##### Table of Contents



U.S. 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, 2009
 Commission file number 000-24498
 DIAMOND HILL INVESTMENT GROUP, INC.
  Ohio
    
    65-0190407(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 325 John H. McConnell Blvd, Suite 200, Columbus, Ohio 43215
 (Registrants telephone number, including area code)
 þ o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ




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##### 



PAGEPart I: FINANCIAL INFORMATION
    
    
    3Item 1. Consolidated Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20Part II: OTHER INFORMATION
    
    
    20Item 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Defaults Upon Senior Securities
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    21Signatures
    
    
    22Exhibit 31.1Exhibit 31.2Exhibit 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
 3/31/2009
    
    
    12/31/2008(Unaudited)ASSETSCash and cash equivalents
    
    $
    10,523,583
    
    
    $
    15,788,560Investment portfolio
    
    
    18,025,958
    
    
    
    17,185,611Accounts receivable
    
    
    4,656,082
    
    
    
    5,339,558Prepaid expenses
    
    
    682,753
    
    
    
    1,067,388Fixed assets, net of depreciation, and other assets
    
    
    972,816
    
    
    
    835,314Income tax receivable
    
    
    1,051,811
    
    
    
    2,334,836Deferred taxes
    
    
    3,210,921
    
    
    
    1,989,016Total assets
    
    $
    39,123,924
    
    
    $
    44,540,283LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable and accrued expenses
    
    $
    1,034,472
    
    
    $
    1,294,396Accrued incentive compensation
    
    
    1,760,000
    
    
    
    13,000,000Total liabilities
    
    
    2,794,472
    
    
    
    14,294,396Commitments and contingencies
    
    
    
    
    
    
    Shareholders EquityCommon
stock, no par value 
7,000,000 shares authorized;
 2,593,762 issued and outstanding at March 31, 2009; 
2,447,299 issued and outstanding at December 31,
2008
    
    
    21,939,138
    
    
    
    16,233,501Preferred stock, undesignated, 1,000,000 shares
authorized and unissued
    
    
    
    
    
    
    Deferred compensation
    
    
    (4,881,658
    )
    
    
    (4,908,215
    )Retained earnings
    
    
    19,271,972
    
    
    
    18,920,601Total shareholders equity
    
    
    36,329,452
    
    
    
    30,245,887Total liabilities and shareholders equity
    
    $
    39,123,924
    
    
    $
    44,540,283
   3




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Diamond Hill Investment Group, Inc.
Consolidated Statements of Income (unaudited)
 Three Months Ended March 31,2009
    
    
    2008REVENUES:Investment advisory
    
    $
    7,788,943
    
    
    $
    9,512,895Mutual fund administration, net
    
    
    1,094,531
    
    
    
    1,390,329Total revenue
    
    
    8,883,474
    
    
    
    10,903,224OPERATING EXPENSES:Compensation and related costs
    
    
    5,138,095
    
    
    
    5,841,754General and administrative
    
    
    646,180
    
    
    
    557,148Sales and marketing
    
    
    145,588
    
    
    
    114,030Third party distribution
    
    
    248,670
    
    
    
    396,105Mutual fund administration
    
    
    577,185
    
    
    
    468,615Total operating expenses
    
    
    6,755,718
    
    
    
    7,377,652NET OPERATING INCOME
    
    
    2,127,756
    
    
    
    3,525,572Investment return
    
    
    (1,578,852
    )
    
    
    (374,664
    )INCOME BEFORE TAXES
    
    
    548,904
    
    
    
    3,150,908Income tax provision
    
    
    (197,533
    )
    
    
    (1,165,219
    )NET INCOME
    
    $
    351,371
    
    
    $
    1,985,689Earnings per shareBasic
    
    $
    0.14
    
    
    $
    0.85Diluted
    
    $
    0.14
    
    
    $
    0.82Weighted average shares outstandingBasic
    
    
    2,508,451
    
    
    
    2,337,706Diluted
    
    
    2,515,633
    
    
    
    2,426,400
   4




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Diamond Hill Investment Group, Inc.
Consolidated Statements of Cash Flow (unaudited)
 Three Months Ended March 31,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net Income
    
    $
    351,371
    
    
    $
    1,985,689Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation on furniture and equipment
    
    
    51,258
    
    
    
    38,465Amortization of deferred compensation
    
    
    452,499
    
    
    
    559,538(Increase) decrease in accounts receivable
    
    
    683,476
    
    
    
    (688,653
    )Change in deferred taxes
    
    
    (1,232,325
    )
    
    
    1,091,993Stock option expense
    
    
    
    
    
    
    1,340Noncash director fee expense
    
    
    150,062
    
    
    
    Investment gain/loss, net
    
    
    4,580,382
    
    
    
    834,487(Decrease) in accrued liabilities
    
    
    (6,647,708
    )
    
    
    (2,993,296
    )Other changes in assets and liabilities
    
    
    1,792,594
    
    
    
    55,699Net cash provided by operating activities
    
    
    181,609
    
    
    
    885,262CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (188,761
    )
    
    
    (194,502
    )Cost of investments purchased and other portfolio activity
    
    
    (10,881,666
    )
    
    
    (333,610
    )Proceeds from sale of investments
    
    
    5,460,937
    
    
    
    Net cash (used in) investing activities
    
    
    (5,609,490
    )
    
    
    (528,112
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payment for repurchase of common shares
    
    
    
    
    
    
    (116,896
    )Payment of taxes withheld on employee stock transactions
    
    
    (23,471
    )
    
    
    (131,800
    )Proceeds from common stock issuance
    
    
    186,375
    
    
    
    404,341Net cash provided by financing activities
    
    
    162,904
    
    
    
    155,645CASH AND CASH EQUIVALENTSNet change during the period
    
    
    (5,264,977
    )
    
    
    512,795At beginning of period
    
    
    15,788,560
    
    
    
    11,783,278At end of period
    
    $
    10,523,583
    
    
    $
    12,296,073Cash paid during the period for:Interest
    
    
    
    
    
    
    Income taxes
    
    
    
    
    
    
    Noncash Transactions during the period for:Common Stock Issued as Incentive Compensation
    
    
    4,852,216
    
    
    
    5,754,140
   5




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Diamond Hill Investment Group, Inc.
Notes to Consolidated Financial Statements (unaudited)
 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
  Furniture and Equipment
  Revenue Recognition  General
   7




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Significant Accounting Policies (Continued)
 Revenue Recognition  Performance Incentive Revenue
  As Of March 31,2009
    
    
    2008AUM  Contractual Period Ends Quarterly
    
    $
    84,077,397
    
    
    $
    284,542,311AUM  Contractual Period Ends Annually
    
    
    143,724,736
    
    
    
    376,395,460Total AUM Subject to Performance Incentive
    
    $
    227,802,133
    
    
    $
    660,937,771
 For The Three Months Ending March 31,2009
    
    
    2008Performance Incentive Fees  Method 1
    
    $
    4,645
    
    
    $
    280,900Performance Incentive Fees  Method 2
    
    $
    4,645
    
    
    $
    280,900
  Revenue Recognition  Mutual Fund Administration
   8




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Significant Accounting Policies (Continued)
 Revenue Recognition  Mutual Fund Administration (Continued)
 Three Months Ended March 31,2009
    
    
    2008Mutual fund admin revenue, gross
    
    $
    1,846,223
    
    
    $
    2,044,549Mutual fund admin, fund related expense
    
    
    715,552
    
    
    
    661,038Mutual fund admin revenue, net of fund related expenses
    
    
    1,130,671
    
    
    
    1,383,511C-Share broker commission advance repayments
    
    
    347,453
    
    
    
    398,947C-Share broker commission amortization
    
    
    383,593
    
    
    
    392,129C-Share financing activity, net
    
    
    (36,140
    )
    
    
    6,818Mutual fund administration revenue, net
    
    $
    1,094,531
    
    
    $
    1,390,329
 Third Party Distribution Expense
  Income Taxes
   Earnings Per Share
  Reclassifications
   9




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Investment Portfolio
  March 31,
    
    
    December 31,2009
    
    
    2008Diamond Hill Small Cap Fund
    
    $
    472,812
    
    
    $
    Diamond Hill Small-Mid Cap Fund
    
    
    473,118
    
    
    
    Diamond Hill Large Cap Fund
    
    
    463,892
    
    
    
    Diamond Hill Select Fund
    
    
    464,789
    
    
    
    Diamond Hill Long-Short Fund
    
    
    467,110
    
    
    
    Diamond Hill Strategic Income Fund
    
    
    482,989
    
    
    
    Diamond Hill Investment Partners, L.P.
    
    
    6,864,427
    
    
    
    7,494,929Diamond Hill Investment Partners II, L.P.
    
    
    3,411,821
    
    
    
    3,767,480Diamond Hill Research Partners, L.P.
    
    
    4,925,000
    
    
    
    Other marketable equity securities
    
    
    
    
    
    
    5,923,202Total Investment Portfolio
    
    $
    18,025,958
    
    
    $
    17,185,611
  March 31,
    
    
    December 31,2009
    
    
    2008Total partnership assets
    
    $
    175,092,093
    
    
    $
    196,021,226Total partnership liabilities
    
    
    23,067,642
    
    
    
    33,056,747Net partnership assets
    
    
    152,024,451
    
    
    
    162,964,479Net partnership loss
    
    
    (14,365,968
    )
    
    
    (75,625,562
    )DHCMs portion of net assets
    
    
    15,201,248
    
    
    
    11,262,409DHCMs portion of net loss
    
    
    (956,160
    )
    
    
    (3,866,314
    )
   10




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Capital Stock
 Common Shares
  Authorization of Preferred Shares
  Stock-Based Compensation
 Equity Incentive Plans
 2005 Employee and Director Equity Incentive Plan
 Equity Compensation Grants
  Accelerated Vesting of Certain Equity Incentive Plans and Compensation Grants
  11




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Stock-Based Compensation (Continued)
 401(k) Plan
  Stock Options and Warrants
   Options
    
    
    WarrantsWeighted Average
    
    
    
    
    
    
    Weighted AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstanding December 31, 2007
    
    
    92,500
    
    
    $
    10.40
    
    
    
    25,400
    
    
    $
    47.00Exercisable December 31, 2007
    
    
    72,500
    
    
    $
    12.03
    
    
    
    25,400
    
    
    $
    47.00Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired / Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    17,500
    
    
    
    11.81
    
    
    
    1,000
    
    
    
    22.50Outstanding March 31, 2008
    
    
    75,000
    
    
    $
    10.08
    
    
    
    24,400
    
    
    $
    48.07Exercisable March 31, 2008
    
    
    55,000
    
    
    $
    12.10
    
    
    
    24,400
    
    
    $
    48.07Outstanding December 31, 2008
    
    
    
    
    
    $
    
    
    
    
    10,000
    
    
    $
    13.00Exercisable December 31, 2008
    
    
    
    
    
    $
    
    
    
    
    10,000
    
    
    $
    13.00Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired / Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding March 31, 2009
    
    
    
    
    
    $
    
    
    
    
    10,000
    
    
    $
    13.00Exercisable March 31, 2009
    
    
    
    
    
    $
    
    
    
    
    10,000
    
    
    $
    13.00
   12




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Stock-Based Compensation (Continued)
 Stock Options and Warrants (Continued)
  WarrantsRemainingNumber
    
    Life
    
    
    NumberOutstanding
    
    In Years
    
    
    Exercisable
    
    
    Exercise Price2,000
    
    
    0.12
    
    
    
    2,000
    
    
    
    22.506,000
    
    
    0.92
    
    
    
    6,000
    
    
    
    11.252,000
    
    
    1.11
    
    
    
    2,000
    
    
    
    8.7510,000
    
    
    0.80
    
    
    
    10,000
  Operating Leases
  2009
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013$              196,000
    
    $
    267,000
    
    
    $
    249,000
    
    
    $
    254,000
    
    
    $
    130,000
  Income Taxes
  Tax Impact of Stock Option and Warrant Exercises
   13




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Earnings Per Share
  Three Months Ended March 31,2009
    
    
    2008Basic and Diluted net income
    
    $
    351,371
    
    
    $
    1,985,689Weighted average number of outstanding sharesBasic
    
    
    2,508,451
    
    
    
    2,337,706Diluted
    
    
    2,515,633
    
    
    
    2,426,400Earnings per shareBasic
    
    $
    0.14
    
    
    $
    0.85Diluted
    
    $
    0.14
    
    
    $
    0.82
 Commitments and Contingencies
   14




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ITEM 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-looking Statements
  General
     15




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Assets Under Management
  Assets Under Management by ProductAs of March 31,(in millions)
    
    2009
    
    
    2008
    
    
    % ChangeMutual funds
    
    $
    2,643
    
    
    $
    3,152
    
    
    
    -16
    %Separate accounts
    
    
    1,063
    
    
    
    1,032
    
    
    
    3
    %Private investment funds
    
    
    203
    
    
    
    481
    
    
    
    -58
    %Total
    
    $
    3,909
    
    
    $
    4,665
    
    
    
    -16
    %
 Assets Under Management by ObjectiveAs of March 31,(in millions)
    
    2009
    
    
    2008
    
    
    % ChangeSmall and Small-Mid Cap
    
    $
    445
    
    
    $
    566
    
    
    
    -21
    %Large Cap and Select
    
    
    1,418
    
    
    
    1,036
    
    
    
    37
    %Long-Short
    
    
    1,930
    
    
    
    2,799
    
    
    
    -31
    %Strategic and fixed income
    
    
    116
    
    
    
    264
    
    
    
    -56
    %Total
    
    $
    3,909
    
    
    $
    4,665
    
    
    
    -16
    %
 Change in Assets Under ManagementFor the Three Months Ended March 31,(in millions)
    
    2009
    
    
    2008AUM at beginning of the period
    
    $
    4,510
    
    
    $
    4,403Net cash inflows (outflows)mutual funds
    
    
    (138
    )
    
    
    309separate accounts
    
    
    39
    
    
    
    74private investment funds
    
    
    3
    
    
    
    (13
    )(96
    )
    
    
    370Net market appreciation (depreciation) and income
    
    
    (505
    )
    
    
    (108
    )Increase (decrease) during the period
    
    
    (601
    )
    
    
    262AUM at end of the period
    
    $
    3,909
    
    
    $
    4,665
 Consolidated Results of Operations
  Three Months Ended March 31,2009
    
    
    2008
    
    
    % ChangeNet income (in thousands)
    
    $
    351
    
    
    $
    1,986
    
    
    
    -82
    %Net income per shareBasic
    
    $
    0.14
    
    
    $
    0.85
    
    
    
    -84
    %Diluted
    
    $
    0.14
    
    
    $
    0.82
    
    
    
    -83
    %Weighted average shares
outstanding (in thousands)Basic
    
    
    2,508
    
    
    
    2,338Diluted
    
    
    2,516
    
    
    
    2,426
  16




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Three Months Ended March 31, 2009 compared with Three Months Ended March 31, 2008
  Revenue
 Three Months EndedMarch 31,(in Thousands)
    
    2009
    
    
    2008
    
    
    % ChangeInvestment advisory
    
    $
    7,789
    
    
    $
    9,513
    
    
    
    -18
    %Mutual fund administration, net
    
    
    1,094
    
    
    
    1,390
    
    
    
    -21
    %Total
    
    $
    8,883
    
    
    $
    10,903
    
    
    
    -19
    %
  Investment Advisory Fees.
 Mutual Fund Administration Fees.
 Expenses
 Three Months EndedMarch 31,(in Thousands)
    
    2009
    
    
    2008
    
    
    % ChangeCompensation and related costs
    
    $
    5,138
    
    
    $
    5,842
    
    
    
    -12
    %General and administrative
    
    
    646
    
    
    
    557
    
    
    
    16
    %Sales and marketing
    
    
    146
    
    
    
    114
    
    
    
    28
    %Third party distribution
    
    
    249
    
    
    
    396
    
    
    
    -37
    %Mutual fund administration
    
    
    577
    
    
    
    469
    
    
    
    23
    %Total
    
    $
    6,756
    
    
    $
    7,378
    
    
    
    -8
    %
 Compensation and Related Costs.
  17




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General and Administrative.
 Sales and Marketing.
 Third Party Distribution.
 Mutual Fund Administration.
 Beacon
Hill Fund Services
 Liquidity and Capital Resources
     18




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##### Table of Contents



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
  
 ITEM 3: Defaults Upon Senior Securities
 
 ITEM 4: Submission of Matters to a Vote of Security Holders
 
 ITEM 5: Other Information
  20




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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.
  21




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##### Table of Contents



SIGNATURES
   Date
    
    Title
    
    SignatureMay 8, 2009
    
    President, Chief Executive
Officer, and a Director
    
    /s/ R. H. Dillon

R. H. DillonMay 8, 2009
    
    Chief Financial Officer, Treasurer, and
Secretary
    
    /s/ James F. Laird

James F. Laird
  22




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##### Table of Contents



EXHIBIT INDEX
 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.
  23