Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 
x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
For the quarterly period ended September 30, 2011.
OR
 
¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
For the transition period from             to             .
Commission file number 1-31234

WESTWOOD HOLDINGS GROUP, INC.
(Exact name of registrant as specified in its charter)

 
 	 	 	
DELAWARE	 	75-2969997	
(State or other jurisdiction of
incorporation or organization)	 	(IRS Employer
Identification No.)	
200 CRESCENT COURT, SUITE 1200
DALLAS, TEXAS
75201
(Address of principal executive office)
(Zip Code)
(214) 756-6900
(Registrant’s telephone number, including area code)
---
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

Large accelerated filer	 	¨	  	Accelerated filer	 	x	
 	 	 	 	
Non-accelerated filer	 	¨  (Do not check if a smaller reporting company)	  	Smaller reporting company	 	¨	
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Shares of common stock, par value $0.01 per share, outstanding as of October 18, 2011: 7,696,093.

 

Table of Contents
WESTWOOD HOLDINGS GROUP, INC.
INDEX

 	 	 	  	PAGE	 	
 	 	 	
PART I	 	FINANCIAL INFORMATION	  	 	 	 	
 	 	 	
Item 1.	 	Unaudited Consolidated Financial Statements	  	 	 	 	
 	 	 	
 	 	Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010	  	 	1	  	
 	 	 	
 	 	Consolidated Statements of Income for the three and nine months ended September 30, 2011 and September 30, 2010	  	 	2	  	
 	 	 	
 	 	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2011	  	 	3	  	
 	 	 	
 	 	Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and September 30, 2010	  	 	4	  	
 	 	 	
 	 	Notes to Interim Consolidated Financial Statements	  	 	5	  	
 	 	 	
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	 	15	  	
 	 	 	
Item 3.	 	Quantitative And Qualitative Disclosures About Market Risk	  	 	23	  	
 	 	 	
Item 4.	 	Controls and Procedures	  	 	23	  	
 	 	 	
PART II	 	OTHER INFORMATION	  	 	 	 	
 	 	 	
Item 1.	 	Legal Proceedings	  	 	23	  	
 	 	 	
Item 1A.	 	Risk Factors	  	 	24	  	
 	 	 	
Item 2.	 	Unregistered Sales of Equity Securities and Use of Proceeds	  	 	24	  	
 	 	 	
Item 6.	 	Exhibits	  	 	24	  	
 	 	
Signatures	  	 	25	  	

Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 2011 and December 31, 2010
(in thousands, except par value and share amounts)

 	  	September  30,
2011
(unaudited)	 	 	December 31,
2010	 	
ASSETS	  	 	 	 	 	 	 	 	
Current Assets:	  	 	 	 	 	 	 	 	
Cash and cash equivalents	  	$	4,572	  	 	$	1,744	  	
Accounts receivable	  	 	7,997	  	 	 	7,348	  	
Investments, at fair value	  	 	48,830	  	 	 	43,300	  	
Deferred income taxes	  	 	2,383	  	 	 	2,757	  	
Prepaid income taxes	  	 	1,428	  	 	 	-	  	
Other current assets	  	 	869	  	 	 	733	  	
 	  	 	 	 	 	 	 	 	
Total current assets	  	 	66,079	  	 	 	55,882	  	
Goodwill	  	 	11,338	  	 	 	11,281	  	
Intangible assets, net	  	 	4,745	  	 	 	5,119	  	
Property and equipment, net of accumulated depreciation of $1,697 and $1,542	  	 	2,038	  	 	 	346	  	
 	  	 	 	 	 	 	 	 	
Total assets	  	$	84,200	  	 	$	72,628	  	

LIABILITIES AND STOCKHOLDERS’ EQUITY	  	 	 	 	 	 	 	 	
Current Liabilities:	  	 	 	 	 	 	 	 	
Accounts payable and accrued liabilities	  	$	1,461	  	 	$	1,290	  	
Dividends payable	  	 	2,628	  	 	 	-	  	
Compensation and benefits payable	  	 	10,073	  	 	 	9,369	  	
Income taxes payable	  	 	-	  	 	 	173	  	
Deferred acquisition liability	  	 	773	  	 	 	899	  	
Other current liabilities	  	 	14	  	 	 	13	  	
 	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	14,949	  	 	 	11,744	  	
Deferred income taxes	  	 	1,276	  	 	 	117	  	
Dividends payable	  	 	224	  	 	 	-	  	
Deferred rent	  	 	1,233	  	 	 	90	  	
 	  	 	 	 	 	 	 	 	
Total long-term liabilities	  	 	2,733	  	 	 	207	  	
 	  	 	 	 	 	 	 	 	
Total liabilities	  	 	17,682	  	 	 	11,951	  	
 	  	 	 	 	 	 	 	 	
Stockholders’ Equity:	  	 	 	 	 	 	 	 	
Common stock, $0.01 par value, authorized 25,000,000 shares, issued 8,091,068 and outstanding 7,696,093 shares at September 30, 2011; issued 7,874,873 and outstanding 7,645,678 shares at December 31, 2010	  	 	81	  	 	 	79	  	
Additional paid-in capital	  	 	74,198	  	 	 	65,639	  	
Treasury stock, at cost – 394,975 shares at September 30, 2011; 229,195 shares at December 31, 2010	  	 	(14,607	) 	 	 	(8,749	) 	
Accumulated other comprehensive income, net of deferred taxes	  	 	1,643	  	 	 	926	  	
Retained earnings	  	 	5,203	  	 	 	2,782	  	
 	  	 	 	 	 	 	 	 	
Total stockholders’ equity	  	 	66,518	  	 	 	60,677	  	
 	  	 	 	 	 	 	 	 	
Total liabilities and stockholders’ equity	  	$	84,200	  	 	$	72,628	  	
 	  	 	 	 	 	 	 	 	
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)

 	  	Three months ended
September 30,	 	  	Nine months ended
September 30,	 	
 	  	2011	 	 	2010	 	  	2011	 	 	2010	 	
REVENUES:	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Advisory fees	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Asset-based	  	$	13,376	  	 	$	10,157	  	  	$	41,034	  	 	$	30,457	  	
Performance-based	  	 	-	  	 	 	-	  	  	 	991	  	 	 	-	  	
Trust fees	  	 	3,468	  	 	 	2,834	  	  	 	10,297	  	 	 	8,950	  	
Other revenues, net	  	 	(796	) 	 	 	482	  	  	 	(406	) 	 	 	476	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Total revenues	  	 	16,048	  	 	 	13,473	  	  	 	51,916	  	 	 	39,883	  	

EXPENSES:	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Employee compensation and benefits	  	 	8,295	  	 	 	7,296	  	  	 	27,084	  	 	 	21,447	  	
Sales and marketing	  	 	221	  	 	 	181	  	  	 	666	  	 	 	569	  	
WHG mutual funds	  	 	34	  	 	 	83	  	  	 	523	  	 	 	344	  	
Information technology	  	 	503	  	 	 	328	  	  	 	1,503	  	 	 	977	  	
Professional services	  	 	710	  	 	 	817	  	  	 	2,438	  	 	 	1,916	  	
General and administrative	  	 	988	  	 	 	657	  	  	 	2,870	  	 	 	2,026	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Total expenses	  	 	10,751	  	 	 	9,362	  	  	 	35,084	  	 	 	27,279	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Income before income taxes	  	 	5,297	  	 	 	4,111	  	  	 	16,832	  	 	 	12,604	  	
Provision for income taxes	  	 	2,014	  	 	 	1,512	  	  	 	6,263	  	 	 	4,579	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Net income	  	$	3,283	  	 	$	2,599	  	  	$	10,569	  	 	$	8,025	  	

Earnings per share:	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Basic	  	$	0.47	  	 	$	0.39	  	  	$	1.51	  	 	$	1.13	  	
Diluted	  	$	0.46	  	 	$	0.38	  	  	$	1.47	  	 	$	1.11	  	
 	 	 	 	 	
Dividends declared per share	  	$	0.35	  	 	$	0.33	  	  	$	1.05	  	 	$
	0.99

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, 2011
(in thousands, except share amounts)
(unaudited)

 	  	Westwood Holdings
Group, Inc.
Common Stock, Par	 	  	Addi-
tional
Paid-In
Capital	 	 	Treasury
Stock	 	 	Accumu-
lated
Other
Comp-
rehensive
Income	 	  	Retained
Earnings	 	 	Total	 	 	
 	  	Shares	 	 	Amount	 	  	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	
BALANCE, January 1, 2011	  	 	7,645,678	  	 	$	79	  	  	$	65,639	  	 	$	(8,749	) 	 	$	926	  	  	$	2,782	  	 	$	60,677	  	 	 	 	
Net income	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	10,569	  	 	 	10,569	  	 	 	 	
Other comprehensive income – unrealized gain on investment securities, net of $386 in taxes	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	717	  	  	 	 	 	 	 	717	  	 	 	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	11,286	  	 	 	 	
Issuance of restricted stock, net	  	 	211,095	  	 	 	2	  	  	 	(2	) 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	-	  	 	 	 	
Dividends declared	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	(8,148	) 	 	 	(8,148	) 	 	 	 	
Restricted stock amortization	  	 	 	 	 	 	 	 	  	 	7,601	  	 	 	 	 	 	 	 	 	  	 	 	 	 	 	7,601	  	 	 	 	
Tax benefit related to equity compensation	  	 	 	 	 	 	 	 	  	 	895	  	 	 	 	 	 	 	 	 	  	 	 	 	 	 	895	  	 	 	 	
Stock options exercised	  	 	5,100	  	 	 	-	  	  	 	65	  	 	 	 	 	 	 	 	 	  	 	 	 	 	 	65	  	 	 	 	
Purchase of treasury stock	  	 	(165,780	) 	 	 	 	 	  	 	 	 	 	 	(5,858	) 	 	 	 	 	  	 	 	 	 	 	(5,858	) 	 	 	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	
BALANCE, September 30, 2011	  	 	7,696,093	  	 	$	81	  	  	$	74,198	  	 	$	(14,607	) 	 	$	1,643	  	  	$	5,203	  	 	$	66,518	  	 	 	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	
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)

 	  	For the nine months
ended September 30,	 	
 	  	2011	 	 	2010	 	
CASH FLOWS FROM OPERATING ACTIVITIES:	  	 	 	 	 	 	 	 	
Net income	  	$	10,569	  	 	$	8,025	  	
Adjustments to reconcile net income to net cash provided by operating activities:	  	 	 	 	 	 	 	 	
Depreciation	  	 	184	  	 	 	206	  	
Amortization of intangible assets	  	 	374	  	 	 	79	  	
Fair value adjustment of deferred acquisition liabilities	  	 	(126	) 	 	 	46	  	
Unrealized (gains) and losses on trading investments	  	 	682	  	 	 	(312	) 	
Restricted stock amortization	  	 	7,601	  	 	 	6,927	  	
Deferred income taxes	  	 	1,147	  	 	 	205	  	
Excess tax benefits from stock based compensation	  	 	(692	) 	 	 	(979	) 	
Net purchases of investments – trading securities	  	 	(5,109	) 	 	 	(3,872	) 	
Change in operating assets and liabilities:	  	 	 	 	 	 	 	 	
Accounts receivable	  	 	(649	) 	 	 	(181	) 	
Other current assets	  	 	(168	) 	 	 	86	  	
Accounts payable and accrued liabilities	  	 	170	  	 	 	354	  	
Compensation and benefits payable	  	 	704	  	 	 	478	  	
Income taxes payable and prepaid income taxes	  	 	(706	) 	 	 	(588	) 	
Other liabilities	  	 	335	  	 	 	(59	) 	
 	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	14,316	  	 	 	10,415	  	

CASH FLOWS FROM INVESTING ACTIVITIES:	  	 	 	 	 	 	 	 	
Purchases of available for sale investments	  	 	-	  	 	 	(39,877	) 	
Sales of available for sale investments	  	 	-	  	 	 	39,257	  	
Purchase of property and equipment	  	 	(1,092	) 	 	 	(43	) 	
 	  	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(1,092	) 	 	 	(663	) 	

CASH FLOWS FROM FINANCING ACTIVITIES:	  	 	 	 	 	 	 	 	
Purchase of treasury stock	  	 	(5,858	) 	 	 	(2,723	) 	
Excess tax benefits from stock based compensation	  	 	692	  	 	 	979	  	
Cash dividends	  	 	(5,295	) 	 	 	(7,231	) 	
Proceeds from exercise of stock options	  	 	65	  	 	 	183	  	
 	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(10,396	) 	 	 	(8,792	) 	

NET INCREASE IN CASH	  	 	2,828	  	 	 	960	  	
Cash and cash equivalents, beginning of period	  	 	1,744	  	 	 	2,879	  	
 	  	 	 	 	 	 	 	 	
Cash and cash equivalents, end of period	  	$	4,572	  	 	$	3,839	  	

Supplemental cash flow information:	  	 	 	 	 	 	 	 	
Cash paid during the period for income taxes	  	$	5,877	  	 	$	4,961	  	
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”, “we” or “our”) was incorporated under the laws of the State of Delaware on December 12, 2001. 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 retirement plans, public retirement plans, endowments and foundations, mutual funds, individuals and clients of Westwood Trust. Westwood Trust provides institutions and high net worth individuals with 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 revenues and results of operations.
Westwood Management is a registered investment adviser 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, 2011, 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”). 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, 2010. Operating results for the periods in these consolidated financial statements are not necessarily indicative of the results for any future period. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (‘GAAP”) and include the accounts of Westwood and its subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP 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 assets under management. A limited number of our clients have a contractual performance-based fee component, which would pay us an additional fee if we outperform a specified index over a specific period of time. We record revenue for performance-based fees at the end of the measurement period. Most advisory and trust fees are payable in advance or in arrears on a calendar quarterly basis. Advance payments are deferred and recognized as services are performed, usually within the same calendar quarter, and our consolidated financial statements do not contain significant amounts of deferred revenue. Deferred revenue is shown on the balance sheet under the heading of “Other current liabilities”. Other revenues generally consist of interest and investment income. These revenues are recognized as earned or as the services are performed.
 
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Variable Interest Entities
A variable interest entity (VIE) is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the voting rights of the equity investors are not proportional to their obligations to absorb expected losses or receive expected residual returns of the entity.
We have examined whether the entities in which we have an interest are VIEs and whether we qualify as the primary beneficiary of the VIEs that we identify. We have included the disclosures related to VIEs in a note to these consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of short-term, highly liquid investments with maturities of three months or less, other than pooled investment vehicles that are considered investments.
Accounts Receivable
Our accounts receivable balances generally consist of advisory and trust fees receivable from customers that we believe and have experienced to be fully collectable. Our trade accounts receivable balances do not include any allowance for doubtful accounts nor has any bad debt expense attributable to trade receivables been recorded for the periods presented in these consolidated financial statements.
Investments
Prior to the fourth quarter of 2010, money market securities were classified as available for sale securities. In the fourth quarter of 2010, we reevaluated our investment classifications and determined that money market securities more closely fit the trading classification and began to account for them accordingly. In that money market securities do not have significantly fluctuating values, our balance sheet and income statement were not impacted upon reclassification of these securities. Class A shares of Teton Advisors, Inc. (“Teton shares”) are classified as available for sale. The Teton shares are carried at quoted market value with a 25% discount for lack of marketability. Unrealized gains and losses on the Teton shares are recorded through other comprehensive income. All other marketable securities are classified as trading securities and are carried at quoted market value on the accompanying consolidated 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 and Other Intangible Assets
Goodwill represents the excess of the cost of acquired assets over the fair value of the underlying identifiable assets at the date of acquisition. Goodwill is not amortized but is tested annually for impairment.
During the third quarter of 2011, we completed our annual goodwill impairment assessment and determined that no impairment loss was required. We perform annual impairment assessments as of July 1 and reassess if circumstances indicate a potential impairment between annual assessment dates. We assess the fair value of our business units for goodwill purposes using a market multiple approach.
Our intangible assets represent the acquisition date fair value of acquired client relationships, trade names and non-compete agreements and are reflected net of amortization. In valuing these assets, we made significant estimates regarding their useful lives, growth rates and potential attrition. We periodically review intangible assets for events or circumstances that would indicate impairment. For a further discussion of our intangible assets, please see “Note 7. INTANGIBLE ASSETS” of these consolidated financial statements.
 
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
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 basis of assets and liabilities as measured at enacted income tax rates. Deferred income tax expense is generally the result of changes in deferred tax assets and liabilities. Deferred taxes relate primarily to stock-based compensation expense.
We do not have uncertain tax positions for any of the periods presented. If an uncertain tax position should arise, we would report a liability for an unrecognized tax expense from an uncertain tax position taken or expected to be taken on a tax return. We include penalties and interest on income based taxes in “Provision for income taxes” on our consolidated statements of income.
Stock Based Compensation
We account for stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification  (“ASC”) No. 718, Compensation-Stock Compensation (“ASC 718”). Under ASC 718, 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 recorded for these awards is based on their grant-date fair value as required by ASC 718.
We have issued restricted stock and granted stock options in accordance with our Third Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan, as amended, (the “Plan”). We valued stock options granted in accordance with the Black-Scholes option-pricing model and expensed this value 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 consolidated 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, our stock-based compensation expense and results of operations could be materially affected.
3. EARNINGS PER SHARE
Basic earnings per common share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding for the periods ended September 30, 2011 and 2010, respectively. Diluted EPS for these periods is computed based on the weighted average number of shares outstanding plus the effect of dilutive shares of restricted stock and stock options granted to employees and non-employee directors and contingently issuable shares.
Under FASB ASC No. 620, Earnings Per Share, shares of unvested restricted stock that contain non-forfeitable rights to dividends are treated as participating securities, which requires allocating a portion of net income to those shares as if they were a separate class of stock, which reduces net income available to common stockholders. Prior to the third quarter of 2010, shares of unvested restricted stock contained non-forfeitable rights to dividends and accordingly were participating securities. In the third quarter of 2010, the Plan was modified such that dividends on unvested restricted shares no longer contain non-forfeitable rights to dividends, which removes requirements to treat such shares as a separate class of stock and to allocate a portion of net income to such shares for the third quarter of 2010 and future periods. There were no anti-dilutive restricted shares or options as of September 30, 2011 or 2010.
 
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
The following table sets forth the computation of basic and diluted shares (in thousands, except per share and share amounts):

 	  	Three months ended
September 30,	 	  	Nine months ended
September 30,	 	
 	  	2011	 	  	2010	 	  	2011	 	  	2010	 	
Net income	  	$	3,283	  	  	$	2,599	  	  	$	10,569	  	  	$	8,025	  	
Less: Income allocated to participating restricted shares	  	 	-	  	  	 	-	  	  	 	-	  	  	 	(576	) 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Net income available to common stockholders	  	$	3,283	  	  	$	2,599	  	  	$	10,569	  	  	$	7,449	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Weighted average shares outstanding – basic	  	 	7,005,473	  	  	 	6,634,585	  	  	 	6,976,988	  	  	 	6,567,429	  	
Dilutive potential shares from unvested restricted shares	  	 	172,430	  	  	 	158,437	  	  	 	186,780	  	  	 	66,506	  	
Dilutive contingently issuable shares	  	 	22,380	  	  	 	54,651	  	  	 	23,475	  	  	 	54,651	  	
Dilutive potential shares from stock options	  	 	15,855	  	  	 	18,855	  	  	 	17,092	  	  	 	22,130	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Weighted average shares outstanding – diluted	  	 	7,216,138	  	  	 	6,866,528	  	  	 	7,204,335	  	  	 	6,710,716	  	

Earnings per share:	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Basic	  	$	0.47	  	  	$	0.39	  	  	$	1.51	  	  	$	1.13	  	
Diluted	  	$	0.46	  	  	$	0.38	  	  	$	1.47	  	  	$	1.11	  	
4. INVESTMENTS:
Investment balances are presented in the table below (in thousands). All investments are carried at fair value. Our investments in Teton shares are accounted for as available for sale securities. All other investments are accounted for as trading securities.

 	  	Cost	 	  	Gross
Unrealized
Gains	 	  	Gross
Unrealized
Losses	 	 	Estimated
Market
Value	 	
September 30, 2011:	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
U.S. Government obligations	  	$	38,484	  	  	$	9	  	  	$	-	  	 	$	38,493	  	
Funds:	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Money market	  	 	3,011	  	  	 	-	  	  	 	-	  	 	 	3,011	  	
Equity – available for sale	  	 	-	  	  	 	2,528	  	  	 	-	  	 	 	2,528	  	
Equity – trading	  	 	4,950	  	  	 	-	  	  	 	(152	) 	 	 	4,798	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Marketable securities	  	$	46,445	  	  	$	2,537	  	  	$	(152	) 	 	$	48,830	  	

December 31, 2010:	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
U.S. Government obligations	  	$	32,774	  	  	$	11	  	  	$	-	  	 	$	32,785	  	
Funds:	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Money market	  	 	3,795	  	  	 	-	  	  	 	-	  	 	 	3,795	  	
Equity – available for sale	  	 	-	  	  	 	1,425	  	  	 	-	  	 	 	1,425	  	
Equity – trading	  	 	4,767	  	  	 	533	  	  	 	(5	) 	 	 	5,295	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Marketable securities	  	$	41,336	  	  	$	1,969	  	  	$	(5	) 	 	$	43,300	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
5. FAIR VALUE MEASUREMENTS
We determined estimated fair values of our financial instruments using available information. The fair value amounts discussed in Notes 4 and 5 to the consolidated financial statements are not necessarily indicative of either the amounts realizable upon disposition of these instruments or our intent or ability to dispose of these assets. The estimated fair value of cash and cash equivalents, 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, money market funds, WHG Funds mutual funds and Westwood Trust 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
 
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
market values of our money market holdings generally do not fluctuate. The fair value of the Teton shares, which is designated as an “available for sale” security, is equal to the closing market price as of September 30, 2011 of $16.85 per share less a 25% discount for lack of marketability.
Effective January 1, 2008, we adopted the provisions of FASB ASC No. 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring fair value and requires additional disclosures regarding certain fair value measurements. ASC 820 establishes a three-tier hierarchy for measuring fair value as follows:
 
 	•	 	level 1 – quoted market prices in active markets for identical assets,	
 
 	•	 	level 2 – inputs other than quoted prices that are directly or indirectly observable, and	
 
 	•	 	level 3 – unobservable inputs where there is little or no market activity.	
The following table summarizes the values of our assets as of within the fair value hierarchy (in thousands).

 	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Total	 	
As of September 30, 2011	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Investments in securities:	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Trading	  	$	46,302	  	  	$	-	  	  	$	-	  	  	$	46,302	  	
Available for sale	  	 	-	  	  	 	-	  	  	 	2,528	  	  	 	2,528	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total Financial instruments	  	$	46,302	  	  	$	-	  	  	$	2,528	  	  	$	48,830	  	

As of December 31, 2010	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Investments in securities:	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Trading	  	$	41,875	  	  	$	-	  	  	$	-	  	  	$	41,875	  	
Available for sale	  	 	-	  	  	 	-	  	  	 	1,425	  	  	 	1,425	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total Financial instruments	  	$	41,875	  	  	$	-	  	  	$	1,425	  	  	$	43,300	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
We used level 3 inputs to determine the fair value of our 200,000 Teton shares. This fair value amount is not necessarily indicative of either the amount we would realize upon disposition of these shares or our intent or ability to dispose of them. There were no transfers of assets (including level 3 assets) to or from other asset classes and there were no gains, losses, purchases or sales of the Teton shares. The following table presents information regarding this investment.

 	  	Three Months
Ended
September 30,	 	  	Nine Months
Ended
September 30,	 	
Investments in available for sale securities (in thousands)	  	2011	 	  	2010	 	  	2011	 	  	2010	 	
Beginning balance	  	$	2,512	  	  	$	1,350	  	  	$	1,425	  	  	$	2,399	  	
Unrealized gains/(losses) included in Other Comprehensive Income	  	 	16	  	  	 	-	  	  	 	1,103	  	  	 	(1,049	) 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Ending balance	  	$	2,528	  	  	$	1,350	  	  	$	2,528	  	  	$	1,350	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
6. OTHER COMPREHENSIVE INCOME
We record changes in other comprehensive income in the Consolidated Statement of Stockholder’s Equity. Other comprehensive income includes unrealized gains on available for sale securities. A summary of other comprehensive income follows (in thousands):
 
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 	  	Three Months
Ended
September 30,	 	  	Nine Months
Ended
September 30,	 	
 	  	2011	 	  	2010	 	  	2011	 	  	2010	 	
Net income	  	$	3,283	  	  	$	2,599	  	  	$	10,569	  	  	$	8,025	  	
Other comprehensive income (loss), net of tax:	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Change in unrealized gain on available for sale securities	  	 	10	  	  	 	-	  	  	 	717	  	  	 	(682	) 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Comprehensive income	  	$	3,293	  	  	$	2,599	  	  	$	11,286	  	  	$	7,343	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
7. INTANGIBLE ASSETS
The following is a summary of our intangible assets at September 30, 2011 and December 31, 2010 (in thousands):

 	  	Weighted
Average
Amortization
Period
(years)	 	  	Gross
Carrying
Amount	 	  	Accumu-
lated
Amortiz-
ation	 	 	Net
Carrying
Amount	 	
September 30, 2011	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Client relationships	  	 	14.2	  	  	$	5,005	  	  	$	(408	) 	 	$	4,597	  	
Trade names	  	 	2.0	  	  	 	256	  	  	 	(123	) 	 	 	133	  	
Non-compete agreements	  	 	2.3	  	  	 	26	  	  	 	(11	) 	 	 	15	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Total	  	 	 	 	  	$	5,287	  	  	$	(542	) 	 	$	4,745	  	

December 31, 2010	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Client relationships	  	 	14.2	  	  	$	5,005	  	  	$	(139	) 	 	$	4,866	  	
Trade names	  	 	2.0	  	  	 	256	  	  	 	(27	) 	 	 	229	  	
Non-compete agreements	  	 	2.3	  	  	 	26	  	  	 	(2	) 	 	 	24	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Total	  	 	 	 	  	$	5,287	  	  	$	(168	) 	 	$	5,119	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Amortization expense was $374,000 and $79,000 for the nine months ended September 30, 2011 and 2010, respectively. Estimated amortization expense for the intangible assets for the next five years is as follows (in thousands):

For the Year ending December 31,	  	Estimated
Amortization
Expense	
2011	  	$498	
2012	  	472	
2013	  	359	
2014	  	359	
2015	  	359	
8. EQUITY
On August 9, 2011, our board of directors authorized management to repurchase up to $10.0 million of our outstanding common stock on the open market or in privately negotiated transactions. The stock repurchase program expires August 9, 2012. From August 10, 2011 through September 30, 2011, we purchased 87,686 shares of our common stock in accordance with the stock purchase plan. The shares were purchased at an average cost of $33.78 per share and are shown as treasury shares in the equity section of our balance sheet at cost. Approximately $7.0 million remains available for such purchases.
 
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
On July 20, 2011, we declared a quarterly cash dividend of $0.35 per share on common stock payable on October 3, 2011 to stockholders of record on September 15, 2011.
On July 1, 2011, we purchased 7,260 shares of our common stock from employees of Westwood to assist in satisfying their tax obligations related to vested restricted shares. The shares were purchased at $38.30 per share, the closing price of our common stock on that day, and are shown as treasury shares in the equity section of our balance sheet at cost.
On April 29, 2011, we purchased 554 shares of our common stock from an employee of Westwood to assist in satisfying her tax obligation related to vested restricted shares. The shares were purchased at $37.65 per share, the closing price of our common stock on that day, and are shown as treasury shares in the equity section of our balance sheet at cost.
On April 20, 2011, we granted an aggregate of 9,000 shares of restricted stock to non-employee directors. These shares are subject to vesting conditions as described in “Note 10. STOCK BASED COMPENSATION”.
On April 20, 2011, we declared a quarterly cash dividend of $0.35 per share on common stock payable on July 1, 2011 to stockholders of record on June 15, 2011.
On February 23, 2011, we purchased 70,280 shares of our common stock from employees of Westwood to assist in satisfying their tax obligations related to vested restricted shares. The shares were purchased at $36.95 per share, the closing price of our common stock on that day, and are shown as treasury shares in the equity section of our balance sheet at cost.
On February 23, 2011, we granted an aggregate of 211,220 shares of restricted stock to certain employees. These shares are subject to vesting conditions as described in “Note 10. STOCK BASED COMPENSATION”.
On February 3, 2011, we declared a quarterly cash dividend of $0.35 per share on common stock payable on April 1, 2011 to stockholders of record on March 15, 2011.
9. VARIABLE INTEREST ENTITIES
Westwood Trust sponsors common trust funds (“CTFs”) for its clients. These funds allow clients to commingle assets to achieve economies of scale. Westwood Management provides investment advisory services to the WHG Funds, a family of mutual funds. Some clients of Westwood Management hold their investments in ten limited liability companies and two limited partnerships that we formed and sponsor. The CTFs, WHG Funds, limited liability companies and partnerships (the “Westwood VIEs”) are considered VIEs because our clients, who hold the equity at risk, do not have direct or indirect ability through voting or similar rights to make decisions about the funds that have a significant effect on their success. We receive fees for managing assets in these entities commensurate with market rates.
We evaluate all of our advisory relationships and CTFs to determine whether or not we qualify as the primary beneficiary based on whether there is an obligation to absorb the majority of expected losses or a right to receive the majority of residual returns. Since all losses and returns are distributed to the shareholders of the Westwood VIEs, we are not the primary beneficiary and consequently the Westwood VIEs are not included in our consolidated financial statements.
We have not provided any financial support that we were not previously contractually obligated to provide and there are no arrangements that would require us to provide additional financial support to any of the Westwood VIEs. Our investments in the WHG Funds and the CTFs are accounted for as investments in accordance with our other investments described in “Note. 4 INVESTMENTS”. The following table displays assets under management, corporate money invested and risk of loss in each vehicle (in millions).
 
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 	  	As of September 30, 2011	 	
 	  	Assets
Under
Management	 	  	Corporate
Investment	 	  	Risk
of
Loss	 	
WHG Funds	  	$	1,089	  	  	$	2.6	  	  	$	2.6	  	
Common Trust Funds	  	 	1,503	  	  	 	2.2	  	  	 	2.2	  	
LLCs	  	 	417	  	  	 	-	  	  	 	-	  	
Partnerships	  	 	23	  	  	 	-	  	  	 	-	  	

 	  	As of December 31, 2010	 	
 	  	Assets
Under
Management	 	  	Corporate
Investment	 	  	Risk
of
Loss	 	
WHG Funds	  	$	902	  	  	$	2.7	  	  	$	2.7	  	
Common Trust Funds	  	 	1,631	  	  	 	2.6	  	  	 	2.6	  	
LLCs	  	 	443	  	  	 	-	  	  	 	-	  	
Partnerships	  	 	27	  	  	 	-	  	  	 	-	  	
McCarthy Multi-Cap Stock Fund	  	 	68	  	  	 	-	  	  	 	-	  	
10. STOCK BASED COMPENSATION
The Plan reserves shares of Westwood common stock for issuance to eligible employees, directors and consultants of Westwood or its subsidiaries in the form of restricted stock and stock options. The total number of shares that may be issued under the Plan (including predecessor plans) may not exceed 3,398,100 shares and at September 30, 2011, approximately 870,000 shares remained available for issuance under the Plan.
The following table presents the total expense recorded for stock based compensation (in thousands):

 	  	Nine months ended
September 30,	 	
 	  	2011	 	  	2010	 	
Service condition restricted stock expense	  	$	5,848	  	  	$	5,291	  	
Performance based restricted stock expense	  	 	1,753	  	  	 	1,636	  	
 	  	 	 	 	  	 	 	 	
Total stock based compensation expense	  	$	7,601	  	  	$	6,927	  	
 	  	 	 	 	  	 	 	 	
Restricted Stock
Under the Plan, we have granted restricted stock to employees and non-employee directors, 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. As of September 30, 2011, approximately $19.1 million of remaining unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 2.2 years. Our two types of restricted stock grants are discussed below.
Employee and non-employee director restricted share grants
Restricted shares granted to employees vest over four years and non-employee directors’ shares vest over one year. The following table details the status and changes in our restricted stock grants that are subject only to a service condition for the nine months ended September 30, 2011:
 
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Restricted shares subject only to a service condition:	  	Shares	 	 	Weighted Average
Grant Date Fair
Value	
 	 	 	
Non-vested, January 1, 2011	  	 	551,100	  	 	$34.83	
Granted	  	 	220,220	  	 	36.64	
Vested	  	 	(198,025	) 	 	32.39	
Forfeited	  	 	(9,125	) 	 	36.35	
 	  	 	 	 	 	 	
Non-vested, September 30, 2011	  	 	564,170	  	 	36.37	
 	  	 	 	 	 	 	
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 five and six years, respectively, provided annual performance goals established by the Compensation Committee of Westwood’s board of directors are met. In February 2011, the Compensation Committee established the goal for 2011 as adjusted pre-tax income of at least $19,330,265, representing a compound annual growth rate of 10% over annual adjusted pre-tax income recorded in 2006. At September 30, 2011 there were 190,000 shares of unvested performance based restricted shares outstanding.
In the first quarter of 2011, 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 to vest this year and began recording expense related to those shares.
11. SEGMENT REPORTING:
We operate two segments: Westwood Management and Westwood Trust. These segments are managed separately based on the 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. 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 stock-based compensation expense.
Westwood Management
Westwood Management provides investment advisory services to corporate retirement plans, public retirement plans, endowments, foundations, the WHG Funds and individuals, 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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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 	  	Westwood
Management	 	  	Westwood
Trust	 	  	Westwood
Holdings	 	 	Eliminations	 	 	Consolidated	 	
 	  	(in thousands)	 	
Three months ended September 30, 2011	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Net revenues from external sources	  	$	12,574	  	  	$	3,474	  	  	$	-	  	 	$	-	  	 	$	16,048	  	
Net intersegment revenues	  	 	1,182	  	  	 	4	  	  	 	-	  	 	 	(1,186	) 	 	 	-	  	
Income before income taxes	  	 	7,083	  	  	 	623	  	  	 	(2,409	) 	 	 	-	  	 	 	5,297	  	
Segment assets	  	 	71,263	  	  	 	13,954	  	  	 	(1,017	) 	 	 	-	  	 	 	84,200	  	
Segment goodwill	  	 	5,259	  	  	 	6,079	  	  	 	-	  	 	 	-	  	 	 	11,338	  	
 	 	 	 	 	 	
Three months ended September 30, 2010	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Net revenues from external sources	  	$	10,638	  	  	$	2,835	  	  	$	-	  	 	$	-	  	 	$	13,473	  	
Net intersegment revenues	  	 	985	  	  	 	4	  	  	 	-	  	 	 	(989	) 	 	 	-	  	
Income before income taxes	  	 	6,153	  	  	 	345	  	  	 	(2,387	) 	 	 	-	  	 	 	4,111	  	
Segment assets	  	 	56,327	  	  	 	4,067	  	  	 	4,974	  	 	 	-	  	 	 	65,368	  	
Segment goodwill	  	 	3,403	  	  	 	512	  	  	 	-	  	 	 	-	  	 	 	3,915	  	
 	 	 	 	 	 	
Nine months ended September 30, 2011	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Net revenues from external sources	  	$	41,612	  	  	$	10,304	  	  	$	-	  	 	$	-	  	 	$	51,916	  	
Net intersegment revenues	  	 	3,574	  	  	 	12	  	  	 	-	  	 	 	(3,586	) 	 	 	-	  	
Income before income taxes	  	 	22,866	  	  	 	1,567	  	  	 	(7,601	) 	 	 	-	  	 	 	16,832	  	
 	 	 	 	 	 	
Nine months ended September 30, 2010	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Net revenues from external sources	  	$	30,931	  	  	$	8,952	  	  	$	-	  	 	$	-	  	 	$	39,883	  	
Net intersegment revenues	  	 	3,108	  	  	 	13	  	  	 	-	  	 	 	(3,121	) 	 	 	-	  	
Income before income taxes	  	 	17,960	  	  	 	1,571	  	  	 	(6,927	) 	 	 	-	  	 	 
	12,604

 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2010 filed with the SEC, and those set forth below:
 
 	•	 	our ability to identify and market services that appeal to our customers;	
 	•	 	the significant concentration of our revenues in four of our customers;	
 	•	 	our relationships with investment consulting firms;	
 	•	 	our relationships with current and potential customers;	
 	•	 	our ability to retain qualified personnel;	
 	•	 	our ability to develop and market new asset classes successfully;	
 	•	 	our ability to maintain our fee structure in light of competitive fee pressures;	
 	•	 	competition in the marketplace;	
 	•	 	downturns in financial markets;	
 	•	 	new legislation adversely affecting the financial services industries;	
 	•	 	interest rates;	
 	•	 	changes in our effective tax rate;	
 	•	 	our ability to maintain an effective system of internal controls; and	
 	•	 	other risks as detailed from time to time in our SEC reports.	
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 release publicly 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 and public retirement plans, endowments and foundations, the WHG Funds, other mutual funds, individuals 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., our principal asset classes have consistently ranked above the median in performance within their peer groups when measured over ten years and longer. 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 client accounts under investment advisory and subadvisory agreements. Advisory fees are calculated based on a percentage of assets under management and are paid in accordance with the terms of the agreements. Westwood Management’s advisory fees are paid quarterly in advance based on assets under management on the last day of the preceding quarter, quarterly in arrears based on assets under management on the last day of the quarter just ended, or are based on a daily or monthly analysis of assets under management for the stated period. Westwood Management recognizes revenues as services are rendered. A limited number of our clients have a contractual performance-based fee component in their contract, which generates additional revenues if we outperform a specified index over a specific period of time. We record
 
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revenue from performance-based fees at the end of the measurement periods. Since our advance paying clients’ billing periods coincide with the calendar quarter to which such payments relate, revenue is fully recognized within the quarter and our consolidated financial statements contain no deferred advisory fee revenues.
Our trust fees are generated by Westwood Trust pursuant to trust or custodial agreements. Trust fees are separately negotiated with each client and are generally based on a percentage of assets under management. Westwood Trust also provides trust services to a small number of clients on a fixed fee basis. Most trust fees are paid quarterly in advance and are recognized as services are rendered. Since billing periods for most of Westwood Trust’s advance paying clients coincide with the calendar quarter, revenue is fully recognized within the quarter and our consolidated financial statements do not contain a significant amount of deferred revenue.
Our other revenues generally consist of interest and investment income. Although we invest most of our cash in U.S. Treasury securities, we also invest in equity and fixed income instruments and money market funds.
Assets Under Management
Assets under management increased $1.0 billion to $11.7 billion at September 30, 2011, compared with $10.6 billion at September 30, 2010. The average of beginning and ending assets under management for the third quarter of 2011 was $12.8 billion compared to $10.2 billion for the third quarter of 2010, an increase of 26%.
The following table displays assets under management as of September 30, 2011 and 2010:

 	  	As of September 30,
(in millions)	 	  	% Change
September 30, 2011
vs.
September 30, 2010	
 	  	2011	 	  	2010	 	  	 	
Institutional	  	$	7,769	  	  	$	7,952	  	  	(2)%	
Private Wealth	  	 	2,796	  	  	 	1,929	  	  	45      	
Mutual Funds	  	 	1,089	  	  	 	760	  	  	43      	
 	  	 	 	 	  	 	 	 	  	 	
Total Assets Under Management	  	$	11,654	  	  	$	10,641	  	  	9%	

 	•	 	Institutional includes: separate accounts of corporate pension and profit sharing plans, public employee retirement funds, Taft Hartley plans, endowments, foundations and individuals; subadvisory relationships where Westwood Management provides investment management services for funds offered by other financial institutions; and managed account relationships with brokerage firms and other registered investment advisors who offer Westwood Management’s products to their customers.	
 
 	•	 	Private Wealth includes assets for which Westwood Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals pursuant to trust or agency agreements. Also included are assets acquired in the McCarthy transaction representing institutional and high net worth clients for which Westwood provides investment management and advisory services.	
 
 	•	 	Mutual Funds include the WHG Funds, a family of mutual funds for which Westwood Management serves as advisor.	
 
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Roll-Forward of Assets Under Management

($ millions)	  	Three Months Ended
September 30,	 	 	Nine Months Ended
September 30,	 	
 	  	2011	 	 	2010	 	 	2011	 	 	2010	 	
Institutional	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Beginning of period assets	  	$	9,432	  	 	$	7,220	  	 	$	8,359	  	 	$	7,599	  	
Inflows	  	 	278	  	 	 	57	  	 	 	1,429	  	 	 	838	  	
Outflows	  	 	(245	) 	 	 	(160	) 	 	 	(894	) 	 	 	(880	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net flows	  	 	33	  	 	 	(103	) 	 	 	535	  	 	 	(42	) 	
Market appreciation/(depreciation)	  	 	(1,696	) 	 	 	835	  	 	 	(1,125	) 	 	 	395	  	
Net change	  	 	(1,663	) 	 	 	732	  	 	 	(590	) 	 	 	353	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
End of period assets	  	 	7,769	  	 	 	7,952	  	 	 	7,769	  	 	 	7,952	  	

Private Wealth	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Beginning of period assets	  	 	3,203	  	 	 	1,787	  	 	 	3,148	  	 	 	2,009	  	
Inflows	  	 	127	  	 	 	23	  	 	 	238	  	 	 	65	  	
Outflows	  	 	(82	) 	 	 	(33	) 	 	 	(329	) 	 	 	(203	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net flows	  	 	45	  	 	 	(10	) 	 	 	(91	) 	 	 	(138	) 	
Market appreciation/(depreciation)	  	 	(452	) 	 	 	152	  	 	 	(261	) 	 	 	58	  	
Net change	  	 	(407	) 	 	 	142	  	 	 	(352	) 	 	 	(80	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
End of period assets	  	 	2,796	  	 	 	1,929	  	 	 	2,796	  	 	 	1,929	  	

Mutual Funds	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Beginning of period assets	  	 	1,288	  	 	 	652	  	 	 	970	  	 	 	566	  	
Inflows	  	 	99	  	 	 	80	  	 	 	448	  	 	 	274	  	
Outflows	  	 	(106	) 	 	 	(40	) 	 	 	(200	) 	 	 	(120	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net flows	  	 	(7	) 	 	 	40	  	 	 	248	  	 	 	154	  	
Market appreciation/(depreciation)	  	 	(192	) 	 	 	68	  	 	 	(129	) 	 	 	40	  	
Net change	  	 	(199	) 	 	 	108	  	 	 	119	  	 	 	194	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
End of period assets	  	 	1,089	  	 	 	760	  	 	 	1,089	  	 	 	760	  	

Total	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Beginning of period assets	  	 	13,923	  	 	 	9,659	  	 	 	12,477	  	 	 	10,174	  	
Inflows	  	 	504	  	 	 	160	  	 	 	2,115	  	 	 	1,177	  	
Outflows	  	 	(433	) 	 	 	(233	) 	 	 	(1,423	) 	 	 	(1,203	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net flows	  	 	71	  	 	 	(73	) 	 	 	692	  	 	 	(26	) 	
Market appreciation/(depreciation)	  	 	(2,340	) 	 	 	1,055	  	 	 	(1,515	) 	 	 	493	  	
Net change	  	 	(2,269	) 	 	 	982	  	 	 	(823	) 	 	 	467	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
End of period assets	  	$	11,654	  	 	$	10,641	  	 	$	11,654	  	 	$	10,641	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Three months ended September 30, 2011 and 2010
The $2.3 billion decrease in assets under management for the three months ended September 30, 2011 was due to market depreciation of $2.3 billion and outflows of $433 million, partially offset by inflows of $504 million. Inflows were primarily into existing institutional separate accounts and subadvisory mandates and new private wealth accounts. Outflows were primarily related to account closings and outflows from institutional separate accounts, subadvisory mandates and private wealth clients. The WHG Funds had net outflows due primarily to a clients’ rebalancing withdrawal during the quarter.
The $982 million increase in assets under management for the three months ended September 30, 2010 was due to market appreciation of $1.1 billion and inflows of $160 million, partially offset by outflows of $233 million. Inflows were primarily into the WHG Funds, existing institutional separate accounts and subadvisory mandates. Outflows were primarily related to outflows from institutional separate accounts and subadvisory mandates.
 
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Nine months ended September 30, 2011 and 2010
The $823 million decrease in assets under management for the nine months ended September 30, 2011 was due to market depreciation of $1.5 billion and outflows of $1.4 billion, partially offset by inflows of $2.1 billion. Inflows were driven primarily by additional inflows into institutional separate accounts, the WHG Funds and private wealth accounts. Outflows were primarily related to account closings and outflows from institutional separate accounts, subadvisory and private wealth clients.
The $467 million increase in assets under management for the nine months ended September 30, 2010 was due to inflows of $1.2 billion and market appreciation of $493 million, partially offset by outflows of $1.2 billion. Inflows were driven primarily by additional inflows into institutional separate accounts, subadvisory mandates and the WHG Funds. Outflows were primarily related to account closings and outflows from institutional separate accounts and subadvisory clients.
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, 2011 is based upon data derived from the consolidated statements of income contained in our consolidated financial statements and should be read in conjunction with those statements, included elsewhere in this quarterly report.

 	  	 	 	 	 	 	  	 	 	 	 	 	  	% Change	 	
 	  	Three months ended
September 30,	 	  	Nine months  ended
September 30,	 	  	Three months ended
September 30, 2011
vs.
September 30, 2010	 	Nine months ended
September 30, 2011
vs.
September 30,  2010	 	
 	  	2011	 	 	2010	 	  	2011	 	 	2010	 	  	 	 	 	 	
Revenues	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	
Advisory fees	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	
Asset-based	  	$	13,376	  	 	$	10,157	  	  	$	41,034	  	 	$	30,457	  	  	    32%	 	    35%	 	
Performance-based	  	 	-	  	 	 	-	  	  	 	991	  	 	 	-	  	  	NM	 	NM	 	
Trust fees	  	 	3,468	  	 	 	2,834	  	  	 	10,297	  	 	 	8,950	  	  	22	 	15	 	
Other revenues	  	 	(796	) 	 	 	482	  	  	 	(406	) 	 	 	476	  	  	NM	 	NM	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	
Total revenues	  	 	16,048	  	 	 	13,473	  	  	 	51,916	  	 	 	39,883	  	  	19	 	30	 	

Expenses	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	
Employee compensation and benefits	  	 	8,295	  	 	 	7,296	  	  	 	27,084	  	 	 	21,447	  	  	14	 	26	 	
Sales and marketing	  	 	221	  	 	 	181	  	  	 	666	  	 	 	569	  	  	22	 	17	 	
WHG mutual funds	  	 	34	  	 	 	83	  	  	 	523	  	 	 	344	  	  	(59)	 	52	 	
Information technology	  	 	503	  	 	 	328	  	  	 	1,503	  	 	 	977	  	  	53	 	54	 	
Professional services	  	 	710	  	 	 	817	  	  	 	2,438	  	 	 	1,916	  	  	(13)	 	27	 	
General and administrative	  	 	988	  	 	 	657	  	  	 	2,870	  	 	 	2,026	  	  	50	 	42	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	
Total expenses	  	 	10,751	  	 	 	9,362	  	  	 	35,084	  	 	 	27,279	  	  	15	 	29	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	
Income before income taxes	  	 	5,297	  	 	 	4,111	  	  	 	16,832	  	 	 	12,604	  	  	29	 	34	 	
Provision for income taxes	  	 	2,014	  	 	 	1,512	  	  	 	6,263	  	 	 	4,579	  	  	33	 	37	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	
Net income	  	$	3,283	  	 	$	2,599	  	  	$	10,569	  	 	$	8,025	  	  	    26%	 	    32%	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	
Three months ended September 30, 2011 compared to three months ended September 30, 2010
Total Revenues. Our total revenues increased by 19% to $16.0 million for the three months ended September 30, 2011 compared with $13.5 million for the three months ended September 30, 2010. Asset-based advisory fees increased by 32% to $13.4 million for the three months ended September 30, 2011 compared with $10.2 million for the three months ended September 30, 2010 as a result of increased average assets under management by Westwood Management due to assets acquired in the McCarthy acquisition in November 2010, and inflows from new and existing clients, partially offset by market depreciation of assets and the withdrawal of assets by certain clients. Trust fees increased by 22% to $3.5 million for the three months ended September 30, 2011 compared with $2.8 million for the three months ended September 30, 2010 as a result of increased assets under management by Westwood Trust due to inflows from new accounts. Market depreciation of assets and net asset outflows from existing clients partially offset these increases. Other revenues, which generally consist of interest and investment income, decreased to $(796,000) for the three months ended September 30, 2011 compared with $482,000 for the three months ended September 30, 2010. Other revenues are presented net and decreased primarily due to an increase of $1.3 million in net unrealized losses on investments.
 
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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 costs increased by 14% to $8.3 million for the three months ended September 30, 2011 compared with $7.3 million for the three months ended September 30, 2010. The increase was primarily due to increases of $515,000 in incentive compensation expense as a result of higher pretax income, $399,000 in salary expense due primarily to increased average headcount and salary increases, $139,000 in service-based restricted stock expense due to additional grants in February and April 2011, and $52,000 in health insurance expense. These increases were partially offset by a decrease of $116,000 in performance-based restricted stock expense. In the first quarter of 2011 we concluded that it was probable that we would meet the performance goal required in order for the applicable percentage of the performance-based restricted shares awarded to our Chief Investment Officer and Chief Executive Officer to vest. As a result, we recognized expense of approximately $584,000 in the first, second and third quarters of 2011 related to these performance-based restricted stock grants. We had 81 full-time employees as of September 30, 2011 compared to 67 full-time employees as of September 30, 2010.
Sales and Marketing. Sales and marketing costs relate to our marketing efforts, including travel and entertainment, direct marketing and advertising costs. Sales and marketing costs increased by 22% to $221,000 for the three months ended September 30, 2011 compared with $181,000 for the three months ended September 30, 2010. The increase is primarily the result of increased referral fees and travel expenses partially offset by decreased direct marketing expenses.
WHG Mutual Funds. WHG Mutual Funds expenses relate to our marketing, distribution, administration and acquisition efforts related to the WHG Funds. WHG Mutual Funds expenses decreased by 59% to $34,000 for the three months ended September 30, 2011 compared with $83,000 for the three months ended September 30, 2010 due to a decrease in the acquisition liability we recorded as part of the mutual fund acquisition we completed in 2009. The acquisition liability fluctuates based on the value of the accounts we acquired and will be paid in the fourth quarter of 2011. Partially offsetting this decrease was an increase in shareholder servicing and marketing costs.
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 53% to $503,000 for the three months ended September 30, 2011 compared with $328,000 for the three months ended September 30, 2010. The increase is primarily due to software and software implementation costs related to upgraded client reporting and portfolio accounting systems and increased research expenses.
Professional Services. Professional services expenses generally consist of costs associated with subadvisory fees, audit, legal and other professional services. Professional services expenses decreased by 13% to $710,000 for the three months ended September 30, 2011 compared with $817,000 for the three months ended September 30, 2010. The decrease is primarily due to decreases of $98,000 in legal fees and $65,000 in professional services related to growth initiatives. Increases of $30,000 in subadvisor fees related to common trust funds sponsored by Westwood Trust and $23,000 in tax consultation fees partially offset these decreases.
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 50% to $988,000 for the three months ended September 30, 2011 compared with $657,000 for the three months ended September 30, 2010. The increase is primarily due to increased amortization expense related to intangible assets acquired in November 2010, increased rent expense due to a new lease for our Dallas office effective June 2011 and a lease related to our Omaha office acquired in November 2010, increased charitable contributions and higher fees related to a new director compensation plan.
Provision for Income Tax Expense. Provision for income tax expenses increased by 33% to $2.0 million for the three months ended September 30, 2011 compared with $1.5 million for the three months ended September 30, 2010. The effective tax rate increased to 38.0% for the three months ended September 30, 2011 from 36.8% for the three months ended September 30, 2010 primarily due to current year taxable income in a higher federal tax bracket, provision to return adjustments from our 2010 federal tax return and an additional state tax liability related to an acquisition we made in November 2010.
 
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Nine months ended September 30, 2011 compared to nine months ended September 30, 2010
Total Revenues. Our total revenues increased by 30% to $51.9 million for the nine months ended September 30, 2011 compared with $39.9 million for the nine months ended September 30, 2010. Asset-based advisory fees increased by 35% to $41.0 million for the nine months ended September 30, 2011 compared with $30.5 million for the nine months ended September 30, 2010 as a result of increased average assets under management by Westwood Management due to assets acquired in the McCarthy acquisition in November 2010 and inflows from new and existing clients, partially offset by market depreciation of assets and the withdrawal of assets by certain clients. We recognized a performance-based advisory fee of $991,000 for the nine months ended September 30, 2011. We did not earn a performance-based advisory fee for the nine months ended September 30, 2010. Trust fees increased by 15% to $10.3 million for the nine months ended September 30, 2011 compared with $9.0 million for the nine months ended September 30, 2010 as a result of increased assets under management by Westwood Trust due to inflows from new accounts. Market depreciation of assets and net asset outflows from existing clients partially offset these increases. Other revenues, which generally consist of interest and investment income, decreased to $(406,000) for the nine months ended September 30, 2011 compared with $476,000 for the nine months ended September 30, 2010. Other revenues are presented net and increased primarily due to an increase of $994,000 in net unrealized losses on investments partially offset by an increase of $102,000 in realized gains on investments.
Employee Compensation and Benefits. Employee compensation and benefits costs increased by 26% to $27.1 million for the nine months ended September 30, 2011 compared with $21.4 million for the nine months ended September 30, 2010. The increase was primarily due to increases of $3.1 million in incentive compensation expense as a result of higher pretax income and performance-based incentive compensation related to investment and marketing goals, $1.3 million in salary expense due primarily to increased average headcount and salary increases, $675,000 in restricted stock expense due to increases of $558,000 of expense related to service-based grants and $117,000 of expense related to performance-based grants, $222,000 in payroll tax expense related to increased salaries and an increase in the number of shares of restricted stock that vested and $145,000 in health insurance costs. In the first quarter of 2011 we concluded that it was probable that we would meet the performance goal required in order for the applicable percentage of the performance-based restricted shares awarded to our Chief Investment Officer and Chief Executive Officer to vest. As a result, we recognized expense of approximately $584,000 in the first, second and third quarters of 2011 related to these performance-based restricted stock grants. We had 81 full-time employees as of September 30, 2011 compared to 67 full-time employees as of September 30, 2010.
Sales and Marketing. Sales and marketing costs increased by 17% to $666,000 for the nine months ended September 30, 2011 compared with $569,000 for the nine months ended September 30, 2010. The increase is primarily the result of increased referral fees and travel expenses partially offset by decreased direct marketing expenses.
WHG Mutual Funds. WHG Mutual Funds expenses increased by 52% to $523,000 for the nine months ended September 30, 2011 compared with $344,000 for the nine months ended September 30, 2010 due to increased legal costs related to the reorganization of the McCarthy Multi-Cap Stock Fund, which was acquired in November 2010, into the WHG Dividend Growth Fund and higher shareholder servicing and marketing costs. These increases were partially offset by a decrease in the acquisition liability we recorded as part of the mutual fund acquisition we completed in 2009. The acquisition liability fluctuates based on the value of the accounts we acquired and will be paid in the fourth quarter of 2011.
Information Technology. Information technology expenses increased by 54% to $1.5 million for the nine months ended September 30, 2011 compared with $1.0 million for the nine months ended September 30, 2010. The increase is primarily due to software and software implementation costs related to upgraded client reporting and portfolio accounting systems, increased quotation expense and increased research costs.
Professional Services. Professional services expenses increased by 27% to $2.4 million for the nine months ended September 30, 2011 compared with $1.9 million for the nine months ended September 30, 2010. The increase is primarily due to increases of $276,000 in subadvisor fees related to common trust funds sponsored by Westwood Trust, $145,000 in professional services related to growth initiatives and $152,000 in audit fees related to
 
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unconsolidated investment vehicles we acquired in 2010. An $85,000 decrease in legal fees partially offset these increases.
General and Administrative. General and administrative expenses increased by 42% to $2.9 million for the nine months ended September 30, 2011 compared with $2.0 million for the nine months ended September 30, 2010. The increase is primarily due to increased amortization expense related to intangible assets acquired in November 2010, increased rent expense due to a new lease for our Dallas office effective June 2011 and a lease related to our Omaha office acquired in November 2010, increased charitable contributions and higher fees related to a new director compensation plan.
Provision for Income Tax Expense. Provision for income tax expenses increased by 37% to $6.3 million for the nine months ended September 30, 2011 compared with $4.6 million for the nine months ended September 30, 2010. The effective tax rate increased to 37.2% for the nine months ended September 30, 2011 from 36.3% for the nine months ended September 30, 2010 primarily due to current year taxable income in a higher federal tax bracket, provision to return adjustments from our 2010 federal tax return and an additional state tax liability related to an acquisition we made in November 2010.
Supplemental Financial Information
As supplemental information, we are providing non-generally accepted accounting principles (“non-GAAP”) performance measures that we refer to as Economic earnings and Economic 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. Both our Management and Board of Directors review Economic Earnings and Economic 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 management and investors when evaluating 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 Economic Earnings, we add to net income the non-cash expense associated with equity-based compensation awards of restricted stock and stock options, amortization of intangible assets and the deferred taxes related to the tax-basis amortization of goodwill. We define Economic Expenses as total expenses less non-cash equity-based compensation expense and amortization of intangible assets. Although depreciation on property and equipment is a non-cash expense, we do not add it back when calculating Economic Earnings or deduct it when calculating Economic Expenses because depreciation charges represent a decline in the value of the related assets that will ultimately require replacement.
Our Economic Earnings increased by 17% to $5.9 million for the three months ended September 30, 2011 compared with $5.0 million for the three months ended September 30, 2010, primarily due to an increase in total revenues. For the nine months ended September 30, 2011, Economic Earnings increased by 24% to $18.7 million compared to $15.1 million for the nine months ended September 30, 2010, primarily due to increased revenues.
The following tables provide a reconciliation of net income to Economic Earnings and total expenses to Economic Expenses (in thousands):

 	  	Three Months Ended
September 30	 	 	%
Change	 	
 	  	2011	 	 	2010	 	 	 	 	
Net Income	  	$	3,283	  	 	$	2,599	  	 	 	26	% 	
Add: Restricted stock expense	  	 	2,409	  	 	 	2,387	  	 	 	1	  	
Add: Intangible amortization	  	 	125	  	 	 	26	  	 	 	381	  	
Add: Deferred taxes on goodwill	  	 	47	  	 	 	9	  	 	 	422	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Economic earnings	  	$	5,864	  	 	$	5,021	  	 	 	17	  	

Total expenses	  	$	10,751	  	 	$	9,362	  	 	 	15	  	
Less: Restricted stock expense	  	 	(2,409	) 	 	 	(2,387	) 	 	 	1	  	
Less: Intangible amortization	  	 	(125	) 	 	 	(26	) 	 	 	381	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Economic expenses	  	$	8,217	  	 	$	6,949	  	 	 	18	% 	

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 	  	Nine Months Ended
September 30	 	 	%
Change	 	
 	  	2011	 	 	2010	 	 	 	 	
Net Income	  	$	10,569	  	 	$	8,025	  	 	 	32	% 	
Add: Restricted stock expense	  	 	7,601	  	 	 	6,927	  	 	 	10	  	
Add: Intangible amortization	  	 	374	  	 	 	79	  	 	 	373	  	
Add: Deferred taxes on goodwill	  	 	142	  	 	 	28	  	 	 	407	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Economic earnings	  	$	18,686	  	 	$	15,059	  	 	 	24	  	

Total expenses	  	$	35,084	  	 	$	27,279	  	 	 	29	  	
Less: Restricted stock expense	  	 	(7,601	) 	 	 	(6,927	) 	 	 	10	  	
Less: Intangible amortization	  	 	(374	) 	 	 	(79	) 	 	 	373	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Economic expenses	  	$	27,109	  	 	$	20,273	  	 	 	34	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	
Liquidity and Capital Resources
We fund our operations and cash requirements with cash generated from operating activities. As of September 30, 2011, we had no long-term debt. The changes in net cash provided by operating activities generally reflect the changes in earnings plus the effects of non-cash items and changes in working capital. Changes in working capital, especially accounts receivable and accounts payable, are generally the result of timing differences between collection of fees billed and payment of operating expenses.
During the nine months ended September 30, 2011, cash flow provided by operating activities, principally our investment advisory business, was $14.3 million. At September 30, 2011, we had working capital of $51.1 million. Cash flow used in investing activities during the nine months ended September 30, 2011 of $1.1 million was related to purchases of fixed assets. Cash flow used in financing activities during the nine months ended September 30, 2011 of $10.4 million was due to the purchase of treasury shares and the payment of dividends and partially offset by tax benefits from equity-based compensation and cash from the exercise of stock options.
We had cash and investments of $53.4 million as of September 30, 2011 and $45.0 million as of December 31, 2010. Dividends payable were $2.9 million and $0 as of September 30, 2011 and December 31, 2010, respectively. We had no liabilities for borrowed money at September 30, 2011. We have a deferred acquisition liability to be paid in the fourth quarter of 2011, which we expect to pay with funds generated from operations.
Our future liquidity and capital requirements will depend upon numerous factors, including our results of operations, the timing and magnitude of capital expenditures or strategic initiatives, our dividend policy and other business and risk factors described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC. We believe that current cash and short-term investment balances and cash generated from operations will be sufficient to meet the operating and capital requirements of our ordinary business operations through at least the next twelve months. However, there can be no assurance that we will not require additional financing within this time frame. The failure to raise needed capital on attractive terms, if at all, could have a material adverse effect on our business, financial condition and results of operations.
Contractual Obligations
There have been no significant changes in our contractual obligations since December 31, 2010.
Critical and Significant Accounting Policies and Estimates
There have been no significant changes in our critical or significant accounting policies and estimates since December 31, 2010.
 
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Accounting Developments
In June 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance regarding the presentation of comprehensive income. Under this new guidance, an entity must present the components of net income and comprehensive income in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance eliminates the option to present other comprehensive income in the statement of shareholders’ equity. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The new guidance is effective for our 2012 fiscal year, which begins on January 1, 2012. This guidance will not have a material effect on our consolidated financial statements.
In September 2011, the FASB issued new guidance regarding the testing of goodwill for impairment. This new guidance allows entities to perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value in order to determine if quantitative testing is required. This qualitative assessment is optional and is intended to reduce the cost and complexity of annual goodwill impairment tests. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is allowed provided the entity has not yet performed its 2011 impairment test or issued its financial statements. This guidance will not have a material effect on our consolidated financial statements.
 
ITEM 3.	QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK	
There have been no significant changes in our Quantitative and Qualitative Disclosures about Market Risk from those previously reported in our Annual Report on Form 10-K for 2010.
 
ITEM 4.	CONTROLS AND PROCEDURES	
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
For the quarter ended September 30, 2011, there were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
 
ITEM 1.	LEGAL PROCEEDINGS	
We are subject from time to time to certain claims and legal proceedings arising in the ordinary course of our business. We do not believe the outcome of these proceedings will have a material impact on our financial position, operations or cash flow.
 
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Table of Contents
ITEM 1A.	RISK FACTORS	
We face a number of significant risks and uncertainties in our business, which are detailed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 and summarized in this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These risks and uncertainties may affect our current position and future prospects and should be considered carefully in evaluating us and an investment in our common stock.
 
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	
The following table displays information with respect to the treasury shares we purchased during the three months ended September 30, 2011.

Period	  	Total
number
of shares
purchased	 	  	Average
price
paid
per
share	 	  	Total
number of
shares
purchased
as part of
publicly
announced
plans or
programs	 	  	Maximum
number (or
approximate
dollar value)
of shares that
may yet be
purchased
under the
plans or
programs (1)	 	
July 1 through July 30, 2011	  	 	7,260	  	  	$	38.30	  	  	 	-	  	  	$	10,000,000	  	
August 1 through August 31, 2011	  	 	31,733	  	  	 	34.40	  	  	 	31,733	  	  	 	8,908,528	  	
September 1 through September 30, 2011	  	 	55,953	  	  	 	33.43	  	  	 	55,953	  	  	 	7,037,954	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	 	94,946	  	  	$	34.13	  	  	 	87,686	  	  	$	7,037,954	  	
 
(1)	On August 9, 2011, our board of directors authorized management to repurchase up to $10.0 million of our outstanding common stock on the open market or in privately negotiated transactions. The share repurchase program expires on August 9, 2012.	
Note: The treasury shares purchased in July were purchased from Westwood employees at the market close price on the date of purchase in order to satisfy their tax obligations from vested restricted shares. We anticipate purchasing additional shares in subsequent years for the same purpose. The August and September purchases were made in accordance with our publicly announced share repurchase plan to purchase up to $10 million of our outstanding shares.
 
ITEM 6.	EXHIBITS	

 	 	
31.1	 	Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a)	
 	 	
31.2	 	Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a)	
 	 	
32.1*	 	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 	 	
32.2*	 	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 	 	
101.INS**	 	XBRL Instance Document	
 	 	
101.SCH**	 	XBRL Taxonomy Extension Schema Document	
 	 	
101.CAL**	 	XBRL Taxonomy Extension Calculation Linkbase Document	
 	 	
101.DEF**	 	XBRL Taxonomy Extension Definition Linkbase Document	
 	 	
101.LAB**	 	XBRL Taxonomy Extension Label Linkbase Document	
 	 	
101.PRE**	 	XBRL Taxonomy Extension Presentation Linkbase Document	
 
*	Pursuant to Item 601(b)(32) of SEC Regulation S-K, these exhibits are furnished rather than filed with this report.	
**	These exhibits are furnished herewith. In accordance with Rule 406T of Regulation S-T, these exhibits are not deemed to be filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are not deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.	
 
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: October 18, 2011	 	 	 	WESTWOOD HOLDINGS GROUP, INC.	
 	 	 	 	
 	 	 	 	By:	 	        /s/ Brian O. Casey	
 	 	 	 	 	 	Brian O. Casey
President & Chief Executive Officer	

 	 	 	 	By:	 	        /s/ William R. Hardcastle, Jr.	
 	 	 	 	 	 	William R. Hardcastle, Jr.
Chief Financial Officer	
 
25

Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13a-14(a)
I, Brian O. Casey, certify that:
 
1.	I have reviewed this report on Form 10-Q of Westwood Holdings Group, Inc.;	
 
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: October 18, 2011	 	 	 	 	
 	 	 	
 	 	 	 	        /s/ Brian O. Casey	
 	 	 	 	        Brian O. Casey
        President & Chief Executive Officer	
 
26

Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a)
I, William R. Hardcastle, Jr., certify that:
 
1.	I have reviewed this report on Form 10-Q of Westwood Holdings Group, Inc.;	
 
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: October 18, 2011	 	 	 	 	
 	 	 	
 	 	 	 	        /s/ William R. Hardcastle, Jr.	
 	 	 	 	        William R. Hardcastle, Jr.
        Chief Financial Officer	
 
27

Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Westwood Holdings Group, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian O. Casey, President & Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.78m or 78o(d)); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

October 18, 2011	 	 	 	 	
 	 	 	
 	 	 	 	        /s/ Brian O. Casey	
 	 	 	 	        Brian O. Casey
        President & Chief Executive Officer	
A signed original of this written statement required by Section 906 has been provided to Westwood Holdings Group, Inc. and will be retained by Westwood Holdings Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
 
28

Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Westwood Holdings Group, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William R. Hardcastle, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15U.S.C. 78m or 78o(d)); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

October 18, 2011	 	 	 	 	
 	 	 	
 	 	 	 	        /s/ William R. Hardcastle, Jr.	
 	 	 	 	        William R. Hardcastle, Jr.
        Chief Financial Officer	
A signed original of this written statement required by Section 906 has been provided to Westwood Holdings Group, Inc. and will be retained by Westwood Holdings Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
 
29