##### Table of Contents



United States Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 Commission file number 000-24498
 DIAMOND HILL INVESTMENT GROUP, INC.
  Ohio
(State of incorporation)
    
    65-0190407
(I.R.S. Employer Identification No.)
 325 John H. McConnell Blvd, Suite 200, Columbus, Ohio 43215
 (614) 255-3333  (Registrants telephone number, including area code)
 Yes: þ No: o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 Yes: o No: þ




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##### 



PAGEPart I: FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20Part II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Defaults Upon Senior Securities
    
    
    21Item 4. (Removed and Reserved)
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    22Signatures
    
    
    23EX-31.1EX-31.2EX-32.1
   2




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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 ITEM 1:
    
    Consolidated Financial Statements
 Diamond Hill Investment Group, Inc.
Consolidated Balance Sheets
 3/31/2011
    
    
    12/31/2010(Unaudited)ASSETSCash and cash equivalents
    
    $
    5,212,306
    
    
    $
    5,775,526Investment portfolio
    
    
    10,483,953
    
    
    
    11,527,060Accounts receivable
    
    
    9,565,273
    
    
    
    8,695,103Prepaid expenses
    
    
    811,488
    
    
    
    787,033Furniture and equipment, net of depreciation, and other assets
    
    
    831,434
    
    
    
    907,670Deferred taxes
    
    
    907,585
    
    
    
    873,474Total assets
    
    $
    27,812,039
    
    
    $
    28,565,866LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable and accrued expenses
    
    $
    2,470,176
    
    
    $
    4,101,079Accrued incentive compensation
    
    
    5,400,000
    
    
    
    16,111,250Income tax payable
    
    
    414,079
    
    
    
    855,285Total liabilities
    
    
    8,284,255
    
    
    
    21,067,614Commitments and contingencies
    
    
    
    
    
    
    Shareholders EquityCommon stock, no par value
7,000,000 shares authorized;
2,899,282 issued and outstanding at March 31, 2011;
2,795,683 issued and outstanding at December 31, 2010
    
    
    42,112,791
    
    
    
    34,423,011Preferred stock, undesignated, 1,000,000 shares
authorized and unissued
    
    
    
    
    
    
    Deferred compensation
    
    
    (6,429,711
    )
    
    
    (7,137,729
    )Retained earnings/(Accumulated deficit)
    
    
    (16,155,296
    )
    
    
    (19,787,030
    )Total shareholders equity
    
    
    19,527,784
    
    
    
    7,498,252Total liabilities and shareholders equity
    
    $
    27,812,039
    
    
    $
    28,565,866Book value per share
    
    $
    6.74
    
    
    $
    2.68
   3




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Diamond Hill Investment Group, Inc.
Consolidated Statements of Income

(unaudited)
 Three Months Ended March 31,2011
    
    
    2010REVENUES:Investment advisory
    
    $
    14,437,868
    
    
    $
    11,480,525Mutual fund administration, net
    
    
    2,011,880
    
    
    
    1,910,383Total revenue
    
    
    16,449,748
    
    
    
    13,390,908OPERATING EXPENSES:Compensation and related costs
    
    
    9,164,771
    
    
    
    7,781,678General and administrative
    
    
    1,014,569
    
    
    
    811,309Sales and marketing
    
    
    232,264
    
    
    
    138,388Third party distribution
    
    
    250,669
    
    
    
    258,775Mutual fund administration
    
    
    338,937
    
    
    
    472,154Total operating expenses
    
    
    11,001,210
    
    
    
    9,462,304NET OPERATING INCOME
    
    
    5,448,538
    
    
    
    3,928,604Investment return
    
    
    370,781
    
    
    
    244,917INCOME BEFORE TAXES
    
    
    5,819,319
    
    
    
    4,173,521Income tax provision
    
    
    (2,187,585
    )
    
    
    (1,503,201
    )NET INCOME
    
    $
    3,631,734
    
    
    $
    2,670,320Earnings per shareBasic
    
    $
    1.28
    
    
    $
    0.98Diluted
    
    $
    1.28
    
    
    $
    0.98Weighted average shares outstandingBasic
    
    
    2,837,860
    
    
    
    2,719,075Diluted
    
    
    2,837,860
    
    
    
    2,720,804
   4




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Diamond Hill Investment Group, Inc.
Consolidated Statements of Cash Flows

(unaudited)
 Three Months Ended March 31,2011
    
    
    2010CASH FLOWS FROM OPERATING ACTIVITIES:Net Income
    
    $
    3,631,734
    
    
    $
    2,670,320Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation on furniture and equipment
    
    
    82,496
    
    
    
    79,557Amortization of deferred compensation
    
    
    527,063
    
    
    
    583,744(Increase) decrease in accounts receivable
    
    
    (870,170
    )
    
    
    2,139,984Increase (decrease) in deferred income taxes
    
    
    (34,111
    )
    
    
    (94,633
    )Noncash director fee expense
    
    
    199,827
    
    
    
    164,827Investment gain/loss, net
    
    
    (364,386
    )
    
    
    (231,863
    )Decrease in accrued liabilities
    
    
    (4,880,169
    )
    
    
    (5,751,261
    )Other changes in assets and liabilities
    
    
    (458,759
    )
    
    
    (337,376
    )Net cash used in operating activities
    
    
    (2,166,475
    )
    
    
    (776,701
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of furniture and equipment
    
    
    (6,260
    )
    
    
    (12,319
    )Cost of investments purchased and other portfolio activity
    
    
    (925,507
    )
    
    
    Proceeds from sale of investments
    
    
    2,333,000
    
    
    
    Net cash provided by (used in) investing activities
    
    
    1,401,233
    
    
    
    (12,319
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payment of taxes withheld on employee stock transactions
    
    
    (38,824
    )
    
    
    Proceeds from common stock issuance
    
    
    240,846
    
    
    
    240,773Net cash provided by financing activities
    
    
    202,022
    
    
    
    240,773CASH AND CASH EQUIVALENTSNet change during the period
    
    
    (563,220
    )
    
    
    (548,247
    )At beginning of period
    
    
    5,775,526
    
    
    
    11,513,194At end of period
    
    $
    5,212,306
    
    
    $
    10,964,947Cash paid during the period for:Interest
    
    $
    
    
    
    $
    Income taxes
    
    
    2,656,000
    
    
    
    1,951,700Noncash transactions during the period for:Common stock issued as incentive compensation
    
    
    7,461,984
    
    
    
    5,003,146
   5




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Diamond Hill Investment Group, Inc.
Notes to Consolidated Financial Statements (unaudited)
 Business and Organization
     Significant Accounting Policies
  Principles of Consolidation
  Segment Information
  Cash and Cash Equivalents
   6




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Significant Accounting Policies (Continued)
 Accounts Receivable
  Valuation of Investment Portfolio
   Limited Partnership Interests
      7




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Significant Accounting Policies (Continued)
 Furniture and Equipment
  Revenue Recognition  General
  Revenue Recognition  Performance Incentive Revenue
  As Of March 31,2011
    
    
    2010AUM  Contractual Period Ends Quarterly
    
    $
    110,628,628
    
    
    $
    108,323,321AUM  Contractual Period Ends Annually
    
    
    138,280,045
    
    
    
    184,966,484Total AUM Subject to Performance Incentive
    
    $
    248,908,673
    
    
    $
    293,289,805
 For The Three Months Ending March 31,2011
    
    
    2010Performance Incentive Fees  Method 1
    
    $
    507
    
    
    $
    Performance Incentive Fees  Method 2
    
    $
    507
    
    
    $
    105,039
 Revenue Recognition  Mutual Fund Administration
   8




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Revenue Recognition  Mutual Fund Administration (Continued)
    Three Months Ended March 31,2011
    
    
    2010Mutual fund administration:Administration revenue, gross
    
    $
    2,941,314
    
    
    $
    2,806,11112b-1/service fees and commission revenue
received from fund clients
    
    
    1,897,172
    
    
    
    2,226,98812b-1/service fees and commission expense
payments to third parties
    
    
    (1,897,172
    )
    
    
    (2,226,988
    )Fund related expense
    
    
    (943,045
    )
    
    
    (927,205
    )Revenue, net of fund related expenses
    
    
    1,998,269
    
    
    
    1,878,906DHCM C-Share financing:Broker commission advance repayments
    
    
    115,234
    
    
    
    158,941Broker commission amortization
    
    
    (101,623
    )
    
    
    (127,464
    )Financing activity, net
    
    
    13,611
    
    
    
    31,477Mutual fund administration revenue, net
    
    $
    2,011,880
    
    
    $
    1,910,383
 Third Party Distribution Expense
  Income Taxes
   9




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Significant Accounting Policies (Continued)
 Income Taxes (Continued)
  Earnings Per Share
  Investment Portfolio
  March 31,
    
    
    December 31,2011
    
    
    2010Diamond Hill Small Cap Fund
    
    $
    221,050
    
    
    $
    211,301Diamond Hill Small-Mid Cap Fund
    
    
    231,048
    
    
    
    217,915Diamond Hill Large Cap Fund
    
    
    221,629
    
    
    
    210,413Diamond Hill Select Fund
    
    
    231,034
    
    
    
    221,491Diamond Hill Long-Short Fund
    
    
    214,981
    
    
    
    206,312Diamond Hill Strategic Income Fund
    
    
    200,948
    
    
    
    198,566Diamond Hill Investment Partners, L.P.
    
    
    1,200,183
    
    
    
    1,177,098Diamond Hill Investment Partners II, L.P.
    
    
    1,176,350
    
    
    
    1,155,022Diamond Hill Research Partners, L.P.
    
    
    5,856,856
    
    
    
    7,928,942Diamond Hill Research Partners International, L.P.
    
    
    929,874
    
    
    
    Total Investment Portfolio
    
    $
    10,483,953
    
    
    $
    11,527,060
  As ofMarch 31, 2011
    
    
    December 31, 2010Total partnership assets
    
    $
    166,337,065
    
    
    $
    173,007,238Total partnership liabilities
    
    
    28,913,339
    
    
    
    32,855,190Net partnership assets
    
    
    137,423,726
    
    
    
    140,152,048DHCMs portion of net assets
    
    
    9,163,263
    
    
    
    10,261,062
 For the
    
    
    For theThree Months Ended
    
    
    Year EndedMarch 31, 2011
    
    
    December 31, 2010Net partnership income
    
    
    2,117,254
    
    
    
    4,486,719DHCMs portion of net income
    
    
    310,200
    
    
    
    939,265
  10




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Investment Portfolio (Continued)
  Capital Stock
 Common Shares
  Authorization of Preferred Shares
  Stock-Based Compensation
 Equity Incentive Plans
 2005 Employee and Director Equity Incentive Plan
  401(k) Plan
  Stock Options and Warrants
   11




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Stock-Based Compensation (Continued)
 Stock Options and Warrants (Continued)
 WarrantsWeighted AverageShares
    
    
    Exercise PriceOutstanding December 31, 2009
    
    
    6,000
    
    
    $
    10.42Exercisable December 31, 2009
    
    
    6,000
    
    
    $
    10.42Granted
    
    
    
    
    
    
    Expired / Forfeited
    
    
    2,000
    
    
    
    11.25Exercised
    
    
    2,000
    
    
    
    11.25Outstanding March 31, 2010
    
    
    2,000
    
    
    $
    8.75Exercisable March 31, 2010
    
    
    2,000
    
    
    $
    8.75
  Operating Leases
  2011
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015
    
    
    Thereafter$253,000
    
    $
    348,000
    
    
    $
    356,000
    
    
    $
    358,000
    
    
    $
    361,000
    
    
    $
    210,000
  Income Taxes
   12




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Earnings Per Share
  Three Months Ended March 31,2011
    
    
    2010Basic and Diluted net income
    
    $
    3,631,734
    
    
    $
    2,670,320Weighted average number of outstanding sharesBasic
    
    
    2,837,860
    
    
    
    2,719,075Diluted
    
    
    2,837,860
    
    
    
    2,720,804Earnings per shareBasic
    
    $
    1.28
    
    
    $
    0.98Diluted
    
    $
    1.28
    
    
    $
    0.98
 Regulatory Requirements
  March 31,
    
    
    December 31,2011
    
    
    2010Net Capital
    
    $
    213,267
    
    
    $
    86,107Minimum Net Capital Requirement
    
    
    53,140
    
    
    
    35,667Ratio of Aggregate Indebtedness
to Net Capital
    
    
    3.74 to 1
    
    
    
    8.79 to 1
 Commitments and Contingencies
   13




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ITEM 2:
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Forward-looking Statements
  General
     14




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Assets Under Management
  Assets Under Management by ProductAs of March 31,(in millions)
    
    2011
    
    
    2010
    
    
    % ChangeMutual funds
    
    $
    4,390
    
    
    $
    3,816
    
    
    
    15
    %Separate accounts
    
    
    3,631
    
    
    
    2,691
    
    
    
    35
    %Sub-advised mutual funds
    
    
    1,021
    
    
    
    153
    
    
    
    567
    %Private investment funds
    
    
    208
    
    
    
    216
    
    
    
    -4
    %Total AUM
    
    $
    9,250
    
    
    $
    6,876
    
    
    
    35
    %
 Assets Under Managementby Investment ObjectiveAs of March 31,(in millions)
    
    2011
    
    
    2010
    
    
    % ChangeSmall
    
    $
    1,006
    
    
    $
    701
    
    
    
    44
    %Small-Mid Cap
    
    
    317
    
    
    
    162
    
    
    
    96
    %Large Cap
    
    
    5,095
    
    
    
    3,038
    
    
    
    68
    %Select
    
    
    390
    
    
    
    423
    
    
    
    -8
    %Long-Short
    
    
    2,263
    
    
    
    2,382
    
    
    
    -5
    %Strategic Income
    
    
    179
    
    
    
    170
    
    
    
    5
    %Total AUM
    
    $
    9,250
    
    
    $
    6,876
    
    
    
    35
    %
 Change in Assets Under ManagementFor the Three Months Ended March 31,(in millions)
    
    2011
    
    
    2010AUM at beginning of the period
    
    $
    8,623
    
    
    $
    6,283Net cash inflows (outflows)mutual funds
    
    
    3
    
    
    
    254sub-advised mutual funds
    
    
    36
    
    
    
    1separate accounts
    
    
    161
    
    
    
    152private investment funds
    
    
    (6
    )
    
    
    (0
    )194
    
    
    
    407Net market appreciation and income
    
    
    433
    
    
    
    186Increase during the period
    
    
    627
    
    
    
    593AUM at end of the period
    
    $
    9,250
    
    
    $
    6,876
  15




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Consolidated Results of Operations
  Three Months Ended March 31,(in thousands, except per share amounts)
    
    2011
    
    
    2010
    
    
    % ChangeNet operating income
    
    $
    5,449
    
    
    $
    3,929
    
    
    
    39
    %Net operating income after tax (a)
    
    $
    3,401
    
    
    $
    2,514
    
    
    
    35
    %Net income
    
    $
    3,632
    
    
    $
    2,670
    
    
    
    36
    %Net operating income after tax per share(a)Basic
    
    $
    1.20
    
    
    $
    0.92
    
    
    
    30
    %Diluted
    
    $
    1.20
    
    
    $
    0.92
    
    
    
    30
    %Net income per shareBasic
    
    $
    1.28
    
    
    $
    0.98
    
    
    
    31
    %Diluted
    
    $
    1.28
    
    
    $
    0.98
    
    
    
    31
    %Operating profit margin
    
    
    33
    %
    
    
    29
    %
    
    NM
 (a)
    
     Net operating income after tax is a non-GAAP performance measure. See Use of
Supplemental Data as Non-GAAP Performance Measure on page 18 of this report. Three Months Ended March 31, 2011 compared with Three Months Ended March 31, 2010
  Revenue
 Three Months EndedMarch 31,(in thousands)
    
    2011
    
    
    2010
    
    
    % ChangeInvestment advisory
    
    $
    14,438
    
    
    $
    11,481
    
    
    
    26
    %Mutual fund administration, net
    
    
    2,012
    
    
    
    1,910
    
    
    
    5
    %Total
    
    $
    16,450
    
    
    $
    13,391
    
    
    
    23
    %
  Investment Advisory Fees.
  16




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Mutual Fund Administration Fees.
 Expenses
 Three Months EndedMarch 31,(in thousands)
    
    2011
    
    
    2010
    
    
    % ChangeCompensation and related costs
    
    $
    9,165
    
    
    $
    7,782
    
    
    
    18
    %General and administrative
    
    
    1,014
    
    
    
    811
    
    
    
    25
    %Sales and marketing
    
    
    232
    
    
    
    138
    
    
    
    68
    %Third party distribution
    
    
    251
    
    
    
    259
    
    
    
    -3
    %Mutual fund administration
    
    
    339
    
    
    
    472
    
    
    
    -28
    %Total
    
    $
    11,001
    
    
    $
    9,462
    
    
    
    16
    %
 Compensation and Related Costs.
 General and Administrative.
 Sales and Marketing.
 Third Party Distribution.
 Mutual Fund Administration.
  17




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##### Table of Contents



Beacon Hill Fund Services
  Three Months EndedMarch 31,(in thousands)
    
    2011
    
    
    2010Revenue1
    
    $
    489
    
    
    $
    382Expenses
    
    
    625
    
    
    
    610Net loss
    
    $
    (136
    )
    
    $
    (228
    )
 1
    
    Beacon Hills revenue for the three months ended March 31, 2011 and 2010 includes
$131 thousand and $111 thousand, respectively, of inter-company revenue earned from services
provided to DHCM. These amounts have been eliminated from the Consolidated Statements of Income. Liquidity and Capital Resources
    Use of Supplemental Data as Non-GAAP Performance Measure
 Net Operating Income After Tax
   18




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##### Table of Contents



Three Months Ended March 31,(in thousands, except per share data)
    
    2011
    
    
    2010Net Operating Income, GAAP basis
    
    $
    5,449
    
    
    $
    3,929Non-GAAP Adjustments:Tax Provision excluding impact of Investment Return
    
    
    2,048
    
    
    
    1,415Net operating income after tax, non-GAAP basis
    
    
    3,401
    
    
    
    2,514Net operating income after tax per basic share, non-GAAP basis
    
    $
    1.20
    
    
    $
    0.92Net operating income after tax per diluted share, non-GAAP
basis
    
    $
    1.20
    
    
    $
    0.92Basic weighted average shares outstanding, GAAP basis
    
    
    2,838
    
    
    
    2,719Diluted  weighted average shares outstanding, GAAP basis
    
    
    2,838
    
    
    
    2,721
  Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
   19




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ITEM 3:
    
    Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4:
    
    Controls and Procedures
   
 PART II: OTHER INFORMATION
 
 ITEM 1:
    
    Legal Proceedings
  
 ITEM 1A:
    
    Risk Factors
  
 ITEM 2:
    
    Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number
    
    
    Maximum Numberof Shares Purchased
    
    
    of Shares That Mayas part of a Publicly
    
    
    Yet Be PurchasedTotal Number
    
    
    Average Price
    
    
    Announced Plans
    
    
    Under the Plans orPeriod
    
    of Shares Purchased
    
    
    Paid Per Share
    
    
    or Programs
    
    
    Programs (1)January 1, 2011 through
January 31, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333,895February 1, 2011 through
February 28, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333,895March 1, 2011 through
March 31, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333,895
 (1)
    
     The Companys current share repurchase program was announced on August 9, 2007. The
board of directors authorized management to repurchase up to 350,000 shares of its common stock in
the open market and in private transactions in accordance with applicable securities laws. The
Companys stock repurchase program is not subject to an expiration date.  20




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##### Table of Contents



ITEM 3:
    
    Defaults Upon Senior Securities
  
 ITEM 4:
    
    (Removed and Reserved).
 
 ITEM 5:
    
    Other Information
   21




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ITEM 6:
    
    Exhibits
 3.1
    
    
    Amended and Restated Articles of Incorporation of the Company. (Incorporated by
reference from Form 8-K Current Report for the event on May 2, 2002 filed with the
SEC on May 7, 2002; File No. 000-24498.)3.2
    
    
    Code of Regulations of the Company. (Incorporated by reference from Form 8-K Current
Report for the event on May 2, 2002 filed with the SEC on May 7, 2002; File No.
000-24498.)31.1
    
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).31.2
    
    
    Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).32.1
    
    
    Section 1350 Certifications.
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##### Table of Contents



SIGNATURES
   Date
    
    Title
    
    SignatureApril 29, 2011
    
    President, Chief Executive Officer,
and a Director
    
    /s/ R. H. DillonR. H. DillonApril 29, 2011
    
    Chief Financial Officer, Treasurer,
and Secretary
    
    /s/ James F. LairdJames F. Laird
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