WHG

Westwood Holdings Group Inc. 10-K Summary (Fiscal Year Ended Dec 31, 2009)

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2009, for Westwood Holdings Group, Inc. (WHG), a Delaware corporation and holding company. WHG operates through two primary subsidiaries: Westwood Management Corp., which provides investment advisory services, and Westwood Trust, which provides trust and custodial services. The company manages assets for corporate and public retirement plans, endowments, foundations, and high-net-worth individuals. As of December 31, 2009, the company had 64 full-time employees and managed approximately $10.2 billion in assets under management (AUM).

Key Financial Metrics

Profitability: The effective tax rate was 35.9% in 2009 compared to 36.2% in 2008. Operating margins were impacted by the absence of performance fees.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 8% primarily due to the absence of performance-based fees, which dropped from $8.7 million in 2008 to $0 in 2009. Asset-based advisory fees increased 18% to $31.8 million, driven by higher average AUM.
• Asset Growth: AUM increased 42% to $10.2 billion, driven by market appreciation and net inflows from new clients. Quarterly average AUM increased 10% to $8.5 billion.
• Expense Management: Total expenses remained relatively flat, increasing only 1% to $30.2 million. Employee compensation increased 2% due to higher restricted stock expense and salary increases, partially offset by lower incentive compensation.
• Acquisition: In November 2009, WHG acquired the business of Baxter Financial Corporation related to the Philadelphia Fund, reorganizing it into the WHG LargeCap Value Fund. This resulted in $2.7 million in recorded assets (goodwill and intangibles) and $1.7 million in deferred liabilities.

Guidance, Outlook, and Risks

Outlook: Management expects to continue growing assets through new client relationships and the expansion of existing asset classes. The company is eligible to earn performance fees in 2010 dependent on out-performance, subject to under-performance carry-forwards from 2009. The company intends to continue paying quarterly dividends, with a $0.33 per share dividend declared in February 2010.

Risks and Contingencies:

• Performance Fee Volatility: A significant portion of 2008 revenue was derived from performance fees. The lack of such fees in 2009 highlights the volatility of this revenue stream.
• Client Concentration: While the four largest clients accounted for only 13.1% of fee revenues in 2009 (down from 31.0% in 2008), the loss of any large client could materially impact results.
• Market Dependence: Revenues are directly tied to the value of AUM. Market declines or shifts in investor preference away from equity securities could reduce revenues.
• Regulatory Environment: The company is subject to extensive regulation by the SEC and the Texas Department of Banking. Non-compliance could result in sanctions or closure.

Investor Verification Checklist

• Verify the sustainability of the 42% AUM growth and whether it is driven by organic inflows or market appreciation.
• Assess the likelihood of earning performance fees in 2010 given the "under-performance carry-forward" from 2009.
• Review the deferred acquisition liabilities ($1.7 million) from the Baxter Financial acquisition and the potential for future cash outflows.
• Confirm the company's ability to maintain its dividend policy given the 25% decline in net income.
• Monitor the concentration of revenue from the top four clients, noting the significant reduction in concentration from 2008 to 2009.