3,411 Stock-based and deferred compensation 20,779 14,187 Change in fair value of contingent consideration obligations 10,600 1,800 Unrealized (appreciation) depreciation on investments ( 4,159 ) 1,432 Loss on equity method investment 227 — Loss on debt extinguishment 4,596 1,675 Changes in operating assets and liabilities: Receivables ( 14,789 ) 15,487 Prepaid expenses 513 ( 483 ) Other assets 402 ( 11 ) Accounts payable and accrued expenses 10,615 ( 34,160 ) Accrued compensation and benefits ( 5,144 ) ( 13,994 ) Other liabilities ( 453 ) ( 1,842 ) Net cash provided by operating activities 264,061 182,720 Cash flows from investing activities Purchases of property and equipment ( 8,298 ) ( 7,046 ) Purchases of investments ( 9,415 ) ( 5,527 ) Sales of investments 7,267 3,553 Purchase of equity method investment — ( 1,500 ) Cost of asset acquisition ( 586 ) — Net cash used in investing activities ( 11,032 ) ( 10,520 ) Cash flows from financing activities Issuance of Class A common stock 170 93 Issuance of Class B common stock from exercise of stock options 4,235 3,122 Repurchase of common stock ( 25,872 ) ( 22,821 ) Payments of taxes related to net share settlement of equity awards ( 22,109 ) ( 9,145 ) Repayments and repurchases of long-term senior debt ( 142,000 ) ( 113,387 ) Payment of dividends ( 25,409 ) ( 11,518 ) Receipt of consideration for acquisition — 649 Net cash used in financing activities ( 210,985 ) ( 153,007 ) Effect of changes of foreign exchange rate on cash and cash equivalents ( 48 ) ( 30 ) Net increase in cash and cash equivalents 41,996 19,163 Cash and cash equivalents, beginning of period 22,744 37,121 Cash and cash equivalents, end of period $ 64,740 $ 56,284 Supplemental cash flow information Cash paid for interest $ 14,806 $ 32,371 Cash paid for income taxes 49,137 27,729 See the accompanying notes to the unaudited condensed consolidated financial statements. 8 Table of Contents Victory Capital Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. ORGANIZATION AND NATURE OF BUSINESS 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 Services, Inc. (“VCS”), formerly known as Victory Capital Advisers, Inc., which occurred 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.” On and effective July 1, 2019, the Company completed the acquisition (the “USAA AMCO Acquisition”) of USAA Asset Management Company (“USAA Adviser”) and the Victory Capital Transfer Agency, Inc. (“VCTA”), formerly known as the USAA Transfer Agency Company d/b/a USAA Shareholder Account Services (together with USAA Adviser, the “USAA Acquired Companies”). The USAA AMCO Acquisition includes USAA’s mutual fund and ETF businesses and its 529 College Savings Plan (collectively, the “USAA Mutual Fund Business”). Refer to Note 4, Acquisitions, for further details on the acquisition. On March 1, 2021, the Company completed the acquisition of THB Asset Management (“THB”), resulting in THB becoming the Company’s tenth investment franchise. At March 1, 2021, the THB AUM that was acquired totaled $ 547 million. THB manages responsible investment portfolios in the micro-cap, small-cap and mid-cap asset classes, including U.S., global and international strategies. Refer to Note 4, Acquisitions, for further details on the acquisition. On September 13, 2021, the Company announced that VCM had reached a definitive agreement to acquire 100 % of New Energy Capital Partners (“NEC”). Founded in 2004 and based in Hanover, New Hampshire, NEC is an alternative asset management firm focused on debt and equity investments in clean energy infrastructure projects and companies. On November 1, 2021, the acquisition of NEC was completed, resulting in NEC becoming the Company’s eleventh investment franchise. On September 24, 2021, the Company filed a Registration Statement on Form S-3 on behalf of Crestview Victory, Crestview, Reverence Capital Partners Opportunities Fund I, L.P., Reverence Capital Partners Opportunities Fund I (Cayman), L.P., and Reverence Capital Partners Opportunities Fund I (AI), L.P. (collectively, the “Reverence Capital Funds”) and RCP Lake Co-Invest, L.P. (the “Selling Shareholders”) to permit the Selling Shareholders to sell up to 44,973,804 shares of the Company’s Class A common stock from time to time. On October 13, 2021, the Form S-3 was declared effective. On September 27, 2021, the Company announced that its Board of Directors approved amendments to its corporate charter and bylaws to eliminate the Company’s dual-class share structure. The charter amendment is subject to shareholder approval at a Special Meeting of Stockholders scheduled for November 19, 2021. VCM is a registered investment adviser managing assets through mutual funds, institutional separate accounts, separately managed account products, unified managed account products, collective trust funds, private funds, undertakings for the collective investment in transferrable securities, other pooled vehicles and ETFs. VCM also provides mutual fund administrative services for the Victory Portfolios, Victory Variable Insurance Funds, Victory Institutional Funds and the mutual fund series of the Victory Portfolios II (collectively, the “Victory Funds”), a family of open-end mutual funds, the VictoryShares (the Company’s ETF brand), as well as the USAA Mutual Fund Business, which includes the USAA Mutual Fund Trust, a family of open-end mutual funds (the “USAA Funds”). Additionally, VCM employs all of the Company’s United States investment professionals across its Franchises and Solutions, which are not separate legal entities. VCM’s three wholly-owned subsidiaries are RS Investment Management (Singapore) Pte. Ltd., RS Investments (Hong Kong) Limited, and RS Investments (UK) Limited. VCS is registered with the SEC as a limited purpose broker-dealer and serves as distributor and underwriter for the Victory Funds and USAA Funds. VCTA is registered with the SEC as a transfer agent for the USAA Funds. NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete annual financial statements. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. 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. Certain prior period amounts have been reclassified to conform to the current year presentation. Operating results for the 9 Table of Contents three- and nine -month period s end ing September 30 , 20 2 1 are not necessarily indicative of the results that may be expected for the year ending December 31, 20 2 1 . 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. The Company owns 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. 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, 2020. Use of Estimates and Assumptions The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements and the notes. Actual results may ultimately differ materially from those estimates. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. 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 nine months ended September 30, 2021. New Accounting Pronouncements Accounting Standards Adopted in 2021 • Internal-Use Software: Effective January 1, 2021 , the Company adopted, on a prospective basis, Accounting Standards Update (“ASU”) 2018-15 (“ASU 2018-15”), "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)," which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those of developing or obtaining internal-use software. The adoption had no impact on the Company’s consolidated financial statements. • Subsequent Measurement of Goodwill: Effective January 1, 2021 , the Company adopted, on a prospective basis, ASU 2017-04 (“ASU 2017-04”), “Intangibles – Goodwill and Other (Topic 350)” (“ASU 2017-04”) which simplifies the test for goodwill impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill (step two) to measure a goodwill impairment charge. Goodwill impairment will be based upon the results of step one of the impairment test, which is defined as the excess of the carrying amount of a reporting unit over its fair value, not to exceed the carrying amount of goodwill allocated to that reporting unit. The adoption had no impact on the Company’s consolidated financial statements. Recently Issued Accounting Standards • Reference Rate Reform: In March 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU 2020-04, (“ASU 2020-04”), “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 contains optional practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The amendments in this guidance are effective for all entities from March 12, 2020 through December 31, 2022, and the amendments for contract modifications may be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. Interest payable on the Company’s outstanding term loans under the 2019 Credit Agreement and amounts receivable or payable under the Company’s Swap are based on the three month LIBOR rate. The Company is currently assessing the practical expedients and exceptions available under ASU 2020-04 as it prepares for the future discontinuance of this LIBOR rate. • Expected Credit Losses: In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 creates a new model for determining current expected credit losses (“CECL”) on trade and other receivables, net investments in leases, contract assets and long-term receivables. The CECL impairment model requires companies to consider the risk of loss even if it is remote and to include forecasts of future economic conditions as well as information about past events and current conditions. The effective date for calendar-year public business entities is January 1, 2020. As an emerging growth company (“EGC”), the 10 Table of Contents Company will adopt ASU 2016-13 on January 1, 2023 and is currently reviewing the effect of this new standard on its consolidated financial statements . • Leases: 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”). The New Lease Standard requires lessees to recognize a right-of-use asset and a lease liability for all leases (with the exception of short-term leases) on their balance sheet at the commencement date and recognize expenses on their income statement similar to ASC Topic 840 guidance. In addition, the FASB issued ASU 2018-11, Leases Targeted Improvements, which provides a package of practical expedients for entities to apply upon adoption. The effective date for calendar-year public business entities was January 1, 2019. 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 Victory’s EGC status, the Company will adopt the New Lease Standard 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, 2020, the Company has approximately $ 16.5 million in undiscounted, future minimum cash commitments under net operating leases. The New Lease Standard is expected to result in a gross up on the Consolidated Balance Sheets and to have no material impact to the Consolidated Statements of Operations, liquidity or the Company’s debt covenant compliance under the current credit agreement. NOTE 3. Revenue RECOGNITION In accordance with revenue recognition standard requirements, the following table disaggregates our revenue by type and product: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Investment management fees Mutual funds (Victory/USAA Funds) $ 137,433 $ 112,983 $ 399,854 $ 337,355 ETFs (VictoryShares) 4,338 2,890 11,792 8,498 Separate accounts and other vehicles 31,357 24,318 92,000 71,920 Performance-based fees Mutual funds (USAA Funds) ( 1,402 ) ( 2,699 ) ( 4,394 ) ( 2,699 ) Separate accounts and other vehicles ( 371 ) ( 252 ) 420 ( 921 ) Total investment management fees 171,355 137,240 499,672 414,153 Fund administration and distribution fees Administration fees Mutual funds (Victory/USAA Funds) 30,874 27,605 89,891 83,948 ETFs (VictoryShares) 477 370 1,378 1,055 Distribution fees Mutual funds (Victory/USAA Funds) 7,340 6,296 21,624 18,999 Transfer agent fees Mutual funds (USAA Funds) 16,244 17,145 48,578 56,808 Total fund administration and distribution fees 54,935 51,416 161,471 160,810 Total revenue $ 226,290 $ 188,656 $ 661,143 $ 574,963 The following table presents balances of receivables: (in thousands) September 30, 2021 December 31, 2020 Customer receivables Mutual funds (Victory/USAA Funds) $ 65,512 $ 60,868 ETFs (VictoryShares) 1,712 1,419 Separate accounts and other vehicles 24,065 22,641 Receivables from contracts with customers 91,289 84,928 Non-customer receivables 11,891 3,254 Total receivables $ 103,180 $ 88,182 11 Table of Contents Revenue The Company’s revenue includes fees earned from providing; • investment management services, • fund administration services, • fund transfer agent services, and • fund distribution services. Revenue is recognized for each distinct performance obligation identified in customer contracts when the performance obligation has been satisfied by transferring services to a customer either over time or at the point in time when the customer obtains control of the service. Revenue is recognized in the amount of variable or fixed consideration allocated to the satisfied performance obligation that Victory expects to be entitled to in exchange for transferring services to a customer. Variable consideration is included in the transaction price only when it is probable that a significant reversal of such revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved. 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. 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. The Company has contractual arrangements with third parties to provide certain advisory, administration, transfer agent and distribution services. Management considers whether we are acting as the principal service provider or as an agent to determine whether revenue should be recorded based on the gross amount payable by the customer or net of payments to third-party service providers, respectively. Victory is considered a principal service provider if we control the service that is transferred to the customer. We are considered an agent when we arrange for the service to be provided by another party and do not control the service. Investment Management Fees Investment management fees are received in exchange for investment management services that represent a series of distinct incremental days of investment management service. Control of investment management services is transferred to the customers over time as these customers receive and consume the benefits provided by these services. Investment management fees are calculated as a contractual percentage of AUM and are generally paid in arrears on a monthly or quarterly basis. Investment management fees are recognized as revenue using a time-based output method to measure progress. Revenue is recorded at month end or quarter end when the value of consideration is measured. The amount of investment management fee revenue varies from one reporting period to another as levels of AUM change (from inflows, outflows and market movements) and as the number of days in the reporting period change. The Company may waive certain fees for investment management services provided to the Victory Funds, USAA Funds, VictoryShares and other pooled investment vehicles and may subsidize certain share classes of the Victory Funds, USAA Funds, VictoryShares and other pooled investment vehicles to ensure that specified operating expenses attributable to such share classes do not exceed a specified percentage. These waivers and reimbursements reduce the transaction price allocated to investment management services and are recognized as a reduction to investment management fees revenue. The amounts due to the Victory Funds, USAA Funds, VictoryShares and other pooled investment vehicles for waivers and expense reimbursements represent consideration payable to customers, which is recorded in accounts payable and accrued expenses in the unaudited Condensed Consolidated Balance Sheets, and no distinct services are received in exchange for these payments. Performance‑based investment management fees, which include fees under performance fee and fulcrum fee arrangements, are included in the transaction price for providing investment management services. 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 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 performance fee adjustment, increasing or decreasing the total 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. 12 Table of Contents Fund Administration Fees The Company recognizes fund administration fees as revenue using a time-based output method to measure progress. Fund administration fees are determined based on the contractual rate applied to average daily net assets of the Victory Funds, USAA Funds and VictoryShares for which administration services are provided. Revenue is recorded on a monthly basis when the value of consideration is measured using actual average daily net assets and constraints are removed. The Company’s fund administration fee revenue is recorded in fund administration and distribution fees in the unaudited Condensed Consolidated Statements of Operations. The Company has contractual arrangements with a third party to provide certain sub-administration services. We are the primary obligor under the contracts with the Victory Funds, USAA Funds and VictoryShares and have the ability to select the service provider and establish pricing. As a result, fund administration fees and sub-administration expenses are recorded on a gross basis. Fund Transfer Agent Fees The Company recognizes fund transfer agent fees using a time-based output method to measure progress. Fund transfer agent fees are determined based on the contractual rate applied to either the average daily net assets of the USAA Funds for which transfer agent services are provided or number of accounts in the USAA Funds. Revenue is recorded on a monthly basis when the value of consideration is measured using actual average daily net assets or actual number of accounts and constraints are removed. The Company’s fund transfer agent fee revenue is recorded in fund administration and distribution fees in the unaudited Condensed Consolidated Statements of Operations. The Company also receives fees for sub-transfer agency services under contracts with the Victory Funds for member class shares. Sub-transfer agency fees are recognized and recorded in a manner similar to fund transfer agent fees and are recorded in fund administration and distribution fees in the unaudited Condensed Consolidated Statements of Operations. The Company has contractual arrangements with a third party to provide certain sub-transfer agent services. As the Company is the primary obligor under the transfer agency contracts with the USAA Funds and has the ability to select the service provider and establish pricing, fund transfer agent fees and sub-transfer agent expenses are recorded on a gross basis. Fund Distribution Fees The Company receives compensation for sales and sales-related services promised under distribution contracts with the Victory Funds and USAA Funds. 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. 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. Based on the nature of the calculation, the revenue for these services is accounted for as variable consideration, the Company may recognize distribution fee revenue in the current period that pertains to performance obligations satisfied in prior periods, as it represents variable consideration and is recognized as uncertainties are resolved. The Company’s distribution fee revenue is recorded in fund administration and distribution fees in the unaudited Condensed Consolidated Statements of Operations. The Company has contractual arrangements with third parties to provide certain distribution services. The Company is the primary obligor under the contracts with the Victory Funds and USAA Funds and has the ability to select the service provider and establish pricing. Substantially all of the Company’s revenue is recorded gross of payments made to third parties. Costs Incurred to Obtain or Fulfill Customer Contracts The Company is required to capitalize certain costs directly related to the acquisition or fulfillment of a contract with a customer. Victory has not identified any sales-based compensation or similar costs that meet the definition of an incremental cost to acquire a contract and as such we have no intangible assets related to contract acquisitions. Direct costs incurred to fulfill services under the Company’s distribution contracts include sales commissions paid to third party dealers for the sale of Class C Shares. The Company may pay upfront sales commissions to dealers and institutions that sell Class C shares of the participating Victory Funds at the time of such sale. Upfront sales commission payments with respect to Class C shares equal 1.00 % of the purchase price of the Class C shares sold by the dealer or institution. When the Company makes an upfront payment to a dealer or institution for the sale of Class C shares, the Company capitalizes the cost of such payment, which is recorded in Prepaid expenses in the unaudited Condensed Consolidated Balance Sheets and amortizes the cost over a 12-month period, the estimated period of benefit. Valuation of Assets Under Management The fair value of assets under management of the Victory Funds, USAA Funds and VictoryShares is primarily determined using quoted market prices or independent third-party pricing services or broker price quotes. In limited circumstances, a quotation or price 13 Table of Contents evaluation is not readily available from a pricing service. In these cases, pricing is determined by management based on a prescribed valuation process that has been approved by the directors/trustees of the sponsored products. The same prescribed valuation process is used to price securities in separate accounts and other vehicles for which a quotation or price evaluation is not readily available from a pricing service. For the periods presented, a de minimis amount of the AUM was priced in this manner. NOTE 4. ACQUISITIONS NEC Acquisition On September 13, 2021, the Company announced that VCM had reached a definitive agreement to acquire 100 % of NEC. Founded in 2004 and based in Hanover, New Hampshire, NEC is an alternative asset management firm focused on debt and equity investments in clean energy infrastructure projects and companies. On November 1, 2021, the acquisition of NEC was completed, resulting in NEC becoming the Company’s eleventh investment franchise. Under the terms of the purchase agreement, the Company paid the sellers approximately $ 65 million in cash at closing and will pay up to an additional $ 35 million in cash based on revenue growth over a six year period following the closing date. THB Acquisition On March 1, 2021, the Company completed the acquisition of certain assets of THB, including without limitation, (i) certain investment advisory and business contracts, (ii) certain books and records, (iii) the investment performance track record, and (iv) all business intellectual property and proprietary software, and hired the THB investment team, resulting in THB becoming the Company’s tenth investment franchise. At March 1, 2021, the THB AUM that was acquired totaled $ 547 million. THB manages responsible investment portfolios in the micro-cap, small-cap and mid-cap asset classes, including U.S., global and international strategies . Because substantially all of the fair value of the acquired assets was concentrated in a single identifiable asset, the transaction was accounted for as an asset acquisition. Estimated acquisition costs of $ 0.6 million were allocated to a definite-lived customer relationship intangible asset . USAA AMCO Acquisition On and effective July 1, 2019, the Company completed the USAA AMCO Acquisition which expanded and diversified the Company’s investment platform and increased the Company’s size and scale. The acquisition also provided the Company the rights to offer products and services using the USAA brand and the opportunity to offer its products to USAA members through a direct distribution channel. 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. During the fourth quarter of 2020, the Company paid $ 37.5 million in cash to sellers for the first annual earn out period. A maximum of $ 112.5 million in contingent consideration ($ 37.5 million per year for the remaining 3 years of the earn out period) was payable to sellers as of September 30, 2021. The estimated fair value of contingent consideration payable to sellers is determined using the real options method. Revenue related to “non-managed money” assets is simulated in a risk-neutral framework to calculate expected probability-weighted earn out payments, which are then discounted from the expected payment dates at the relevant cost of debt. 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. The market price of risk and revenue volatility are based on data for comparable companies. As the contingent consideration represents a subordinate, unsecured claim of the Company, the Company assesses a discount rate which incorporates adjustments for credit risk and the subordination of the contingent consideration . 14 Table of Contents Significant inputs to the valuation of contingent consideration payable to sellers as of September 30, 2021 and December 31, 2020 are as follows and are approximate values: September 30, 2021 December 31, 2020 Non-managed money revenue average annual growth rate 4.3 % 2.8 % Market price of risk (continuous) 7.3 % 6.8 % Revenue volatility 18.4 % 15.6 % Discount rate 2.4 % 3.1 % Years remaining in earn out period 2.1 2.9 Undiscounted estimated remaining earn out payments in millions $105.9 - $112.5 $97.7 - $112.5 The estimated fair value of contingent consideration payable to sellers is recorded in consideration payable for acquisition of business in the unaudited Condensed Consolidated Balance Sheets and was estimated at $ 103.1 million at September 30, 2021, which included $ 37.5 million expected to be paid for the second earnout period, as compared to $ 92.5 million at December 31, 2020. The increase in the liability of $ 2.4 million and $ 10.6 million in the three and nine months ended September 30, 2021, respectively, and an increase of $ 2.0 million and $ 1.8 million for 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 . Acquisition-Related Costs Costs related to acquisitions include legal and filing fees, advisory services, mutual fund proxy voting costs and other one-time expenses related to completed and potential transactions. These costs are included in acquisition-related costs in the unaudited Condensed Consolidated Statements of Operations. For the three and nine months ended September 30, 2021, the Company recorded $ 6.0 million and $ 6.3 million, respectively, in acquisition-related costs related to the NEC, THB and USAA AMCO acquisitions and other transactions. Included in these amounts is an estimated liability for one-time payments related to the USAA AMCO Acquisition for assets not acquired in the transaction. Restructuring and Integration Costs 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 nine months ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, (in millions) 2021 2020 2021 2020 Liability balance, beginning of period $ 0.8 $ 2.8 $ 1.0 $ 3.0 Severance expense - - 1.8 0.9 Integration costs - 1.3 0.7 4.0 Total restructuring and integration costs - 1.3 2.5 4.9 Settlement of liabilities ( 0.3 ) ( 1.2 ) ( 3.0 ) ( 5.0 ) Liability balance, end of period $ 0.5 $ 2.9 $ 0.5 $ 2.9 Restructuring and integration costs incurred in the three and nine month periods in 2021 and 2020 primarily relate to the USAA AMCO Acquisition. NOTE 5. Fair Value Measurements The Company determines the fair value of certain financial and nonfinancial assets and liabilities. Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value determinations utilize a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the fair value hierarchy contains three levels: • Level 1—Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets. 15 Table of Contents • Level 2—Valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets and other observable inputs directly or indirectly related to the asset or liability being measured. • Level 3—Valuation inputs are unobservable and significant to the fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The table below shows assets and liabilities measured at fair value on a recurring basis. As of September 30, 2021 (in thousands) Total Level 1 Level 2 Level 3 Financial Assets Money Market Fund $ 10,089 $ 10,089 $ — $ — Investments in Proprietary Funds 886 886 — — Deferred Compensation Plan Investments 28,915 28,915 — — Interest Rate Swap Asset 1,989 — 1,989 — Total Financial Assets $ 41,879 $ 39,890 $ 1,989 $ — Financial Liabilities Contingent Consideration Arrangements (1) ( 103,100 ) — — ( 103,100 ) Total Financial Liabilities $ ( 103,100 ) $ — $ — $ ( 103,100 ) As of December 31, 2020 (in thousands) Total Level 1 Level 2 Level 3 Financial Assets Money Market Fund $ 10,088 $ 10,088 $ — $ — Investments in Proprietary Funds 922 922 — — Deferred Compensation Plan Investments 22,571 22,571 — — Total Financial Assets $ 33,581 $ 33,581 $ — $ — Financial Liabilities Interest Rate Swap Liability $ ( 10,006 ) $ — $ ( 10,006 ) $ — Contingent Consideration Arrangements (1) ( 92,500 ) — — ( 92,500 ) Total Financial Liabilities $ ( 102,506 ) $ — $ ( 10,006 ) $ ( 92,500 ) (1) Refer to Note 4, Acquisitions, for further information regarding the Company’s contingent consideration arrangements. Level 1 assets consist of money market funds and open-end mutual funds. The fair values for these assets are determined utilizing quoted market prices for identical assets. The money market fund is included in cash and cash equivalents in the unaudited Condensed Consolidated Balance Sheets and proprietary fund investments and deferred compensation plan investments are included in investments in the unaudited Condensed Consolidated Balance Sheets. The interest rate swap (the “Swap”) asset and liability represent amounts receivable or payable 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. On February 18, 2021, pursuant to the Second Amendment, the Company lowered the spread on the Term Loan by 0.25 % resulting in a new fixed rate of 3.215 % on the $ 450 million of Term Loan subject to the Swap. The fair value of the Swap is included in the unaudited Condensed Balance Sheets in other assets at September 30, 2021 and in other liabilities as of December 31, 2020. Pricing is determined based on a third party, model-derived valuation in which all significant inputs are observable in active markets (Level 2). Refer to Note 14, Derivatives, for further detail on the Swap. 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. Refer to Note 4, Acquisitions, for further details related to the contingent consideration arrangement. 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. Refer to Note 4, Acquisitions, for further details related to the valuation of contingent consideration payable related to the USAA AMCO Acquisition. 16 Table of Contents Changes in the fair value of contingent consideration arrangement liabilit ies , realized or unrealized, are recorded in earnings and are included in c hange in value of consideration payable for acquisition of business in the u naudited Condensed Consolidated Statements of Operations. The following table presents the change in contingent consideration arrangement liabilities for the nine months ended September 30, 2021. (in thousands) Contingent Consideration Liabilities Balance, December 31, 2020 $ ( 92,500 ) USAA AMCO change in fair value measurement ( 10,600 ) Balance, September 30, 2021 $ ( 103,100 ) There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy from December 31, 2020 to September 30, 2021. 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 September 30, 2021 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. NOTE 6. Related-Party Transactions The Company considers certain funds that it manages, including the Victory Funds, the USAA Funds, the VictoryShares, collective trust funds that it sponsors (the “Victory Collective Funds”) and certain other pooled investment vehicles, to be related parties as a result of our advisory relationship. The Company receives investment management, administrative, distribution and compliance fees in accordance with contracts that VCM and VCS have with the Victory Funds and the USAA Funds and has invested a portion of its balance sheet cash in the USAA Treasury Money Market Fund and earns interest on the amount invested in this fund. The Company receives investment management, administrative and compliance fees in accordance with contracts that VCM has with the VictoryShares. We also receive investment management fees from the Victory Collective Funds and certain other pooled investment vehicles under VCM’s advisory contracts with these funds. In addition, VCTA receives fees for transfer agency services under contracts with the USAA Funds and sub-transfer agency services under contracts with the Victory Funds for member class shares. Director fees payable by the Company in cash and contributions made under the Director Deferred Compensation Plan for non-employee members of our Board of Directors are included in general and administrative expense in the unaudited Condensed Consolidated Statements of Operations. The table below presents balances and transactions involving related parties included in the unaudited Condensed Consolidated Balance Sheets and unaudited Condensed Consolidated Statements of Operations. • Included in cash and cash equivalents is cash held in the USAA Treasury Money Market Fund. • Included in receivables (fund administration and distribution fees) are amounts due from the Victory Funds and USAA Funds for compliance services and amounts due from the USAA Funds and Victory Funds for transfer agent and sub-transfer agent services. • Included in revenue (fund administration and distribution fees) are amounts earned for compliance services, transfer agent services and sub-transfer agent services. • Realized and unrealized gains and losses and dividend income on investments in the Victory Funds and USAA Funds classified as investments in proprietary funds and deferred compensation plan investments 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, VictoryShares and certain other pooled investment vehicles 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. 17 Table of Contents (in thousands) September 30, 2021 December 31, 2020 Related party assets Cash and cash equivalents $ 10,089 $ 10,088 Receivables (investment management fees) 52,166 46,958 Receivables (fund administration and distribution fees) 18,012 16,971 Investments (investments in proprietary funds, fair value) 886 922 Investments (deferred compensation plan investments, fair value) 27,170 22,062 Total $ 108,323 $ 97,001 Related party liabilities Accounts payable and accrued expenses (fund reimbursements) $ 7,015 $ 5,978 Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Related party revenue Investment management fees $ 144,978 $ 115,376 $ 419,744 $ 348,653 Fund administration and distribution fees 54,935 51,416 161,471 160,809 Total $ 199,913 $ 166,792 $ 581,215 $ 509,462 Related party expense General and administrative $ 125 $ — $ 388 $ — Total $ 125 $ — $ 388 $ — Related party other income (expense) Interest income and other income (expense) $ ( 330 ) $ 828 $ 4,253 $ ( 1,268 ) NOTE 7. Investments At September 30, 2021 and December 31, 2020, the Company had investments in proprietary funds and deferred compensation plan investments. Investments in proprietary funds consist entirely of seed capital investments in certain Victory Funds and USAA Funds. Deferred compensation plan investments are held under deferred compensation plans and include Victory Funds, USAA Funds and third-party mutual funds. Unrealized and realized gains and losses on investments in proprietary funds and deferred compensation plan investments are recorded in earnings as interest income and other income (expense). Investments in Proprietary Funds The following table presents a summary of the cost and fair value of investments in proprietary funds: Gross Unrealized Fair (in thousands) Cost Gains (Losses) Value As of September 30, 2021 $ 687 $ 202 $ ( 3 ) $ 886 As of December 31, 2020 758 164 — 922 There were no proceeds from sales and realized gains and losses from investments in proprietary funds for the three months ended September 30, 2021 and 2020. Sales and realized gains and losses for the nine months ended September 30, 2021 and 2020 were as follows: Sale Realized (in thousands) Proceeds Gains (Losses) For the nine months ended September 30, 2021 $ 215 $ 50 $ — For the nine months ended September 30, 2020 274 18 ( 13 ) 18 Table of Contents Deferred Compensation Plan Investments The following table presents a summary of the cost and fair value of deferred compensation plan investments : Gross Unrealized Fair (in thousands) Cost Gains (Losses) Value As of September 30, 2021 $ 24,125 $ 4,967 $ ( 177 ) $ 28,915 As of December 31, 2020 21,205 1,725 ( 359 ) 22,571 Proceeds from sales of deferred compensation plan investments and realized gains and losses recognized during the three and nine months ended September 30, 2021 and 2020 are as follows : Sale Realized (in thousands) Proceeds Gains (Losses) For the three months ended September 30, 2021 $ 3,246 $ 383 $ ( 13 ) For the three months ended September 30, 2020 1,289 48 ( 166 ) Sale Realized (in thousands) Proceeds Gains (Losses) For the nine months ended September 30, 2021 $ 7,051 $ 690 $ ( 41 ) For the nine months ended September 30, 2020 3,279 85 ( 308 ) NOTE 8. Income Taxes The effective tax rate for the three and nine months ended September 30, 2021 and 2020 differs from the United States federal statutory rate primarily as a result of state and local income taxes and excess tax benefits on share-based compensation. For the three months ended September 30, 2021 and 2020, the provision for income taxes was $ 18.2 million and $ 17.0 million, or 19.7 % and 23.4 %, of pre-tax income respectively. For the nine months ended September 30, 2021 and 2020, the provision for income taxes was $ 56.5 million and $ 48.3 million, or 21.3 % and 23.5 % of pre-tax income, respectively. The effective tax rate for the three and nine months ended September 30, 2021 was lower than the effective tax rate for the same periods in 2020 mainly due to higher excess tax benefits on share-based compensation. No valuation allowance was recorded for deferred tax assets in the periods ended September 30, 2021 and 2020. NOTE 9. Debt 2020 Debt Repricing 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. The Company refinanced the 2019 term loans for a reduced applicable margin on LIBOR of 75 basis points . After the January 2020 repricing, the applicable margin on LIBOR was 2.50 %, compared to 3.25 % under the 2019 term loans. 2021 Debt Repricing On February 18, 2021, the Company entered into the Second Amendment (the “Second 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 Second Amendment, the Company repriced the existing term loans (the “Existing Term Loans”) with replacement term loans in an aggregate principal amount of $ 755.7 million (the “Repriced Term Loans”). The Repriced Term Loans provide for substantially the same terms as the Existing Term Loans, including the same maturity date of July 2026 , except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 25 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.25 %, compared to 2.50 % under the Existing Term Loans. During the nine months ended September 30, 2021 and 2020, the Company incurred costs of $ 0.4 million and $ 0.9 million related to the Second Amendment and First Amendment, respectively, which were recorded in general and administrative expense in the unaudited Condensed Consolidated Statements of Operations ($ 0 for the three months ended September 30, 2021 and 2020). 19 Table of Contents The following table summarizes the components of long-term debt in the unaudited Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020: (in thousands) September 30, 2021 December 31, 2020 Effective Interest Rate Term Loans Due July 2026, 2.73 % interest rate $ — $ 788,239 3.17 % Due July 2026, 2.39 % interest rate 646,239 — 2.79 % Term loan principal outstanding 646,239 788,239 Unamortized debt issuance costs ( 7,744 ) ( 12,065 ) Unamortized debt discount ( 4,598 ) ( 7,165 ) Long-term debt, net $ 633,897 $ 769,009 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 September 30, 2021, there were no outstanding borrowings under the revolving credit facility and the Company was in compliance with its financial performance covenant. Refer to Note 16, Subsequent Events, for information related to borrowings under the revolving credit facility subsequent to September 30, 2021. Repayments of outstanding term loans under the 2019 Credit Agreement totaled $ 35.0 million and $ 142.0 million for the three and nine months ended September 30, 2021, respectively. The Company recognized a loss on debt extinguishment of $ 0.7 million and $ 4.6 million in the three and nine months ended September 30, 2021, respectively, due to repayments of term loan principal and entering into the Second Amendment. A total of $ 43.5 million and $ 114.8 million of the outstanding term loans under the 2019 Credit Agreement was repaid or repurchased and retired during the three and nine months ended September 30, 2020, respectively. The Company recognized a net loss on debt extinguishment of $ 0.8 million and $ 1.7 million in the three and nine months ended September 30, 2020 due to term loan repurchases and repayments and entering into the First Amendment. On November 4, 2021, in connection with executing the WestEnd Purchase Agreement, the Company secured commitments for a $ 505.0 million senior secured incremental first lien term loan B facility. See Note 16, Subsequent Events, for additional information on the incremental facility. Interest Expense 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 September 30, 2021 and 2020 : For the Three Months Ended September 30, For the Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Interest expense $ 4,002 $ 6,236 $ 13,279 $ 25,260 Amortization of debt issuance costs 554 739 1,801 2,275 Amortization of debt discount 257 367 854 1,136 Interest rate swap expense 947 724 2,639 205 Other 93 121 280 429 Total $ 5,853 $ 8,187 $ 18,853 $ 29,305 20 Table of Contents NOTE 10. Equity Shares Rollforward The following tables present the changes in the number of shares of common stock issued and repurchased (in thousands): Shares of Common Stock Issued Shares of Treasury Stock Class A Class B Class A Class B Balance, December 31, 2020 19,389 54,767 ( 3,183 ) ( 3,431 ) Issuance of shares 1 — — — Share conversion - Class B to A 221 ( 221 ) — — Repurchase of shares — — ( 287 ) — Vesting of restricted share grants — 953 — — Exercise of options — 109 — — Shares withheld related to net settlement of equity awards — — — ( 431 ) Balance, March 31, 2021 19,611 55,608 ( 3,470 ) ( 3,862 ) Issuance of shares 2 — — — Share conversion - Class B to A 204 ( 204 ) — — Repurchase of shares — — ( 288 ) — Vesting of restricted share grants — 143 — — Exercise of options — 236 — — Shares withheld related to net settlement of equity awards — — — ( 159 ) Balance, June 30, 2021 19,817 55,783 ( 3,758 ) ( 4,021 ) Issuance of shares 2 — — — Share conversion - Class B to A 331 ( 331 ) — — Repurchase of shares — — ( 188 ) — Vesting of restricted share grants — 501 — — Exercise of options — 390 — — Shares withheld related to net settlement of equity awards — — — ( 393 ) Balance, September 30, 2021 20,150 56,343 ( 3,946 ) ( 4,414 ) Shares of Common Stock Issued Shares of Treasury Stock Class A Class B Class A Class B Balance, December 31, 2019 18,100 53,937 ( 1,685 ) ( 2,656 ) Issuance of shares 2 — — — Share conversion - Class B to A 406 ( 406 ) — — Repurchase of shares — — ( 240 ) — Vesting of restricted share grants — 719 — — Exercise of options — 288 — — Shares withheld related to net settlement of equity awards — — — ( 445 ) Balance, March 31, 2020 18,508 54,538 ( 1,925 ) ( 3,101 ) Issuance of shares 2 — — — Share conversion - Class B to A 207 ( 207 ) — — Repurchase of shares — — ( 457 ) — Vesting of restricted share grants — 173 — — Exercise of options — — — — Shares withheld related to net settlement of equity awards — — — ( 43 ) Balance, June 30, 2020 18,717 54,504 ( 2,382 ) ( 3,144 ) Issuance of shares 2 — — — Share conversion - Class B to A 631 ( 631 ) — — Repurchase of shares — — ( 529 ) — Vesting of restricted share grants — 197 — — Exercise of options — 330 — — Shares withheld related to net settlement of equity awards — — — ( 91 ) Balance, September 30, 2020 19,350 54,400 ( 2,911 ) ( 3,235 ) 21 Table of Contents Share Repurchase Program In May 2021, the Company’s Board of Directors authorized a share repurchase program whereby the Company may 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. The Board’s authorization does not obligate the Company to acquire any particular amount of Class A common stock. The amount and timing of purchases under the share repurchase program authorized in May 2021 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 program can be modified, suspended or discontinued at any time and expires when $ 15 million shares of Class A common stock have been repurchased or on December 31, 2022. During the three and nine months ended September 30, 2021, the Company repurchased 188,525 and 763,205 shares of Class A common stock at a total cost of $ 6.3 million and $ 21.7 million for an average price of $ 33.29 and $ 28.46 per share. As of September 30, 2021, a total of $ 5.4 million was available for future repurchases under the current share repurchase program, and a cumulative total of 3,946,187 shares of Class A common stock had been repurchased under programs authorized by the Company’s Board of Directors at a total cost of $ 69.6 million for an average price of $ 17.63 per share. Dividend Payments Dividends paid or payable for the three and nine months ended September 30, 2021 totaled $ 10.8 million and $ 25.5 million, respectively, and included $ 10.2 million and $ 24.4 million for quarterly dividends and $ 0.6 million and $ 1.1 million in cash bonuses and distributions related to dividends previously declared upon vesting of restricted stock and stock option awards. NOTE 11. Share‑Based Compensation Current Period Activity During the three months ended September 30, 2021, the Company issued restricted stock awards for 10,153 shares of common stock, of which awards for 8,178 shares were fully vested on the grant date and awards for 1,975 shares vest based on service over a three year period. For the nine months ended September 30, 2021, the Company issued restricted stock awards for 260,753 shares of common stock, of which awards for 27,282 shares were fully vested on the grant date, awards for 6,595 shares vest based on service over a two year period, and awards for 226,876 shares vest based on service over a three year period. Stock option award and restricted stock award activity during the nine months ended September 30, 2021 and 2020 was as follows: Shares Subject to Stock Option Awards Nine Months Ended September 30, 2021 2020 Avg wtd Avg wtd Avg wtd Avg wtd grant-date exercise grant-date exercise fair value price Units fair value price Units Outstanding at beginning of period $ 3.91 $ 6.50 6,865,101 $ 3.83 $ 6.27 7,880,167 Forfeited 5.27 10.67 ( 76,849 ) 5.86 12.40 ( 8,746 ) Exercised 3.72 5.77 ( 734,712 ) 3.44 5.06 ( 617,412 ) Outstanding at end of the period $ 3.92 $ 6.54 6,053,540 $ 3.86 $ 6.36 7,254,009 Vested $ 3.86 $ 6.37 5,809,189 $ 3.73 $ 5.97 6,641,955 Unvested 5.29 10.62 244,351 5.30 10.67 612,054 Restricted Stock Awards Nine Months Ended September 30, 2021 2020 Avg wtd grant- Avg wtd grant- date fair value Units date fair value Units Unvested at beginning of period $ 14.99 2,827,008 $ 14.29 3,215,619 Granted 26.96 260,753 16.65 781,843 Vested 14.53 ( 1,596,839 ) 14.35 ( 1,089,780 ) Forfeited 16.38 ( 121,424 ) 15.88 ( 78,839 ) Unvested at end of period $ 17.70 1,369,498 $ 14.98 2,828,843 At September 30, 2021 and December 31, 2020, the amount of cash bonuses and distributions related to dividends previously declared on unvested and outstanding restricted share awards and stock options totaled $ 0.8 million and $ 1.2 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. 22 Table of Contents The Company recorded $ 4.0 million and $ 3.6 million of share-based compensation expense in the three months ended September 30, 2021 and 2020, respectively, and $ 13.9 million and $ 13.5 million of share-based compensation in the nine months ended September 30, 2021 and 2020, respectively, in personnel compensation and benefits in the unaudited Condensed Consolidated Statements of Operations. NOTE 12. 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 and nine months ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, (in thousands except per share amounts) 2021 2020 2021 2020 Net income $ 74,175 $ 55,741 $ 208,647 $ 157,627 Shares: Basic : Weighted average number of shares outstanding 67,980 67,743 67,840 67,785 Plus : Incremental shares from assumed conversion of dilutive instruments 6,073 5,694 6,322 5,918 Diluted : Weighted average number of shares outstanding 74,053 73,437 74,162 73,703 Earnings per share Basic: $ 1.09 $ 0.82 $ 3.08 $ 2.33 Diluted: $ 1.00 $ 0.76 $ 2.81 $ 2.14 Outstanding instruments excluded from the computation of weighted average shares for diluted earnings per share because the effect would be anti-dilutive were de minimus in amount for the three months and nine months ended September 30, 2021 and 2020. Holders of non-vested share-based compensation awards do not have rights to receive nonforfeitable dividends on the shares covered by the awards. NOTE 13. Accumulated Other Comprehensive Income (Loss ) The following table presents changes in accumulated other comprehensive income (loss) by component for the nine months ended September 30, 2021 and 2020. Cumulative Cash Flow Translation (in thousands) Hedges (a) Adjustment Total Balance, December 31, 2020 $ ( 7,573 ) $ 113 $ ( 7,460 ) Other comprehensive income (loss) before reclassification and tax 9,356 ( 63 ) 9,293 Tax impact ( 2,275 ) 16 ( 2,259 ) Reclassification adjustments, before tax 2,639 — 2,639 Tax impact ( 642 ) — ( 642 ) Net current period other comprehensive income (loss) 9,078 ( 47 ) 9,031 Balance, September 30, 2021 $ 1,505 $ 66 $ 1,571 Balance, December 31, 2019 $ — $ — $ — Other comprehensive loss before reclassification and tax ( 11,977 ) ( 23 ) ( 12,000 ) Tax impact 2,853 6 2,859 Reclassification adjustments, before tax 205 — 205 Tax impact ( 51 ) — ( 51 ) Net current period other comprehensive loss ( 8,970 ) ( 17 ) ( 8,987 ) Balance, September 30, 2020 $ ( 8,970 ) $ ( 17 ) $ ( 8,987 ) (a) Reclassifications out of accumulated other comprehensive income (loss) related to cash flow hedges are recorded in interest expense and other financing costs. 23 Table of Contents NOTE 14. DERIVATIVES Interest Rate Swaps On March 27, 2020, the Company entered into the Swap to manage interest rate risk associated with a portion of its floating-rate long-term debt. The Company does not purchase or hold any derivative instruments for trading or speculative purposes. Under the terms of the Swap, the Company pays interest at a fixed rate of interest on a quarterly basis and receives interest at the three-month LIBOR rate in effect for that quarter. The notional value, fixed rate of interest and expiration date of the Swap as of September 30, 2021 were $ 450 million – 0.965 % – July 1, 2026 . Refer to Note 5, Fair Value Measurements, for additional disclosures regarding fair value measurements. The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the Company reflects the change in fair value of the derivative instrument. A derivative qualifies for hedge accounting treatment if, at inception, it meets defined correlation and effectiveness criteria. These criteria require that the anticipated cash flows and/or changes in fair value of the hedging instrument substantially offset those of the position being hedged. The Swap is assessed for effectiveness and continued qualification for hedge accounting on a quarterly basis. For the three and nine months ended September 30, 2021 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. Gains or losses from the Swap are reclassified to interest expense in the same period during which the hedged transaction affects earnings. The amount payable to the Swap counterparty at September 30, 2021 of $ 0.9 million is recorded in other liabilities in 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, 2021 (in thousands): Balance Sheets Description September 30, 2021 December 31, 2020 Other assets (Other liabilities) Fair value of interest rate swap $ 1,989 $ ( 10,006 ) Notional amount 450,000 450,000 The following table summarizes the effects of the Swap in the unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020 (in thousands): Three Months Ended Nine Months Ended September 30, September 30, Statement of Operations Description 2021 2020 2021 2020 Interest expense and other financing costs Loss reclassified from AOCI(L) $ 947 $ 724 $ 2,639 $ 205 Three Months Ended Nine Months Ended September 30, September 30, Statements of Comprehensive Income Description 2021 2020 2021 2020 Other comprehensive income (loss) Income (loss) recognized in AOCI(L), net of tax $ 1,276 $ ( 621 ) $ 9,078 $ ( 8,970 ) NOTE 15. 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, which include receipt of required regulatory approvals from the Financial Conduct Authority of the United Kingdom and obtaining an agreed amount of aggregate legally binding commitments from investors in the private fund. On March 8, 2021, the Company announced that Alderwood Capital had received authorization from the Financial Conduct Authority of the United Kingdom and that Alderwood’s private fund had been formally launched to institutional investors. 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 24 Table of Contents 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. Equity method investments are recorded in other assets in the unaudited Condensed Consolidated Balance Sheets. At September 30, 2021 and December 31, 2020, the Company’s equity method investment in Alderwood totaled $ 1.2 million and $ 1.4 million, respectively. Gains and losses from equity method investments are recorded in interest income and other income (expense) in the unaudited Condensed Consolidated Statements of Operations. For the three and nine months ended September 30, 2021, losses from equity method investments were $ 0.1 million and $ 0.2 million, respectively ($ 0 for the three and nine months ended September 30, 2020). NOTE 16. SUBSEQUENT EVENTS On October 12, 2021, the Company paid $ 37.5 million in cash to sellers for the second annual earn out period for the USAA AMCO Acquisition. On and effective November 1, 2021, the Company completed its acquisition of NEC. The Company paid approximately $ 65 million in cash at closing, funded by cash on hand and $ 7.5 million in borrowings against its revolving line of credit. On November 4, 2021 , our Board of Directors declared a quarterly cash dividend of $ 0.17 per share on Victory common stock. The dividend is payable on December 10, 2021 , to stockholders of record on December 27, 2021 . WestEnd Advisors, LLC Purchase Agreement On November 4, 2021, the Company entered into a definitive agreement (the “WestEnd Purchase Agreement”) with WestEnd Advisors, LLC (“WestEnd”), pursuant to which the Company has agreed to purchase 100 % of the equity interests of WestEnd (the “WestEnd Acquisition”) on the terms and subject to the conditions therein. Founded in 2004, and headquartered in Charlotte, North Carolina, WestEnd is an ETF strategist advisor that provides financial advisors with a turnkey, core model allocation strategy for either a holistic solution or complementary source of alpha. The firm offers four primary ETF strategies and one large cap core strategy, all in tax efficient Separately Managed Account (SMA) structures. The aggregate purchase price (the “WestEnd Purchase Price”) to be paid by the Company is (i) $ 480 million in cash, payable at the closing of the WestEnd acquisition (the “WestEnd Closing”) and (ii) contingent earn-out payments based on net revenue of the WestEnd business during each of the first four years following the WestEnd Closing, subject to certain “catch-up” provisions over a five and one half year period following the WestEnd Closing. A maximum of $ 320.0 million ($ 80.0 million per year) in earn-out payments may be paid. The WestEnd Purchase Price is subject to adjustments based on the level of client consents received, net working capital, debt, cash and unpaid transaction expenses. Closing is subject to customary approvals, conditions and consents. In connection with entering into the WestEnd Purchase Agreement, the Company secured commitments for a $ 505.0 million senior secured incremental first lien term loan B facility. The availability of the incremental facility is subject to the satisfaction of certain customary conditions precedent. Neither the closing of the incremental facility, nor the receipt of any other financing, is a condition to the WestEnd Closing.