WESTWOOD HOLDINGS GROUP INC - Quarter Report: 2008 September (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2008.

OR

For the transition period from              to             .

Commission file number 1-31234

WESTWOOD HOLDINGS GROUP, INC.

(Exact name of registrant as specified in its charter)

200 CRESCENT COURT, SUITE 1200

DALLAS, TEXAS

75201

(Address of principal executive office)

(Zip Code)

(214) 756-6900

(Registrant’s telephone number, including area code)

---

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “ smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the issuer’s common stock, par value $0.01 per share, outstanding as of October 20, 2008: 6,954,488.

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WESTWOOD HOLDINGS GROUP, INC.

INDEX

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PART I - FINANCIAL INFORMATION

WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of September 30, 2008 and December 31, 2007

(in thousands, except par value and share amounts)

See notes to interim consolidated financial statements.

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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

See notes to interim consolidated financial statements.

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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2008

(in thousands)

(unaudited)

See notes to interim consolidated financial statements.

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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See notes to interim consolidated financial statements.

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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. DESCRIPTION OF THE BUSINESS:

Westwood Holdings Group, Inc. (“Westwood,” the “Company,” “we,” or “our”) was incorporated under the laws of the State of Delaware on December 12, 2001, as a subsidiary of SWS Group, Inc. (“SWS”). On June 28, 2002, SWS completed the spin-off of Westwood by effecting a dividend distribution of all of the Westwood common stock held by SWS to all of its stockholders on a pro rata basis.

Westwood manages investment assets and provides services for its clients through two subsidiaries, Westwood Management Corp. (“Westwood Management”) and Westwood Trust (“Westwood Trust”). Westwood Management provides investment advisory services to corporate pension funds, public retirement plans, endowments, foundations, and a family of mutual funds, which we call the WHG Funds, and investment subadvisory services to mutual funds and clients of Westwood Trust. Westwood Trust provides to institutions and high net worth individuals trust and custodial services and participation in common trust funds that it sponsors. Revenue is largely dependent on the total value and composition of assets under management (“AUM”). Accordingly, fluctuations in financial markets and in the composition of AUM impact revenue and results of operations.

Westwood Management is a registered investment advisor under the Investment Advisers Act of 1940. Westwood Trust is chartered and regulated by the Texas Department of Banking.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The accompanying consolidated financial statements have been prepared without an audit and reflect all adjustments that, in the opinion of management, are necessary to present fairly our financial position as of September 30, 2008, and results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements are presented using the accrual basis of accounting and have been prepared in accordance with the instructions for the presentation of interim financial information as prescribed by the Securities and Exchange Commission (“SEC”) and, therefore, as permitted by SEC rules, do not contain certain information and footnote disclosures required by accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements should be read in conjunction with our consolidated financial statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2007. Refer to the accounting policies described in the notes to our annual financial statements, which were consistently followed in preparing this interim financial information. Operating results for the nine months ended September 30, 2008 are not necessarily indicative of the results for the year ending December 31, 2008 or any future period.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Investment advisory and trust fees are recognized as services are provided. These fees are determined in accordance with contracts between our subsidiaries and their clients and are generally based on a percentage of

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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

AUM. A limited number of our clients have a performance-based fee component in their contract, which would pay us an additional fee if we outperform a specified index over a specific period of time. We would record as revenue any performance-based fees earned at the end of the performance period. Most advisory and trust fees are payable in advance or in arrears on a calendar quarterly basis. Advance payments are deferred and recognized over the periods services are performed. Since most of our advance paying clients’ billing periods coincide with the calendar quarter to which payment relates, the revenue related to those clients is fully recognized within the quarter; consequently, there is not a significant amount of deferred revenue contained in these financial statements. Deferred revenue is shown on the balance sheet under the heading of “Other current liabilities”. Other revenues generally consist of interest and investment income and unrealized gains and losses on our investments. These revenues are recognized as earned or as the services are performed.

Cash and Cash Equivalents

Cash and cash equivalents consist of short-term, highly liquid investments with maturities of three months or less.

Investments

Money market securities are classified as available for sale securities and have no significant fluctuating values. All other marketable securities are classified as trading securities. All securities are carried at quoted market value on the accompanying balance sheet. Net unrealized holding gains or losses on investments classified as trading securities are reflected as a component of other revenues. We measure realized gains and losses on investments using the specific identification method.

Goodwill

During the third quarter of 2008, we completed our annual impairment assessment as required by the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No.142. No impairment loss was required. We perform our annual impairment assessment in the third quarter as of July 1.

Federal Income Taxes

We file a Federal income tax return as a consolidated group for Westwood and its subsidiaries. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and income tax bases of assets and liabilities as measured at enacted income tax rates. Deferred income tax expense is generally the result of changes in the deferred tax assets and liabilities and relates primarily to stock-based compensation expense.

Fair Value of Financial Instruments

The estimated fair values of our financial instruments have been determined by us using available information. The fair value amounts discussed in Note 3 are not necessarily indicative of either the amounts we would realize upon disposition of these instruments or our intent or ability to dispose of these assets. The estimated fair value of cash and cash equivalents, as well as accounts receivable and payable, approximates their carrying value due to their short-term maturities. The carrying amount of investments designated as “trading” securities, primarily U.S. Government and Government agency obligations as well as mutual funds and common trust fund shares, equals their fair value, which is equal to prices quoted in active markets and, with respect to funds, the net asset value of the shares held as reported by the fund. The carrying amount of investments designated as “available for sale” securities, primarily money market accounts, equals their fair value, which is equal to the net asset value of the shares held as reported by the fund. The market values of our money market holdings generally do not fluctuate.

Effective January 1, 2008, we adopted the provisions of FASB SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value and requires additional disclosures regarding certain fair value measurements. SFAS No. 157 establishes a three tier hierarchy for measuring fair value as follows: level 1 – quoted market prices in active markets, level 2 – inputs other than quoted prices that are directly or indirectly observable and level 3 – unobservable inputs where there is little or no market activity. The

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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

fair value of our investments in “Note 3. Investments” were determined using quoted prices from active markets (level 1). The implementation of SFAS No. 157 had no effect on our financial statements.

Earnings per Share

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding for the periods ended September 30, 2008 and 2007, respectively. Diluted earnings per share for these periods is computed based on the weighted average number of shares outstanding plus the effect of the dilutive impact of stock options and shares of restricted stock granted to employees and non-employee directors. Diluted earnings per common share is computed using the treasury stock method.

The following table sets forth the computation of basic and diluted shares (in thousands, except per share and share amounts):

Stock-Based Compensation

We account for stock-based compensation in accordance with FASB SFAS No. 123 Revised (“SFAS No. 123R”). Under SFAS No. 123R, stock-based compensation expense reflects the fair value of stock-based awards measured at grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. The compensation cost we record for these awards is based on their grant-date fair value as required by SFAS No. 123R.

We have issued restricted stock and stock options in accordance with our Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan. We valued stock options issued based upon the Black-Scholes option-pricing model and recognized this value as an expense over the periods in which the options vested. Implementation of the Black-Scholes option-pricing model required us to make certain assumptions, including expected volatility, risk-free interest rate, expected dividend yield and expected life of the options. We utilized assumptions that we believed to be most appropriate at the time of the valuation. Had we used different assumptions in the pricing model, the expense recognized for stock options may have been different than the expense recognized in our financial statements. We must also apply judgment in developing an expectation of awards of restricted stock and stock options that may be forfeited. If actual experience differs significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.

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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

3. INVESTMENTS:

Investment balances are presented in the table below (in thousands). All of these investments are carried at market value, using prices from active markets as of the balance sheet date. The money market funds are accounted for as available for sale securities. The other investments are accounted for as trading securities.

4. EQUITY:

On July 23, 2008, we declared a quarterly cash dividend of $0.30 per share on common stock payable on October 1, 2008 to stockholders of record on September 15, 2008.

On July 23, 2008, we granted an aggregate of 10,500 shares of restricted stock to non-employee directors. These shares are subject to vesting conditions as described in “Note 5. Stock Based Compensation”.

On July 1, 2008, we purchased 39,070 shares of our common stock from employees of Westwood to satisfy tax obligations related to vested restricted shares. The shares were purchased at $41.66, the closing price of our common stock on that date, and are shown as treasury shares at cost in the equity section of our balance sheet.

On April 24, 2008, we declared a quarterly cash dividend of $0.30 per share on common stock payable on July 1, 2008 to stockholders of record on June 13, 2008.

On February 27, 2008, we granted an aggregate of 183,800 shares of restricted stock to certain employees. These shares are subject to vesting conditions as described in “Note 5. Stock-Based Compensation”.

On February 27, 2008, we purchased 22,500 shares of our common stock from employees of Westwood to assist our employees in satisfying their tax obligations related to vested restricted shares. The shares were purchased at $35.65, the closing price of our common stock on that date, and are shown as treasury shares in the equity section of our balance sheet at cost.

On February 6, 2008, we declared a quarterly cash dividend of $0.30 per share on common stock payable on April 1, 2008 to stockholders of record on March 14, 2008.

5. STOCK-BASED COMPENSATION

We have issued stock options and restricted shares to our employees, non-employee directors and a non-employee consultant. The Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (the “Plan”) reserves shares of Westwood common stock for issuance to eligible employees, directors and consultants of

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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Westwood or its subsidiaries in the form of restricted stock and stock options. The total number of shares that may be issued under the Plan (including the predecessor plans to the Plan) may not exceed 1,948,100 shares. In the event of a change in control of Westwood, the Plan contains provisions providing for the acceleration of the vesting of restricted stock and stock options. At September 30, 2008, approximately 232,000 shares remain available for issuance under the Plan.

The following table presents the total stock-based compensation expense we recorded and the total income tax benefit recognized for stock-based compensation arrangements:

Restricted Stock

Under the Plan, we have granted restricted stock to employees, non-employee directors and a non-employee consultant, which are subject to a service condition, and to our Chief Executive Officer and Chief Investment Officer, which are subject to a service condition and performance goals. Until the shares vest, they are restricted from sale, transfer or assignment in accordance with the terms of the agreements under which they were issued. We calculate compensation cost for restricted stock grants by using the fair market value of our common stock at the date of grant, the number of shares issued and an estimate of shares that will not vest due to forfeitures. This compensation cost is amortized on a straight-line basis over the applicable vesting period. As of September 30, 2008, there was approximately $15.3 million of unrecognized compensation cost, which we expect to recognize over a weighted-average period of 2.2 years. In order to satisfy tax liabilities employees will owe on their vested shares, we may withhold a sufficient number of vested shares from employees on the date vesting occurs. For 2008, we expect the number of shares withheld for this purpose to total 61,570 shares. Our two types of restricted stock grants are discussed below.

Employee and non-employee director restricted share grants

Restricted stock granted to employees vest over four years and the non-employee directors’ shares vest over one year. For the nine months ended September 30, 2008, we recorded $4.0 million of expense for these grants. The following table details the status and changes in our restricted stock grants that are subject only to a service condition for the three months ended September 30, 2008:

CEO and CIO performance-based restricted share grants

Under the Plan, we granted restricted shares to our Chief Executive Officer and Chief Investment Officer that vest over four years and six years, respectively, provided annual performance goals established by the Compensation Committee of Westwood’s board of directors are met. In each year during the applicable vesting period, the Compensation Committee will establish a specific goal for that year’s vesting of the restricted shares, which will be

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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

based in all cases upon Westwood’s adjusted pre-tax income, as defined. In February 2008, the Compensation Committee established the goal for 2008 as an increase of at least 7% in adjusted pre-tax income over the adjusted pre-tax income for the year 2007. If in any year during the vesting period the performance goal is not met, the Compensation Committee may establish a goal for a subsequent vesting period, which if achieved or exceeded may result in full or partial vesting of the shares that did not otherwise become vested in a prior year. However, in no event will the maximum number of shares, which may become vested over the vesting period, exceed 100,000 shares in the case of our Chief Executive Officer and 300,000 shares in the case of our Chief Investment Officer. If a portion of the performance-based restricted shares do not vest, no compensation expense is recognized for that portion and any previously recognized compensation expense related to the shares that do not vest would be reversed.

Because the performance goal was met in 2007, the shares subject to vesting were vested in substance, but required certification by the Compensation Committee, at which time a share price was determined for tax purposes. On February 27, 2008, the 2007 shares, which were expensed in 2007, were certified as vested and the total fair value of the shares was determined to be $2,674,000, utilizing a share price of $35.65, the closing price of our common stock as of the day of certification. In the second quarters of 2008 and 2007, we concluded that it was probable that we would meet the performance goals required in order for the applicable percentage of the performance-based restricted shares awarded to our Chief Executive Officer and Chief Investment Officer to vest in each year. As a result, we recognized expense of approximately $470,000 in both the current and prior year second and third quarters related to these performance-based restricted stock grants.

Stock Options

Options granted under the Plan have a maximum ten-year term and vested over a period of four years. All of our stock options are vested and exercisable. All of our options became fully expensed in 2007. The following table sets forth the summary of option activity under our stock option program for the nine months ended September 30, 2008:

The total intrinsic value of options exercised during the three months ended September 30, 2008 and 2007 was $531,000 and $541,000, respectively. Options exercised represent newly issued shares.

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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

6. SEGMENT REPORTING:

We operate two segments: the Westwood Management segment and the Westwood Trust segment. These segments are managed separately based on types of products and services offered and their related client bases. We evaluate the performance of our segments based primarily on income before income taxes. The entity Westwood Holdings, the parent company of Westwood Management and Westwood Trust, does not have revenues or employees and is the entity in which we record the expense for stock based compensation.

Westwood Management

Westwood Management provides investment advisory services to corporate pension funds, public retirement plans, endowments, foundations and the WHG Funds, as well as investment subadvisory services to mutual funds and clients of Westwood Trust.

Westwood Trust

Westwood Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals.

All segment accounting policies are the same as those described in the summary of significant accounting policies. Intersegment balances that eliminate in consolidation have been applied to the appropriate segment.

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Forward-Looking Statements

Statements in this report that are not purely historical facts, including statements about our expected future financial position, results of operations or cash flows, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “could,” “goal,” “target,” “designed,” “on track,” “comfortable with,” “optimistic” and other similar expressions, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results and the timing of some events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, without limitation, the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC, and those set forth below:

You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

Overview

We manage investment assets and provide services for our clients through our two subsidiaries, Westwood Management and Westwood Trust. Westwood Management provides investment advisory services to corporate pension funds, public retirement plans, endowments, foundations and a family of mutual funds, which we call the WHG Funds, as well as investment subadvisory services to other mutual funds and clients of Westwood Trust. Westwood Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals. Our revenues are generally derived from fees based on a percentage of assets under management. We have been providing investment advisory services since 1983 and, according to recognized industry sources, including Morningstar, Inc., when measured over multi-year periods ten years and longer, our principal asset classes have consistently ranked above the median in performance within their peer groups. Percentages stated in this section are rounded to the nearest whole percent.

Revenues

We derive our revenues from investment advisory fees, trust fees, and other revenues. Our advisory fees are generated by Westwood Management, which manages its clients’ accounts under investment advisory and

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subadvisory agreements. Advisory fees are calculated based on a percentage of assets under management, and are paid in accordance with the terms of the agreements. Westwood Management’s advisory fees are paid quarterly in advance based on the assets under management on the last day of the preceding quarter, quarterly in arrears based on the assets under management on the last day of the quarter just ended, or are based on a daily or monthly analysis of assets under management for the stated period. Westwood Management recognizes revenues as services are rendered. A limited number of our clients have a performance-based fee component in their contract, which would pay us an additional fee if we outperform a specified index over a specific period of time. We would record as revenue any performance-based fees earned at the end of the performance period. We recognized a performance-based fee in the second quarter of 2008 related to a client that has an annual performance period that ends in June. In addition, as of September 30, 2008, we were on track to earn a performance-based fee in 2008 as we did in the fourth quarter of 2007 from a client that has an annual performance period that ends in December. The exact amount of this fee will remain uncertain and will not be recorded as revenue until the performance period ends on December 31, 2008. Since most of our advance paying clients’ billing periods coincide with the calendar quarter to which payment relates, the revenue related to those clients is fully recognized within the quarter; consequently, there is not a significant amount of deferred revenue contained in our financial statements.

Our trust fees are generated by Westwood Trust pursuant to trust or custodial agreements. Trust fees are separately negotiated with each client and are generally based on a percentage of assets under management, which in turn is influenced by the complexity of the operations of the trust and the services provided. Westwood Trust also provides trust services to a small number of clients on a fixed fee basis. Most trust fees are paid quarterly in advance and are recognized as services are rendered. Since the majority of Westwood Trusts’ advance paying clients’ billing periods coincide with the calendar quarter to which payment relates, the revenue related to those clients is fully recognized within the quarter; consequently, there is not a significant amount of deferred revenue contained in our financial statements.

Our other revenues generally consist of interest and investment income and unrealized gains and losses on our investments. We invest most of our cash in U.S. Treasury Bills, although we also invest smaller amounts in money market funds and equity instruments.

Assets Under Management

Assets under management increased $600 million to $8.3 billion at September 30, 2008, compared with $7.7 billion at September 30, 2007. Average assets under management for the third quarter of 2008 were $8.0 billion compared to $7.3 billion for the third quarter of 2007, an increase of 10%. The increase in period ending assets under management was principally attributable to asset inflows from new and existing clients and was partially offset by market depreciation of assets under management and the withdrawal of assets by certain clients. The following table sets forth Westwood Management’s and Westwood Trust’s assets under management as of September 30, 2008 and 2007:

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Westwood Management. In the preceding table, “Separate Accounts” represent corporate pension and profit sharing plans, public employee retirement accounts, Taft Hartley plans, endowments, foundations and individuals. “Subadvisory” represents relationships where Westwood Management provides investment management services for funds offered by other financial institutions. “WHG Funds” represent the family of mutual funds for which Westwood Management serves as advisor. “Westwood Funds” represent the family of mutual funds for which Westwood Management serves as subadvisor. “Managed Accounts” represent relationships with brokerage firms and other registered investment advisors who offer Westwood Management’s products to their customers.

Westwood Trust. In the preceding table, “Commingled Funds” represent funds that have been established to facilitate investment of fiduciary funds of multiple clients by combining assets into a single trust for taxable and tax-exempt entities. “Private Accounts” represent discretionary accounts where Westwood Trust acts as trustee or agent and has full investment discretion. “Agency/Custody Accounts” represent non-discretionary accounts in which Westwood Trust provides agent or custodial services, but does not act in an advisory capacity. For certain assets in this category, Westwood Trust provides limited custody services for a minimal or zero fee currently, but views these assets as potentially converting to fee-generating managed assets in the future. As an example, some assets in this category consist of low-basis stock that is being held in custody for clients currently, but may transfer to fee-generating managed assets during an intergenerational transfer of wealth at some point in the future.

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Results of Operations

The following table (dollars in thousands) and discussion of our results of operations for the three and nine months ended September 30, 2008 is based upon data derived from the consolidated statements of income contained in our consolidated financial statements and should be read in conjunction with these statements, which are included elsewhere in this quarterly report.

Three months ended September 30, 2008 compared to three months ended September 30, 2007

Total Revenues. Our total revenues increased by 15% to $10.1 million for the three months ended September 30, 2008 compared with $8.7 million for the three months ended September 30, 2007. Asset-based advisory fees increased by 28% to $7.4 million for the three months ended September 30, 2008 compared with $5.8 million for the three months ended September 30, 2007, as a result of increased average assets under management by Westwood Management due to inflows from new and existing clients as well as higher average fee realization, which was partially offset by the market depreciation of assets and the withdrawal of assets by certain clients. Trust fees increased by 7% to $2.8 million for the three months ended September 30, 2008 compared with $2.7 million for the three months ended September 30, 2007, as a result of higher average fee realization. Average assets under management by Westwood Trust declined slightly as market depreciation of assets offset inflows from new and existing clients. Other revenues, which generally consist of interest and investment income, decreased by 146% to $(134,000) for the three months ended September 30, 2008 compared with $291,000 for the three months ended September 30, 2007. Other revenues are presented net and decreased primarily due to a decrease of $290,000 in realized and unrealized gains/losses on investments and a decrease of $128,000 in interest and dividend income due to lower interest rates as well as a shift into lower yielding U.S. Treasury Bills.

Employee Compensation and Benefits. Employee compensation and benefits costs generally consist of salaries, incentive compensation, equity based compensation expense and benefits. Employee compensation and benefits increased by 18% to $5.5 million for the three months ended September 30, 2008 compared with $4.7 million for the three months ended September 30, 2007. This increase was due primarily to increased salary and benefits expense due to increased headcount and salary increases for certain employees, an increase of approximately $238,000 in restricted stock expense due to additional employee restricted stock grants in February 2008 and independent director grants in July 2008, increased payroll taxes due on vested restricted shares, increased incentive compensation expense due to higher pretax income and increased health insurance costs. Beginning in 2008, employee restricted stock grants were awarded in the first quarter of the year in order to synchronize the payment of cash incentive bonus awards with employees’ personal tax liabilities resulting from restricted stock vesting. In the second quarters of 2008 and 2007, we concluded that it was probable that we would meet the

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performance goals required in order for the applicable percentage of the performance-based restricted shares awarded to our Chief Executive Officer and Chief Investment Officer to vest in each year. In the current and prior year third quarters, we reaffirmed our conclusions that it was probable that these performance-based restricted shares would vest. As a result, we recognized expense of approximately $470,000 in each of the second and third quarters of both the current and prior year quarters related to these performance-based restricted stock grants. We expect to recognize a similar amount in the fourth quarter of 2008 related to these performance-based restricted stock grants. The conclusion related to the 2008 expense is based, in part, on our belief that it is likely that we will recognize a performance-based fee in the fourth quarter of 2008 related to a client that has an annual performance period that ends in December. As stated above, the exact amount of this fee will remain uncertain and we will not record it until the related performance period ends on December 31, 2008. We had 63 full-time employees as of September 30, 2008 compared to 51 full-time employees as of September 30, 2007.

Sales and Marketing. Sales and marketing costs generally consist of costs associated with our marketing efforts, including travel and entertainment, direct marketing and advertising costs. Sales and marketing costs increased by 60% to $263,000 for the three months ended September 30, 2008 compared with $164,000 for the three months ended September 30, 2007. The increase is primarily the result of increased travel and direct marketing expenses.

WHG Mutual Funds. WHG Mutual Funds expenses generally consist of costs associated with our marketing, distribution and administration efforts related to the WHG Funds. WHG Mutual Funds expenses increased by 119% to $94,000 for the three months ended September 30, 2008 compared with $43,000 for the three months ended September 30, 2007 due to increased shareholder servicing fees related to the funds. Decreased fund expense reimbursements due to a higher level of assets in the funds partially offset this increase.

Information Technology. Information technology expenses are generally costs associated with proprietary investment research tools, maintenance and support, computing hardware, software licenses, telecommunications and other related costs. Information technology costs increased by 24% to $296,000 for the three months ended September 30, 2008 compared with $239,000 for the three months ended September 30, 2007. The increase is primarily due to increased expenses for support services, data fees, software, quotations, telephone costs and depreciation.

Professional Services. Professional services expenses generally consist of costs associated with subadvisory fees, audit, legal and other professional services. Professional services expenses increased by 7% to $450,000 for the three months ended September 30, 2008 compared with $420,000 for the three months ended September 30, 2007. The increase is primarily due to higher advisory fees paid to external subadvisors due to increased average assets under management in international equity, growth and high-yield common trust funds sponsored by Westwood Trust and increased public relations fees. A decrease in legal expenses partially offset these increases.

General and Administrative. General and administrative expenses generally consist of costs associated with the lease of our office space, investor relations, licenses and fees, depreciation, insurance, office supplies and other miscellaneous expenses. General and administrative expenses increased by 29% to $727,000 for the three months ended September 30, 2008 compared with $565,000 for the three months ended September 30, 2007. The increase is primarily due to increases in custody expense, charitable contributions, office supplies and occupancy expenses. These increases were partially offset by decreases in other miscellaneous expenses.

Provision for Income Tax Expense. Provision for income tax expenses increased by 7% to $1,028,000 for the three months ended September 30, 2008 compared with $957,000 for the three months ended September 30, 2007 as a result of increased income. The effective tax rate was 37.2% for the three months ended September 30, 2008 compared to 36.3% for the three months ended September 30, 2007.

Nine months ended September 30, 2008 compared to nine months ended September 30, 2007

Total Revenues. Our total revenues increased by 20% to $28.9 million for the nine months ended September 30, 2008 compared with $24.0 million for the nine months ended September 30, 2007. Asset-based advisory fees increased by 33% to $20.4 million for the nine months ended September 30, 2008 compared with $15.4 million for the nine months ended September 30, 2007, as a result of increased average assets under

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management by Westwood Management due to inflows from new and existing clients as well as higher average fee realization, partially offset by the market depreciation of assets and the withdrawal of assets by certain clients. Performance-based advisory fees were $80,000 for the nine months ended September 30, 2008 compared to zero for the first nine months of the prior year, as a result of a performance-based fee earned in the annual measurement period ended June 30, 2008. Trust fees increased by 9% to $8.3 million for the nine months ended September 30, 2008 compared with $7.6 million for the nine months ended September 30, 2007, as a result of higher average fee realization. Other revenues decreased by 87% to $143,000 for the nine months ended September 30, 2008 compared with $1,123,000 for the nine months ended September 30, 2007. Other revenues decreased primarily due to a decrease of $865,000 in realized and unrealized gains/losses on investments and a decrease of $195,000 in interest income due to lower interest rates and a shift into lower yielding U.S. Treasury Bills. An increase of $86,000 in dividend income partially offset these decreases.

Employee Compensation and Benefits. Employee compensation and benefits increased by 23% to $15.5 million for the nine months ended September 30, 2008 compared with $12.6 million for the nine months ended September 30, 2007. This increase was due primarily to an increase of approximately $1.1 million in restricted stock expense due to additional employee and independent director restricted stock grants in July 2007, employee grants in February 2008 and independent director grants in July 2008, increased salary and benefits expense due to increased headcount and salary increases for certain employees, increased incentive compensation expense due to higher pretax income, increased payroll taxes due to vested restricted stock, increased health insurance expense, increased 401(k) match expense related to increased salaries and incentive compensation expense and increased profit sharing expense. Beginning in 2008, employee restricted stock grants were awarded in the first quarter of the year in order to synchronize the payment of cash incentive bonus awards with employees’ personal tax liabilities resulting from restricted stock vesting. We had 63 full-time employees as of September 30, 2008 compared to 51 full-time employees as of September 30, 2007.

Sales and Marketing. Sales and marketing costs increased by 38% to $595,000 for the nine months ended September 30, 2008 compared with $432,000 for the nine months ended September 30, 2007. The increase is primarily the result of increases in travel and direct marketing expenses.

WHG Mutual Funds. WHG Mutual Funds expenses increased by 63% to $235,000 for the nine months ended September 30, 2008 compared with $144,000 for the nine months ended September 30, 2007. Decreased fund expense reimbursements due to a higher level of assets in the funds was offset by increased shareholder servicing fees related to the funds.

Information Technology. Information technology costs increased by 14% to $823,000 for the nine months ended September 30, 2008 compared with $721,000 for the nine months ended September 30, 2007. The increase is primarily due to increased expenses for support services, software licenses and maintenance, quotations, research tools and telephone expense. Decreases in data fees and equipment rental expense partially offset these increases.

Professional Services. Professional services expenses increased by 12% to $1,337,000 for the nine months ended September 30, 2008 compared with $1,199,000 for the nine months ended September 30, 2007. The increase is primarily due to higher advisory fees paid to external subadvisors due to increased average assets under management in international equity, growth and high-yield common trust funds sponsored by Westwood Trust and increased professional fees related to new products and human resources. Decreases in legal expenses partially offset these increases.

General and Administrative. General and administrative expenses increased by 18% to $2.0 million for the nine months ended September 30, 2008 compared with $1.7 million for the nine months ended September 30, 2007. The increase is primarily due to increases in custody expense, charitable contributions, miscellaneous expenses, occupancy expenses, office supplies expense and employee training and seminar expenses. These increases were partially offset by decreases in insurance expense.

Provision for Income Tax Expense. Provision for income tax expenses increased by 15% to $3.0 million for the nine months ended September 30, 2008 compared with $2.6 million for the nine months ended September 30, 2007 as a result of increased income. The effective tax rate was 35.3% for the nine months ended September 30, 2008 compared to 35.4% for the nine months ended September 30, 2007.

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Supplemental Financial Information

As supplemental information, we are providing non-generally accepted accounting principles (“non-GAAP”) performance measures that we refer to as cash earnings and cash expenses. We provide these measures in addition to, but not as a substitute for, net income and total expenses, which are reported on a U.S. generally accepted accounting principles (“GAAP”) basis. Management and our board of directors review cash earnings and cash expenses to evaluate our ongoing performance, allocate resources and review dividend policy. We believe that these non-GAAP performance measures, while not substitutes for GAAP net income and total expenses, are useful for both management and investors to evaluate our underlying operating and financial performance and our available resources. We do not advocate that investors consider these non-GAAP measures without considering financial information prepared in accordance with GAAP.

In calculating cash earnings, we add to net income the non-cash expense associated with equity-based compensation awards of restricted stock and stock options. We define cash expenses as total expenses less non-cash equity-based compensation expense. Although depreciation on fixed assets is a non-cash expense, we do not add it back when calculating cash earnings or deduct it when calculating cash expenses because depreciation charges represent a decline in the value of the related assets that will ultimately require replacement. In addition, we do not adjust cash earnings for tax deductions related to restricted stock expense.

Our cash earnings increased by 9% to $3.5 million for the three months ended September 30, 2008 compared with $3.2 million for the three months ended September 30, 2007 primarily due to a 15% increase in total revenues. For the nine months ended September 30, 2008, cash earnings increased by 22% to $10.3 million compared with $8.5 million for he nine months ended September 30, 2007, primarily due to a 20% increase in total revenues.

The following tables provide a reconciliation of net income to cash earnings and total expenses to cash expenses (in thousands):