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Section 1: 10-Q (10-Q)

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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 September 30, 2017
Commission file number 000-24498
 
 
390796095_diamondhillinvgroup4ca01a06.jpg

DIAMOND HILL INVESTMENT GROUP, INC.

(Exact name of registrant as specified in its charter)
  
 
Ohio
 
65-0190407
(State of
incorporation)
 
(I.R.S. Employer
Identification No.)
325 John H. McConnell Blvd, Suite 200, Columbus, Ohio 43215
(Address of principal executive offices) (Zip Code)
(614) 255-3333
(Registrant’s telephone number, including area code)
 
 
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, 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 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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
 
¨
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes:  ¨    No:  x
The number of shares outstanding of the issuer’s common stock, as of October 26, 2017, is 3,469,263 shares.
 


Table of Contents


DIAMOND HILL INVESTMENT GROUP, INC.
 
 
 
PAGE
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


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PART I:
FINANCIAL INFORMATION
 
ITEM 1:
Consolidated Financial Statements
Diamond Hill Investment Group, Inc.
Consolidated Balance Sheets
 
 
9/30/2017
 
12/31/2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
89,890,396

 
$
57,189,876

Investment portfolio
129,743,381

 
108,015,635

Accounts receivable
17,711,289

 
18,605,209

Prepaid expenses
2,210,563

 
2,032,726

Income taxes receivable
1,543,958

 
1,111,890

Property and equipment, net of depreciation
3,689,621

 
4,025,758

Deferred taxes
10,390,291

 
8,736,767

Total assets
$
255,179,499

 
$
199,717,861

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Accounts payable and accrued expenses
$
10,404,894

 
$
9,787,048

Accrued incentive compensation
21,060,000

 
22,683,500

Deferred compensation
19,571,038

 
14,182,470

Total liabilities
51,035,932

 
46,653,018

Redeemable noncontrolling interest
19,464,643

 
13,840,688

Shareholders’ equity
 
 
 
Common stock, no par value 7,000,000 shares authorized; 3,468,565 issued and outstanding at September 30, 2017 (inclusive of 203,650 unvested shares); 3,411,556 issued and outstanding at December 31, 2016 (inclusive of 201,800 unvested shares)
119,167,093

 
109,293,803

Preferred stock, undesignated, 1,000,000 shares authorized and unissued

 

Deferred equity compensation
(20,240,809
)
 
(17,728,106
)
Retained earnings
85,752,640

 
47,658,458

Total shareholders’ equity
184,678,924

 
139,224,155

Total liabilities and shareholders’ equity
$
255,179,499

 
$
199,717,861

 
 
 
 
Book value per share
$
53.24

 
$
40.81

The accompanying notes are an integral part of these consolidated financial statements.

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Diamond Hill Investment Group, Inc.
Consolidated Statements of Income (unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
REVENUES:
 
 
 
 
 
 
 
Investment advisory
$
33,782,603

 
$
29,512,076

 
$
98,105,905

 
$
84,751,943

Mutual fund administration, net
2,989,026

 
3,425,165

 
9,247,339

 
11,312,222

Total revenue
36,771,629

 
32,937,241


107,353,244


96,064,165

OPERATING EXPENSES:
 
 
 
 
 
 
 
Compensation and related costs
14,446,102

 
12,714,404

 
42,438,985

 
38,494,459

General and administrative
3,088,000

 
2,994,186

 
9,556,585

 
8,055,287

Sales and marketing
1,230,306

 
1,052,101

 
3,612,877

 
3,106,269

Mutual fund administration
1,119,889

 
1,037,987

 
3,149,242

 
2,865,905

Total operating expenses
19,884,297

 
17,798,678


58,757,689


52,521,920

NET OPERATING INCOME
16,887,332

 
15,138,563

 
48,595,555

 
43,542,245

Investment income, net
2,767,747

 
3,555,368

 
9,673,720

 
4,995,255

Gain on sale of subsidiary

 
2,675,766

 

 
2,675,766

INCOME BEFORE TAXES
19,655,079

 
21,369,697


58,269,275


51,213,266

Income tax expense
(6,496,980
)
 
(7,700,732
)
 
(19,018,708
)
 
(18,497,315
)
NET INCOME
13,158,099

 
13,668,965


39,250,567


32,715,951

Less: Net income attributable to redeemable noncontrolling interest
(459,252
)
 
(242,401
)
 
(1,156,385
)
 
(309,172
)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
12,698,847

 
$
13,426,564


$
38,094,182


$
32,406,779

Earnings per share attributable to common shareholders
 
 
 
 

 
 
Basic
$
3.68

 
$
3.93

 
$
11.07

 
$
9.52

Diluted
$
3.67

 
$
3.93

 
$
11.05

 
$
9.50

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
3,454,178

 
3,413,164

 
3,442,402

 
3,405,460

Diluted
3,461,418

 
3,420,123

 
3,447,976

 
3,410,208

The accompanying notes are an integral part of these consolidated financial statements.

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Diamond Hill Investment Group, Inc.
Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interest (unaudited)
 
Shares
Outstanding
 
Common
Stock
 
Deferred Equity
Compensation
 
Retained
Earnings
 
Total
 
Redeemable Noncontrolling Interest
Balance at December 31, 2016
3,411,556

 
$
109,293,803

 
$
(17,728,106
)
 
$
47,658,458

 
$
139,224,155

 
$
13,840,688

Issuance of restricted stock grants
47,100

 
7,679,436

 
(7,679,436
)
 

 

 

Amortization of restricted stock grants

 

 
4,990,463

 

 
4,990,463

 

Issuance of stock grants
19,219

 
3,892,424

 

 

 
3,892,424

 

Issuance of common stock related to 401k plan match
6,359

 
1,267,649

 

 

 
1,267,649

 

Shares withheld related to employee tax withholding
(13,919
)
 
(2,789,949
)
 

 

 
(2,789,949
)
 

Forfeiture of restricted stock grants
(1,750
)
 
(176,270
)
 
176,270

 

 

 

Net income

 

 

 
38,094,182

 
38,094,182

 
1,156,385

Net subscriptions of consolidated funds

 

 

 

 

 
4,467,570

Balance at September 30, 2017
3,468,565

 
$
119,167,093

 
$
(20,240,809
)
 
$
85,752,640

 
$
184,678,924

 
$
19,464,643

The accompanying notes are an integral part of these consolidated financial statements.



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Diamond Hill Investment Group, Inc.
Consolidated Statements of Cash Flows (unaudited)
 
 
Nine Months Ended 
 September 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
39,250,567

 
$
32,715,951

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
659,707

 
496,250

Share-based compensation
6,258,112

 
6,259,300

Decrease in accounts receivable
143,920

 
1,612,207

Change in current income taxes
(432,068
)
 
5,780,008

Change in deferred income taxes
(1,653,524
)
 
82,427

Gain on sale of subsidiary

 
(2,675,766
)
Net gains on investments
(7,829,950
)
 
(4,212,479
)
Net change in trading securities held by Consolidated Funds
(5,639,151
)
 
(29,436,380
)
Decrease (increase) in accrued incentive compensation
2,268,924

 
(1,950,069
)
Increase in deferred compensation
5,388,568

 
3,133,176

Excess income tax benefit from share-based compensation

 
(4,652,983
)
Income tax benefit from dividends paid on restricted stock

 
(925,000
)
Other changes in assets and liabilities
2,188,850

 
1,929,846

Net cash provided by operating activities
40,603,955

 
8,156,488

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of property and equipment
(509,750
)
 
(339,638
)
Purchase of Company sponsored investments
(13,372,301
)
 
(17,468,890
)
Proceeds from sale of Company sponsored investments
1,995,690

 
18,717,308

Proceeds from sale of subsidiary, net of cash disposed
750,000

 
1,163,769

Net cash provided by (used in) investing activities
(11,136,361
)
 
2,072,549

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Value of shares withheld related to employee tax withholding
(2,789,949
)
 
(9,655,747
)
Excess income tax benefit from share-based compensation

 
4,652,983

Income tax benefit from dividends paid on restricted stock

 
925,000

Net subscriptions received from redeemable noncontrolling interest holders
6,022,875

 
33,730

Net cash provided by (used in) financing activities
3,232,926

 
(4,044,034
)
CASH AND CASH EQUIVALENTS
 
 
 
Net change during the period
32,700,520

 
6,185,003

At beginning of period
57,189,876

 
57,474,777

At end of period
$
89,890,396

 
$
63,659,780

Supplemental cash flow information:
 
 
 
Income taxes paid
$
21,104,300

 
$
12,634,880

Supplemental disclosure of non-cash transactions:
 
 
 
Common stock issued as incentive compensation
$
3,892,424

 
$
3,879,431

Charitable donation of corporate investments and property and equipment
1,748,841

 
1,729,735

Cumulative-effect adjustment from the adoption of ASU 2015-02 (Note 2)

 
4,031,756

Net redemption of ETF shares for marketable securities
(1,555,305
)
 
(244,200
)
The accompanying notes are an integral part of these consolidated financial statements.

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Diamond Hill Investment Group, Inc.
Notes to Consolidated Financial Statements (unaudited)
Note 1 Business and Organization
Diamond Hill Investment Group, Inc. (the "Company"), an Ohio corporation, derives its consolidated revenues and net income from investment advisory and fund administration services.
Diamond Hill Capital Management, Inc. ("DHCM"), an Ohio corporation, is a wholly owned subsidiary of the Company and a registered investment adviser. DHCM is the investment adviser to the Diamond Hill Funds (the "Funds"), a series of open-end mutual funds, private investment funds ("Private Funds"), an exchange traded fund (the "ETF"), and other institutional accounts. In addition, DHCM is administrator for the Funds.
Beacon Hill Fund Services, Inc. (“BHFS”) and BHIL Distributors, Inc. (“BHIL”), collectively operated as "Beacon Hill," were operating subsidiaries of the Company. The Company sold Beacon Hill on July 31, 2016 (See Note 10). Prior to the sale, Beacon Hill provided compliance, treasury, underwriting and other fund administration services to investment advisers and mutual funds.
Note 2 Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of September 30, 2017 and December 31, 2016, and for the three- and nine- month periods ended September 30, 2017 and 2016, for Diamond Hill Investment Group, Inc. and its subsidiaries (referred to in these notes to the condensed consolidated financial statements as "the Company," "management," "we," "us," and "our") have been prepared in accordance with United States generally accepted accounting principles ("GAAP") and with the instructions to Form 10-Q and Article 10 of the Securities and Exchange Commission ("SEC") Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair statement of the financial condition and results of operations at the dates and for the interim periods presented, have been included. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for any full fiscal year. These unaudited condensed consolidated financial statements and footnotes should be read in conjunction with the audited consolidated financial statements of the Company included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016 ("2016 Annual Report") as filed with the SEC.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions related to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Reclassification
Certain prior period amounts and disclosures may have been reclassified to conform to the current period's financial presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the operations of the Company and its controlled subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.

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The Company holds certain investments in the Funds and the ETF for general corporate investment purposes, to provide seed capital for newly formed strategies or to add capital to existing strategies. The Funds are organized in a series fund structure in which there are multiple mutual funds within one Trust. The Trust is an open-end investment company registered under the Investment Company Act of 1940, as amended (the"1940 Act"). The ETF is an individual series of ETF Series Solutions which is also an open-end investment company registered under the 1940 Act. Each of the individual mutual funds and the ETF represent a separate share class of a legal entity organized under the Trust. As of January 1, 2016, the Company adopted ASU 2015-02 - Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02") and we have performed our analysis at the individual mutual fund and ETF level and have concluded the mutual funds and ETF are voting rights entities ("VREs"). The Company has concluded that the mutual funds and the ETF are VREs because the structure of the investment product is such that the shareholders are deemed to have the power through voting rights to direct the activities that most significantly impact the entity's economic performance. To the extent material, these investment products are consolidated if Company ownership, directly or indirectly, represents a majority interest (greater than 50%). The Company records redeemable noncontrolling interests in consolidated investments for which the Company's ownership is less than 100%. The Company has consolidated the ETF and one of our individual mutual funds (collectively the "Consolidated Funds") as our ownership was greater than 50% in each.
DHCM is the managing member of Diamond Hill General Partner, LLC (the “General Partner”), the general partner of Diamond Hill Investment Partners, L.P. (“DHIP”), Diamond Hill Global Fund, L.P. ("DHGF"), and Diamond Hill International Equity Fund, L.P. ("DHIEF"), each a limited partnership (collectively, the "Partnerships" or “LPs”) whose underlying assets consist primarily of marketable securities.
DHCM is wholly owned by the Company and is consolidated by us. Further, DHCM, through its control of the General Partner, has the power to direct each LP’s economic activities and the right to receive investment advisory fees that may be significant to the LPs.
The Company concluded we did not have a variable interest in DHIP as the fees paid to the General Partner are considered to contain customary terms and conditions as found in the market for similar products and the Company has no equity ownership in DHIP.
The Company concluded DHGF and DHIEF were variable interest entities ("VIEs") as DHCM has disproportionately less voting interests than economic interests in each LP, given the limited partners have full power to remove the Company as the General Partner due to the existence of substantive kick-out rights. In addition, substantially all of the LPs' activities are conducted on behalf of the General Partner which has disproportionately few voting rights. The Company concluded we are not the primary beneficiary of DHGF or DHIEF as we lack the power to control the entities due to the existence of single-party kick-out rights where the limited partners have the unilateral ability to remove the General Partner without cause. DHCM’s investments in DHGF and DHIEF are reported as a component of the Company’s investment portfolio, valued at DHCM’s respective share of the net income or loss of each LP.
The LPs are not subject to lock-up periods and can be redeemed on demand. Gains and losses attributable to changes in the value of DHCM’s interests in the LPs are included in the Company’s reported investment income. The Company’s exposure to loss as a result of its involvement with the LPs is limited to the amount of its investments. DHCM is not obligated to provide, and has not provided, financial or other support to the LPs, other than its investments to date and its contractually provided investment advisory responsibilities. The Company has not provided liquidity arrangements, guarantees or other commitments to support the LPs’ operations, and the LPs’ creditors and interest holders have no recourse to the general credit of the Company.
Certain board members, officers and employees of the Company invest in the LPs and are not subject to a management fee or an incentive fee. These individuals receive no remuneration as a result of their personal investment in the LPs. The capital of the General Partner is not subject to a management fee or an incentive fee.
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest represents third-party interests in the Consolidated Funds. This interest is redeemable at the option of the investors and therefore is not treated as permanent equity. Redeemable noncontrolling interest is remeasured at redemption value, which approximates the fair value each reporting period.

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Segment Information
Management has determined that the Company operates in one business segment, providing investment management and administration services to mutual funds, institutional accounts, and private investment funds. Therefore, no disclosures relating to operating segments are presented in the Company's annual or interim financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money market mutual funds.
Accounts Receivable
Accounts receivable are recorded when they are due and are presented on the balance sheet net of any allowance for doubtful accounts. Accounts receivable are written off when they are determined to be uncollectible. Any allowance for doubtful accounts is estimated based on the Company’s historical losses, existing conditions in the industry, and the financial stability of the individuals or entities that owe the receivable. No allowance for doubtful accounts was deemed necessary at September 30, 2017 or December 31, 2016. Accounts receivable from the Funds were $10.7 million as of September 30, 2017 and $10.4 million as of December 31, 2016.
Investments
Management determines the appropriate classification of its investments at the time of purchase and re-evaluates its determination at each reporting period.
Investments classified as trading represent investments in the Funds we advise where the Company has neither control nor the ability to exercise significant influence, as well as securities held in the Consolidated Funds. These investments are measured at fair value based on quoted market prices. Unrealized gains and losses are recorded as investment income (loss) in the Company's consolidated statements of income.
Investments classified as equity method investments represent investments in which the Company owns between 20-50% of the outstanding voting interests in the entity or when it is determined that the Company is able to exercise significant influence but not control over the investments. When using the equity method, the Company recognizes its respective share of the investee's net income or loss for the period which is recorded as investment income in the Company's consolidated statements of income.
Fair Value Measurements
Accounting Standards Codification Topic 820, Fair Value Measurement ("ASC 820") specifies a hierarchy of valuation classifications based on whether the inputs to the valuation techniques used in each valuation classification are observable or unobservable. These classifications are summarized in the three broad levels listed below:
Level 1 - Unadjusted quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-driven valuations in which all significant inputs are observable.
Level 3 - Valuations derived from techniques in which significant inputs are unobservable.

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Inputs used to measure fair value might fall in different levels of the fair value hierarchy, in which case the Company defaults to the lowest level input that is significant to the fair value measurement in its entirety. These levels are not necessarily an indication of the risk or liquidity associated with investments. The following table summarizes investments that are recognized in our consolidated balance sheet using fair value measurements (excludes investments classified as equity method investments) determined based upon the differing levels of inputs as of September 30, 2017:
 
Level 1
Level 2
Level 3
Total
Cash equivalents
$
89,125,334

$

$

$
89,125,334

Trading Investments
 
 
 
 
     Securities held in Consolidated Funds(a)
17,948,350

47,158,391


65,106,741

     Company sponsored investments
34,883,067



34,883,067

(a) Of the securities held in the Consolidated Funds as of September 30, 2017, $41.9 million were held directly by the Company and $23.2 million were held by noncontrolling shareholders.
Level 1 investments are all registered investment companies (mutual funds) or securities held in the Consolidated Funds and include $89.1 million of investments in money market mutual funds that the Company classifies as cash equivalents.
Level 2 investments are comprised of investments in debt securities, which are valued by an independent pricing service using pricing techniques which take into account factors such as trading activity, readily available market quotations, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit rates and other observable inputs.
The Company determines transfers between fair value hierarchy levels at the end of the reporting period. There were no transfers in or out of the levels during the nine months ended September 30, 2017.
Changes in fair values of the investments are recorded in the Company's consolidated statements of income as investment income (loss).
Property and Equipment
Property and equipment, consisting of leasehold improvements, computer equipment, furniture, and fixtures, are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated lives of the assets.
Revenue Recognition – General
The Company earns substantially all of its revenue from investment advisory and fund administration services. Investment advisory and administration fees, generally calculated as a percentage of assets under management ("AUM"), are recorded as revenue as services are performed. In addition to fixed fees based on a percentage of AUM, certain client accounts also provide periodic variable fees. Total revenue from the Funds was $29.6 million and $25.9 million for the three months ended September 30, 2017 and 2016, respectively. Total revenue from the Funds was $86.2 million and $73.9 million for the nine months ended September 30, 2017 and 2016, respectively.

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Revenue Recognition – Variable Fees
The Company manages certain client accounts that provide for variable fees. These fees are calculated based on client investment results over rolling five-year periods. The Company records variable fees at the end of the contract measurement period. No variable fees were earned during the three and nine months ended September 30, 2017 or 2016. The table below shows AUM subject to variable fees and the amount of variable fees that would be recognized based upon investment results as of September 30, 2017:
 
As of September 30, 2017
 
AUM subject to variable fees
Unearned variable fees
Contractual Period Ends:
 
 
Quarter Ended December 31, 2018
$
107,864,155

$
1,379,545

Quarter Ended September 30, 2019
34,040,712

495,418

Quarter Ended March 31, 2020
11,680,413


Quarter Ended September 30, 2021
264,626,823

1,971,752

Total
$
418,212,103

$
3,846,715


The contractual end dates highlight the time remaining until the variable fees are scheduled to be earned. The amount of variable fees that would be recognized based upon investment results as of September 30, 2017 will increase or decrease based on future client investment results through the contractual period end. There can be no assurance that the unearned amounts will ultimately be earned.
Revenue Recognition – Mutual Fund Administration
DHCM has an administrative and transfer agency services agreement with the Funds under which DHCM performs certain services for each Fund. These services include mutual fund administration, fund accounting, transfer agency and other related functions. For performing these services each Fund pays DHCM a fee, which is calculated using an annual rate times the average daily net assets of each respective share class.
The Funds have selected and contractually engaged certain vendors to fulfill various services to benefit the Funds’ shareholders or to satisfy regulatory requirements of the Funds. These services include, among others, required shareholder mailings, federal and state registrations, and legal and audit services. DHCM, in fulfilling a portion of its role under the administration agreement with the Funds, acts as agent to pay these obligations of the Funds. Each vendor is independently responsible for fulfillment of the services it has been engaged to provide and negotiates fees and terms with the management and board of trustees of the Funds. The fee that each Fund pays to DHCM is reviewed annually by the Funds’ board of trustees and specifically takes into account the contractual expenses that DHCM pays on behalf of the Funds. As a result, DHCM is not involved in the delivery or pricing of these services and bears no risk related to these services. Revenue has been recorded net of these Fund related expenses, in accordance with FASB ASC 605-45, Revenue Recognition – Principal Agent Considerations. In addition, DHCM advances the upfront commissions that are paid to brokers who sell Class C shares of the Funds. These advances are capitalized and amortized over 12 months to correspond with the repayments DHCM receives from the principal underwriter to recoup this commission advancement.
Prior to the sale of Beacon Hill, the Company, through Beacon Hill, had underwriting and administrative service agreements with certain clients, including registered mutual funds. The fee arrangements varied from client to client based upon services provided and have been recorded as revenue under mutual fund administration on the Company's consolidated statements of income. Part of Beacon Hill’s role as underwriter was to act as an agent on behalf of its mutual fund clients to receive 12b-1/service fees and commission revenue and facilitate the payment of those fees and commissions to third parties who provide services to the funds and their shareholders. The majority of 12b-1/service fees were paid to independent third parties and the remainder were retained by the Company as reimbursement for expenses the Company had incurred. The amounts of 12b-1/service fees and commissions were determined by each mutual fund client, and Beacon Hill bore no financial risk related to these services. As a result, 12b-1/service fees and commission revenue was recorded net of the expense payments to third parties, in accordance with the appropriate accounting treatment for this agency relationship.

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Mutual fund administration gross and net revenue are summarized below:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Mutual fund administration:
 
 
 
 
 
 
 
Administration revenue, gross
$
6,557,054

 
$
6,445,936

 
$
19,432,002

 
$
20,557,388

12b-1/service fees and commission revenue received from fund clients

 
933,752

 

 
6,360,400

12b-1/service fees and commission expense payments to third parties

 
(831,198
)
 

 
(5,660,429
)
Fund related expense
(3,576,598
)
 
(3,136,319
)
 
(10,214,948
)
 
(9,958,315
)
Revenue, net of related expenses
2,980,456

 
3,412,171

 
9,217,054

 
11,299,044

DHCM C-Share financing:
 
 
 
 
 
 
 
Broker commission advance repayments
101,238

 
157,732

 
315,283

 
558,641

Broker commission amortization
(92,668
)
 
(144,738
)
 
(284,998
)
 
(545,463
)
Financing activity, net
8,570

 
12,994

 
30,285

 
13,178

Mutual fund administration revenue, net
$
2,989,026

 
$
3,425,165

 
$
9,247,339

 
$
11,312,222


Mutual fund administrative net revenue from the Funds was $3.0 million for both the three months ended September 30, 2017 and 2016. Mutual fund administrative net revenue from the Funds was $9.2 million and $8.8 million for the nine months ended September 30, 2017 and 2016, respectively.
Income Taxes
The Company accounts for current and deferred income taxes through an asset and liability approach. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company is subject to examination by federal and applicable state and local jurisdictions for various tax periods. The Company’s income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws among those jurisdictions, as well as the inherent uncertainty in estimating the final resolution of complex tax audit matters, the Company’s estimates of income tax liabilities may differ from actual payments or assessments. The Company regularly assesses its position with regard to tax exposures and records liabilities for these uncertain tax positions and related interest and penalties, if any, according to the principles of FASB ASC 740, Income Taxes. As of September 30, 2017, the Company had not recorded any liability for uncertain tax positions. The Company records interest and penalties, if any, within income tax expense on the income statement.
Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income by the weighted average number of Common Shares outstanding for the period, which includes participating securities. Diluted EPS reflects the potential dilution of EPS due to unvested restricted stock units. See Note 8.

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Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers", which supersedes existing accounting standards for revenue recognition and creates a single framework. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This standard also specifies the accounting for certain costs to obtain or fulfill a contract with a customer. This ASU will supersede much of the existing revenue recognition guidance in GAAP and is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, and requires either a retrospective or a modified retrospective approach to adoption. Early application is permitted for the first interim period within annual reporting periods beginning after December 15, 2016. We anticipate adopting the new ASU on its effective date, January 1, 2018, and expect to utilize the full retrospective approach. Our implementation efforts include a detailed review of revenue contracts within the scope of the guidance and evaluation of the impact on the Company's revenue recognition policies. While we are continuing to assess the potential impacts of the ASU on our financial position and results of operations, we believe that the adoption of this ASU will not have an impact on revenue recognition. While we have not identified changes in the timing of revenue recognition, we continue to evaluate the related disclosures.
In February 2016, the FASB issued ASU 2016-02, "Leases", which, among other things, requires lessees to recognize most leases on-balance sheet. This will increase the reported assets and liabilities of lessees - in some cases significantly. Lessor accounting remains substantially similar to current GAAP. ASU 2016-02 supersedes Topic 840, Leases. ASU 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is currently assessing the impact of this standard on its consolidated financial statements and related disclosures.
Note 3 Investment Portfolio
As of September 30, 2017, the Company held investments (excluding money market funds, which are included with cash and cash equivalents) worth $129.7 million. The following table summarizes the carrying value of these investments as of September 30, 2017 and December 31, 2016:
 
As of
 
September 30, 2017
December 31, 2016
Trading investments:
 
 
Securities held in Consolidated Funds(a)
$
65,106,741

$
57,355,471

Company sponsored investments
34,883,067

9,322,118

Company sponsored equity method investments
29,753,573

41,338,046

Total Investment portfolio
$
129,743,381

$
108,015,635

(a) Of the securities held in the Consolidated Funds as of September 30, 2017, $41.9 million were held directly by the Company and $23.2 million were held by noncontrolling shareholders. Of the securities held in the Consolidated Funds as of December 31, 2016, $42.6 million were held directly by the Company and $14.7 million were held by noncontrolling shareholders.


13

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As of September 30, 2017, our equity method investees consisted of the Diamond Hill High Yield Fund, the Diamond Hill Research Opportunities Fund, DHGF, and DHIEF and our ownership percentages in these funds were 47%, 22%, 95%, and 30%, respectively. The Company's equity method investments consist of cash, marketable equity securities and fixed income securities. The following table includes the condensed summary financial information from the Company's equity method investments as of and for the period ended September 30, 2017:
 
 
 
As of
 
 
 
September 30, 2017
Total assets
 
 
$
130,983,409

Total liabilities
 
 
36,624,404

Net assets
 
 
94,359,005

DHCM's portion of net assets
 
 
29,753,573

 
 
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2017
 
September 30, 2017
Investment income
$
643,059

 
$
2,164,621

Expenses
300,273

 
865,475

Net realized gains
599,849

 
3,171,574

Net change in unrealized appreciation/depreciation
(726,509
)
 
2,887,675

Net income
216,126

 
7,358,395

DHCM's portion of net income
324,189

 
2,372,528

Note 4 Line of Credit
The Company has an uncommitted Line of Credit Agreement (the "Credit Agreement") with a commercial bank that matures in November of 2017 and permits the Company to borrow up to $25.0 million. Borrowings under the Credit Agreement bear interest at a rate equal to LIBOR plus 1.50%. The Company has not borrowed under the Credit Agreement as of and for the period ended September 30, 2017. No interest is payable on the unused portion of the Credit Agreement.
The proceeds of the Credit Agreement may be used by the Company and its subsidiaries for ongoing working capital needs, to seed new investment strategies and other general corporate purposes. The Credit Agreement contains representations, warranties and covenants that are customary for agreements of this type.
Note 5 Compensation Plans
Share-Based Payment Transactions
The Company issues restricted stock units and restricted stock awards (collectively, "Restricted Stock") under the 2014 Equity and Cash Incentive Plan ("2014 Plan"). Restricted stock units represent shares which may be issued in the future, whereas restricted stock awards represent common shares issued and outstanding upon grant subject to vesting restrictions. The following table represents a roll-forward of outstanding Restricted Stock and related activity during the nine months ended September 30, 2017:
 
Shares
 
Weighted-Average
Grant Date Price
per Share
Outstanding Restricted Stock as of December 31, 2016
223,800

 
$
132.96

Grants issued
37,600

 
204.24

Grants vested
(43,500
)
 
95.86

Grants forfeited
(1,750
)
 
100.73

Total Outstanding Restricted Stock as of September 30, 2017
216,150

 
$
153.08

As of September 30, 2017, there were 356,261 Common Shares available for awards under the 2014 Plan.

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Total deferred equity compensation related to unvested Restricted Stock grants was $20.2 million as of September 30, 2017. Compensation expense related to Restricted Stock grants is calculated based upon the fair market value of the common shares on grant date. The Company's policy is to adjust compensation expense for forfeitures as they occur. The recognition of compensation expense related to deferred compensation over the remaining vesting periods is as follows:
Three Months 
 Remaining In
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
$
1,880,821

 
$
5,943,563

 
$
5,207,109

 
$
3,534,581

 
$
2,054,744

 
$
1,619,991

 
$
20,240,809

Stock Grant Transactions
The following table represents stock issued as part of our incentive compensation program during the nine months ended September 30, 2017 and 2016:
 
Shares Issued
 
Grant Date Value
September 30, 2017
19,219

 
$
3,892,424

September 30, 2016
21,940

 
3,879,431

Deferred Compensation Plans
The Company offers two deferred compensation plans, the Diamond Hill Fixed Term Deferred Compensation Plan and the Diamond Hill Variable Term Deferred Compensation Plan (collectively the “Plans”). Under the Plans, participants may elect to voluntarily defer, for a minimum of five years, certain incentive compensation, which the Company then contributes into the Plans. Each participant is responsible for designating investment options for assets they contribute, and the distribution paid to each participant reflects any gains or losses on the assets realized while in the Plans. Assets held in the Plans are included in the Company’s investment portfolio, and the associated obligation to participants is included in deferred compensation liability. Assets held in the Plans are recorded at fair value. Deferred compensation liability was $19.6 million and $14.2 million as of September 30, 2017 and December 31, 2016, respectively.
Note 6 Operating Leases
The Company currently leases office space of approximately 37,829 square feet at one location. The following table summarizes the total lease and operating expenses for the three and nine months ended September 30, 2017 and 2016:
 
 
September 30,
2017
 
September 30,
2016
Three Months Ended
$
235,272

 
$
218,640

Nine Months Ended
$
700,926

 
$
679,195

The approximate future minimum lease payments under the operating lease are as follows:
 
Future Minimum Lease Payments
Three Months 
 Remaining In
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
$
146,587

 
$
586,350

 
$
595,807

 
$
624,179

 
$
624,179

 
$
1,716,000

 
$
4,293,102

In addition to the above lease payments, the Company is also responsible for normal operating expenses of the property. Such operating expenses were approximately $0.4 million in 2016, and are expected to be approximately the same in 2017.

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Note 7 Income Taxes
The Company has determined its interim tax provision projecting an estimated annual effective tax rate. For the three months ended September 30, 2017, the Company recorded income tax expense of $6.5 million, yielding an effective tax rate of 33.1%. The effective tax rate of 33.1% differed from the federal statutory tax rate of 35% due primarily to $0.4 million of excess tax benefits from the vesting of stock awards. The tax benefits were partially offset by the additional income tax expense recorded in the state and city jurisdictions in which we do business.
For the nine months ended September 30, 2017, the Company recorded income tax expense of $19.0 million, yielding an effective tax rate of 32.6%. The effective tax rate of 32.6% differed from the federal statutory tax rate of 35% due primarily to $1.7 million of excess tax benefits from the vesting of stock awards. The tax benefits were partially offset by the additional income tax expense recorded in the state and city jurisdictions in which we do business.
The Company implemented ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" on January 1, 2017. As of January 1, 2017, any excess tax benefits or deficiencies from the vesting of stock awards are recognized through the income tax provision as opposed to common stock. For Restricted Stock, the Company receives an excess income tax benefit calculated as the tax effect of the difference between the fair market value of the stock at the time of grant and vesting. The Company also records tax benefits on dividends paid on Restricted Stock. This change is required to be applied prospectively to all excess tax benefits and tax deficiencies after the date of adoption of the ASU. No adjustment is recorded for any windfall benefits previously recorded in common stock. In addition, all tax-related cash flows resulting from share-based payments will be reported as operating activities in the statement of cash flows under the new guidance, rather than the prior requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. The Company has elected to adopt this change in cash flow presentation prospectively after the date of adoption of the ASU.
For the three months ended September 30, 2016, the Company recorded income tax expense of $7.7 million, yielding an effective tax rate of 36.0%. The effective tax rate of 36.0% differed from the federal statutory tax rate of 35% due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do business. The Company had net tax benefits from equity awards of $0.2 million for the three months ended September 30, 2016, which was reflected as an increase in equity.
For the nine months ended September 30, 2016, the Company recorded income tax expense of $18.5 million, yielding an effective tax rate of 36.1%. The effective tax rate of 36.1% differed from the federal statutory tax rate of 35% due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do business, which was partially offset by a $0.1 million tax benefit related to a charitable donation of appreciated securities previously held in our investment portfolio. The Company had net tax benefits from equity awards of $5.6 million for the nine months ended September 30, 2016, which was reflected as an increase in equity.
The net temporary differences incurred to date will reverse in future periods as the Company generates taxable earnings. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets recorded. The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of September 30, 2017 and December 31, 2016, no valuation allowance was deemed necessary.
FASB ASC 740, Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company did not record an accrual for tax related uncertainties or unrecognized tax positions as of September 30, 2017 or December 31, 2016.

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Table of Contents


Note 8 Earnings Per Share
The Company’s Common Shares outstanding consist of all shares issued and outstanding, including unvested restricted shares. Basic and diluted EPS are calculated under the two-class method. Restricted stock units are considered dilutive. The following table sets forth the computation for basic and diluted EPS and reconciliation between basic and diluted shares outstanding:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Net Income
$
13,158,099

 
$
13,668,965

 
$
39,250,567

 
$
32,715,951

Less: Net income attributable to redeemable noncontrolling interest
(459,252
)
 
(242,401
)
 
(1,156,385
)
 
(309,172
)
Net income attributable to common shareholders
$
12,698,847

 
$
13,426,564

 
$
38,094,182

 
$
32,406,779

 
 
 
 
 
 
 
 
Weighted average number of outstanding shares - Basic
3,454,178

 
3,413,164

 
3,442,402

 
3,405,460

Dilutive impact of restricted stock units
7,240

 
6,959

 
5,574

 
4,748

Weighted average number of outstanding shares - Diluted
3,461,418

 
3,420,123

 
3,447,976

 
3,410,208

 
 
 
 
 
 
 
 
Earnings per share attributable to common shareholders
 
 
 
 
 
 
 
Basic
$
3.68

 
$
3.93

 
$
11.07

 
$
9.52

Diluted
$
3.67

 
$
3.93

 
$
11.05

 
$
9.50

Note 9 Commitments and Contingencies
The Company indemnifies its directors, officers and certain of its employees for certain liabilities that might arise from their performance of their duties to the Company. From time to time, the Company is involved in legal matters relating to claims arising in the ordinary course of business. There are currently no such matters pending that the Company believes could have a material adverse effect on its consolidated financial statements.
Additionally, in the normal course of business, the Company enters into agreements that contain a variety of representations and warranties and which provide general indemnifications. Certain agreements do not contain any limits on the Company’s liability and could involve future claims that may be made against the Company that have not yet occurred. Therefore, it is not possible to estimate the Company’s potential liability under these indemnities. Further, the Company maintains insurance policies that may provide coverage against certain claims under these indemnities.
Note 10 Sale of Beacon Hill
On July 31, 2016, the Company sold the entirety of Beacon Hill’s business. The Company received $1.2 million in cash consideration, net of cash disposed, as well as contingent consideration with a fair value of $1.5 million in the form of a promissory note. During the nine months ended September 30, 2017, the Company received $0.8 million of proceeds from the scheduled collection of the promissory note. The promissory note is included in accounts receivable on the consolidated balance sheets.

17

Table of Contents


Note 11 Subsequent Event
On October 26, 2017, the Company’s board of directors approved a special cash dividend of $7.00 per share payable December 11, 2017 to shareholders of record on December 1, 2017. This dividend will reduce shareholders' equity by approximately $24.3 million.


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Table of Contents


ITEM 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
Throughout this Quarterly Report on Form 10-Q, the Company may make 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, relating to such matters as anticipated operating results, prospects and levels of assets under management, technological developments, economic trends (including interest rates and market volatility), expected transactions and similar matters. The words “believe,” “expect,” “anticipate,” “estimate,” “should,” “hope,” “seek,” “plan,” “intend” and similar expressions identify forward-looking statements that speak only as of the date thereof. While we believe that the assumptions underlying our forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and, accordingly, our actual results and experiences could differ materially from the anticipated results or other expectations expressed in our forward-looking statements. Factors that could cause such actual results or experiences to differ from results discussed in the forward-looking statements include, but are not limited to: the adverse effect from a decline in the securities markets; a decline in the performance of our products; changes in interest rates; changes in national and local economic and political conditions; the continuing economic uncertainty in various parts of the world; changes in government policy and regulation, including monetary policy; changes in our ability to attract or retain key employees; unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations; and other risks identified from time-to-time in other public documents on file with the SEC.
General
The Company derives its consolidated revenue and net income from investment advisory and fund administration services provided by DHCM and, until July 31, 2016, Beacon Hill. DHCM is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. DHCM sponsors, distributes, and provides investment advisory and related services to various clients through the Funds, institutional accounts, the ETF, and the Partnerships. Beacon Hill provided fund administration and statutory underwriting services to U.S. and foreign clients.
The Company’s primary objective is to fulfill our fiduciary duty to our clients. Our secondary objective is to grow the intrinsic value of the Company in order to achieve an adequate long-term return for shareholders.
Assets Under Management
Our revenue is derived primarily from investment advisory and administration fees. Investment advisory and administration fees paid to the Company are generally based on the value of the investment portfolios we manage and fluctuate with changes in the total value of our AUM. Substantially all of our AUM (95%) is valued based on readily available market quotations. AUM in the fixed income strategies (5%) is valued using evaluated prices from independent third-party providers. Fees are recognized in the period that the Company manages these assets.
Our revenues are highly dependent on both the value and composition of AUM. The following is a summary of our AUM by product and investment objective, and a roll-forward of the change in AUM for the three and nine months ended September 30, 2017 and 2016:
 
 
Assets Under Management
 
As of September 30,
(in millions, except percentages)
2017
 
2016
 
% Change
Proprietary funds
$
15,417

 
$
12,843

 
20
 %
Sub-advised funds
1,411

 
568

 
148
 %
Institutional accounts
4,627

 
4,657

 
(1
)%
Total AUM
$
21,455

 
$
18,068

 
19
 %


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Table of Contents


 
Assets Under Management
by Investment Strategy
 
As of September 30,
(in millions, except percentages)
2017
 
2016
 
% Change
Small Cap
$
1,549

 
$
1,818

 
(15
)%
Small-Mid Cap
3,482

 
3,034

 
15
 %
Mid Cap
121

 
41

 
195
 %
Large Cap
10,153

 
7,807

 
30
 %
All Cap Select
396

 
407

 
(3
)%
Long-Short
4,943

 
4,391

 
13
 %
Corporate bonds
687

 
538

 
28
 %
Core fixed income
340

 
183

 
86
 %
  (Less: Investments in affiliated funds)
(216
)
 
(151
)
 
43
 %
Total AUM
$
21,455

 
$
18,068

 
19
 %
 
 
 
 
 
Change in Assets
Under Management
 
For the Three Months Ended 
 September 30,
(in millions)
2017
 
2016
AUM at beginning of the period
$
20,924

 
$
17,584

Net cash inflows (outflows)
 
 
 
proprietary funds
106

 
(69
)
sub-advised funds
(65
)
 
(88
)
institutional accounts
1

 
(371
)
 
42

 
(528
)
Net market appreciation and income
489

 
1,012

Increase during the period
531

 
484

AUM at end of the period
$
21,455

 
$
18,068

 
Change in Assets
Under Management
 
For the Nine Months Ended 
 September 30,
(in millions)
2017
 
2016
AUM at beginning of the period
$
19,381

 
$
16,841

Net cash inflows (outflows)
 
 
 
proprietary funds
805

 
482

sub-advised funds
(197
)
 
(143
)
institutional accounts
(206
)
 
(437
)
 
402

 
(98
)
Net market appreciation and income
1,672

 
1,325

Increase during the period
2,074

 
1,227

AUM at end of the period
$
21,455

 
$
18,068


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Table of Contents


Consolidated Results of Operations
The following is a discussion of our consolidated results of operations.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except per share amounts and percentages)
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Total revenue
$
36,772

 
$
32,937

 
12
 %
 
$
107,353

 
$
96,064

 
12
%
Net operating income
$
16,887

 
$
15,139

 
12
 %
 
$
48,596

 
$
43,542

 
12
%
Net income attributable to common shareholders
$
12,699

 
$
13,427

 
(5
)%
 
$
38,094

 
$
32,407

 
18
%
Earnings per share attributable to common shareholders (Diluted)
$
3.67

 
$
3.93

 
(7
)%
 
$
11.05

 
$
9.50

 
16
%
Operating profit margin
46
%
 
46
%
 
 
 
45
%
 
45
%
 
 
Operating profit margin, as adjusted(a)
47
%
 
48
%
 
 
 
47
%
 
46
%
 
 
(a) Operating profit margin, as adjusted is a non-GAAP performance measure. See the Use of Supplemental Data as Non-GAAP Performance Measure section within this report.
Three Months Ended September 30, 2017 compared with Three Months Ended September 30, 2016
The Company generated net income attributable to common shareholders of $12.7 million ($3.67 per diluted share) for the three months ended September 30, 2017, compared with net income attributable to common shareholders of $13.4 million ($3.93 per diluted share) for the three months ended September 30, 2016. Revenue increased $3.8 million period over period due to an increase in average AUM. The revenue increase was partially offset by an increase in operating expenses of $2.1 million, primarily related to increases in compensation and related costs. The Company had $2.8 million in investment income due to market appreciation for the three months ended September 30, 2017, compared to investment income of $3.6 million for the three months ended September 30, 2016. In addition, the Company recognized a $2.7 million gain on the sale of Beacon Hill during the three months ended September 30, 2016 which was absent for 2017. Income tax expense decreased $1.2 million from the three months ended September 30, 2016 to the three months ended September 30, 2017 due to the overall decrease in income before taxes and the reduction of the effective tax rate from 36.0% to 33.1%.
Operating profit margin was 46% for the three months ended September 30, 2017 and September 30, 2016. Operating profit margin, as adjusted, decreased to 47% for the three months ended September 30, 2017 from 48% for the three months ended September 30, 2016. See Use of Supplemental Data as Non-GAAP Performance Measure section within this report. We expect that our operating margin may fluctuate from period-to-period based on various factors, including revenues; investment results; employee performance; staffing levels; development of investment strategies, products, or channels; and industry comparisons.
Revenue
 
Three Months Ended September 30,
 
 
(in thousands, except percentages)
2017
 
2016
 
% Change
Investment advisory
$
33,783

 
$
29,512

 
14
 %
Mutual fund administration, net
2,989

 
3,425

 
(13
)%
Total
$
36,772

 
$
32,937

 
12
 %
As a percent of total revenues for the third quarter of 2017 and 2016, investment advisory fees accounted for 92% and 90%, respectively.
Investment Advisory Fees. Investment advisory fees increased $4.3 million, or 14%, from the three months ended September 30, 2016 to the three months ended September 30, 2017. Investment advisory fees are calculated as a percentage of the market value of client accounts at contractual fee rates, which vary by investment product. The increase in investment advisory fees was driven by an increase of 17% in average AUM quarter over quarter, partially offset by a decrease of one basis point in the average advisory fee rate from 0.65% for the three months ended September 30, 2016 to 0.64% for the three months ended September 30, 2017.

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Table of Contents


Mutual Fund Administration Fees. Mutual fund administration fees decreased $0.4 million, or 13%, from the three months ended September 30, 2016 to the three months ended September 30, 2017. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of average Funds' AUM. Mutual fund administration fees for the three months ended September 30, 2016 included Beacon Hill administration fees of $0.4    million and the 2017 period reflected the absence of these fees. Mutual fund administration fees from the Funds remained consistent period over period. The 20% increase in average Funds' AUM from the three months ended September 30, 2016 to the three months ended September 30, 2017, was partially offset by a decrease of one basis point in the net administration fee rate from 0.09% for the three months ended September 30, 2016 to 0.08% for the three months ended September 30, 2017. Effective June 1, 2017, the Company reduced the administration fee rate charged on all Fund assets by one basis point.
Expenses
 
Three Months Ended September 30,
 
 
(in thousands, except percentages)
2017
 
2016
 
% Change
Compensation and related costs
$
14,446

 
$
12,715

 
14
%
General and administrative
3,088

 
2,994

 
3
%
Sales and marketing
1,230

 
1,052

 
17
%
Mutual fund administration
1,120

 
1,038

 
8
%
Total
$
19,884

 
$
17,799

 
12
%
Compensation and Related Costs. Employee compensation and benefits increased by $1.7 million, or 14%, from the three months ended September 30, 2016 compared to the three months ended September 30, 2017. This increase is primarily due to compensation cost increases for DHCM employees, including an increase in accrued incentive compensation of $2.1 million, an increase in salary and related benefits of $0.3 million and an increase in restricted stock expense of $0.1 million. These increases were partially offset by a decrease in deferred compensation expense of $0.4 million and the absence of Beacon Hill salary and benefits in 2017 as compared to $0.4 million in 2016. Incentive compensation can fluctuate significantly period over period as we evaluate incentive compensation by reviewing investment performance, individual performance, Company performance and other factors.
General and Administrative. General and administrative expenses increased by $0.1 million, or 3%, from the three months ended September 30, 2016 to the three months ended September 30, 2017. This increase is due primarily to an increase in consulting expense of $0.2 million, an increase in investment research services of $0.2 million and an increase in depreciation expense of $0.1 million, partially offset by a reduction in legal and general administrative expense of $0.4 million.
Sales and Marketing. Sales and marketing expenses increased by $0.2 million, or 17%, from the three months ended September 30, 2016 to the three months ended September 30, 2017. The increase was primarily due to additional payments made to third party intermediaries related to the sale of our proprietary funds.
Mutual Fund Administration. Mutual fund administration expenses increased by $0.1 million, or 8%, from the three months ended September 30, 2016 to the three months ended September 30, 2017. Mutual fund administration expenses consist of both variable and fixed expenses. The variable expenses are based on Fund AUM and the number of shareholder accounts.
Nine Months Ended September 30, 2017 compared with Nine Months Ended September 30, 2016
The Company generated net income attributable to common shareholders of $38.1 million ($11.05 per diluted share) for the nine months ended September 30, 2017, compared with net income attributable to common shareholders of $32.4 million ($9.50 per diluted share) for the nine months ended September 30, 2016. Revenue increased $11.3 million period over period primarily due to an increase in average AUM. The revenue increase was partially offset by an increase in operating expenses of $6.2 million primarily related to increases in compensation and related costs and general and administrative expenses. The Company had $9.7 million in investment income due to market appreciation for the nine months ended September 30, 2017 compared to investment income of $7.7 million (inclusive of $2.7 million gain on the sale of Beacon Hill) for the nine months ended September 30, 2016. Income tax expense increased $0.5 million from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 due to the overall increase in income before taxes, partially offset by the reduction of the effective tax rate from 36.1% to 32.6%.

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Operating profit margin was 45% for both the nine months ended September 30, 2017 and the nine months ended September 30, 2016. Operating profit margin, as adjusted, increased to 47% for the nine months ended September 30, 2017 from 46% for the nine months ended September 30, 2016. See Use of Supplemental Data as Non-GAAP Performance Measure section within this report. We expect that our operating margin may fluctuate from period-to-period based on various factors, including revenues; investment results; employee performance; staffing levels; development of investment strategies, products, or channels; and industry comparisons.
Revenue
 
Nine Months Ended 
 September 30,
 
 
(in thousands, except percentages)
2017
 
2016
 
% Change
Investment advisory
$
98,106

 
$
84,752

 
16
 %
Mutual fund administration, net
9,247

 
11,312

 
(18
)%
Total
$
107,353

 
$
96,064

 
12
 %
As a percent of total revenues for the nine months ended September 30, 2017 and 2016, investment advisory fees accounted for 91% and 88%, respectively.
Investment Advisory Fees. Investment advisory fees increased $13.4 million, or 16%, from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. Investment advisory fees are calculated as a percentage of the market value of client accounts at contractual fee rates, which vary by investment product. The increase in investment advisory fees was driven by an increase of 18% in average AUM period over period and was partially offset by a decrease of one basis point in the average advisory fee rate from 0.65% for the nine months ended September 30, 2016 to 0.64% for the nine months ended September 30, 2017.
Mutual Fund Administration Fees. Mutual fund administration fees decreased $2.1 million, or 18%, from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of average Funds' AUM. Mutual fund administration fees for the nine months ended September 30, 2016 included Beacon Hill administration fees of $2.5 million which were absent in 2017. Mutual fund administration fees related to the Funds increased $0.4 million period over period. This increase is primarily driven by a 21% increase in average Funds' AUM from the nine months ended September 30, 2016 to the nine months ended September 30, 2017, partially offset by a decrease of one basis point in the net administration fee rate from 0.10% for the nine months ended September 30, 2016 to 0.09% for the nine months ended September 30, 2017. Effective June 1, 2017, the Company reduced the administration fee rate charged on all Fund assets by one basis point.
Expenses
 
Nine Months Ended 
 September 30,
 
 
(in thousands, except percentages)
2017
 
2016
 
% Change
Compensation and related costs
$
42,439

 
$
38,495

 
10
%
General and administrative
9,557

 
8,055

 
19
%
Sales and marketing
3,613

 
3,106

 
16
%
Mutual fund administration
3,149

 
2,866

 
10
%
Total
$
58,758

 
$
52,522

 
12
%
Compensation and Related Costs. Employee compensation and benefits increased by $3.9 million, or 10%, from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. This increase is primarily due to compensation cost increases for DHCM employees, including an increase in incentive compensation of $4.9 million, an increase in salary and related benefits of $1.0 million, an increase in deferred compensation expense of $0.4 million, and an increase in restricted stock expense of $0.2 million. These increases were offset by the absence of Beacon Hill salary and benefits in 2017, compared to $2.6 million in 2016. Incentive compensation expense can fluctuate significantly period over period as we evaluate incentive compensation by reviewing investment performance, individual performance, Company performance and other factors.

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Table of Contents


General and Administrative. General and administrative expenses increased by $1.5 million, or 19%, from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. This increase is primarily due to an increase in consulting expense of $0.7 million, an increase in investment research expenses of $0.5 million, and an increase in corporate legal and administrative expense of $0.3 million.
Sales and Marketing. Sales and marketing expenses increased by $0.5 million, or 16%, from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. The increase was primarily due to additional payments made to third party intermediaries related to the sale of our proprietary funds.
Mutual Fund Administration. Mutual fund administration expenses increased by $0.3 million, or 10%, from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. Mutual fund administration expenses consist of both variable and fixed expenses. The variable expenses are based on Fund AUM and the number of shareholder accounts.
Liquidity and Capital Resources
Sources of Liquidity
Our current financial condition is highly liquid, with a significant amount of our assets comprised of cash and cash equivalents, investments, and accounts receivable. Our main source of liquidity is cash flows from operating activities, which is generated from investment advisory and fund administration fees. Cash and cash equivalents, accounts receivable, and investments represented approximately 93% and 92% of total assets as of September 30, 2017 and December 31, 2016, respectively. We believe these sources of liquidity, as well as our continuing cash flows from operating activities, will be sufficient to meet our current and future operating needs for at least the next 12 months.
Uses of Liquidity
In line with the Company’s primary objective to fulfill our fiduciary duty to clients and secondary objective to achieve an adequate long-term return for shareholders, we anticipate our main uses of cash will be for operating expenses and seed capital to fund new and existing investment strategies.
The Board of Directors and management regularly review various factors to determine whether we have capital in excess of that required for the business and the appropriate use of any excess capital. The factors considered include our investment opportunities, capital needed for investment strategies, risks, and future dividend and capital gain tax rates. Evaluating management’s stewardship of capital for shareholders is a central part of our investment discipline that we practice for our clients. We hold ourselves to the same standard.
Working Capital
As of September 30, 2017, the Company had working capital of approximately $170.6 million, compared to $126.0 million at December 31, 2016. Working capital includes cash, securities owned by common shareholders, prepaid expenses and current receivables, net of all liabilities. The Company has no debt, and we believe our available working capital is sufficient to cover current expenses and anticipated capital expenditures.

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Table of Contents


Below is a summary of securities owned by the Company as of September 30, 2017 and December 31, 2016.
 
As of
 
September 30, 2017
 
December 31, 2016
Corporate Investments:
 
 
 
Diamond Hill Core Bond Fund
$
30,384,790

 
$
29,293,308

  Diamond Hill Mid Cap Fund
18,905,534

 
17,754,640

Diamond Hill High Yield Fund
12,995,131

 
6,210,304

Diamond Hill Valuation-Weighted 500 ETF
11,524,297

 
13,329,549

  Diamond Hill Research Opportunities Fund
10,097,119

 
10,921,540

Diamond Hill Global Fund, L.P.
1,931,065

 
1,570,965

Diamond Hill International Equity Fund, L.P.
1,141,897

 

Diamond Hill Short Duration Total Return Fund

 
20,245

Total Corporate Investments
86,979,833

 
79,100,551

Deferred Compensation Plan Investments in the Funds
19,571,038

 
14,182,470

Total investments held by DHCM
106,550,871

 
93,283,021

Redeemable noncontrolling interest in consolidated funds
23,192,510

 
14,732,614

Total Investment Portfolio
$
129,743,381

 
$
108,015,635

Cash Flow Analysis
Cash Flows from Operating Activities
The Company’s cash flows from operating activities are calculated by adjusting net income to reflect other significant operating sources and uses of cash, certain significant non-cash items such as share-based compensation, and timing differences in the cash settlement of operating assets and liabilities.
For the nine months ended September 30, 2017, net cash provided by operating activities totaled $40.6 million. Cash inflows provided by operating activities were primarily driven by net income of $39.3 million and the add back of stock-based compensation of $6.3 million and depreciation of $0.7 million. These cash inflows were partially offset by the net change in trading securities held in the underlying investment portfolio of the Consolidated Funds of $5.6 million, and the effect of non-cash items and timing differences in the cash settlement of assets and liabilities of $0.1 million. We expect that cash flows provided by operating activities will continue to serve as our primary source of working capital in the near future.
For the nine months ended September 30, 2016, net cash provided by operating activities totaled $8.2 million. Cash inflows provided by operating activities were primarily driven by net income of $32.7 million and the add back of stock-based compensation of $6.3 million and depreciation of $0.5 million. These cash inflows were partially offset by the net change in trading securities held in the underlying investment portfolio of the Consolidated Funds of $29.4 million, and the effect of non-cash items and timing differences in the cash settlement of assets and liabilities of $1.9 million.
Cash Flows from Investing Activities
The Company’s cash flows from investing activities consist primarily of capital expenditures and purchases and redemptions in our investment portfolio.
Cash flows used in investing activities totaled $11.1 million for the nine months ended September 30, 2017. The Company purchased investments of $13.4 million, inclusive of $3.9 million of investments into our deferred compensation plans, and $0.5 million of property and equipment purchases during the period. These cash outflows were partially offset by redemptions of investments of $2.0 million and $0.8 million of proceeds from the scheduled collection of the promissory note received from the sale of Beacon Hill.
Cash flows provided by investing activities totaled $2.1 million for the nine months ended September 30, 2016. The Company sold corporate investments of $18.7 million and received net proceeds of $1.2 million from the sale of Beacon Hill, which were offset by corporate investments purchased of $17.5 million, inclusive of $4.4 million into our deferred compensation plans, and property and equipment purchases of $0.3 million during the period.

25

Table of Contents


Cash Flows from Financing Activities
The Company’s cash flows from financing activities may consist of the payment of special dividends, shares withheld related to employee tax withholding, and distributions to or contributions from redeemable noncontrolling interest holders.
For the nine months ended September 30, 2017, net cash provided by financing activities totaled $3.2 million, consisting of net subscriptions received in the Consolidated Funds from redeemable noncontrolling interest holders of $6.0 million, partially offset by the value of shares withheld related to employee tax withholding of $2.8 million.
For the nine months ended September 30, 2016, net cash used in financing activities totaled $4.0 million, consisting of the value of shares withheld related to employee tax withholding of $9.7 million, partially offset by excess income tax benefits of of $4.7 million and $0.9 million related to share based payment and dividends paid on restricted stock, respectively.
Supplemental Consolidated Cash Flow Statement
On January 1, 2016, the Company implemented the new consolidation accounting guidance that resulted in the consolidation of the Consolidated Funds. Our consolidated balance sheet now reflects the investments and other assets and liabilities of the Consolidated Funds, as well as redeemable noncontrolling interests for the portion of the Consolidated Funds that are held by third party investors. Although we can redeem our net interest in the Consolidated Funds at any time, we cannot directly access or sell the assets held by the Consolidated Funds to obtain cash for general operations. Additionally, the assets of the Consolidated Funds are not available to our general creditors.
The following table summarizes the condensed cash flows for the year ended September 30, 2017, that are attributable to Diamond Hill Investment Group, Inc. and to the Consolidated Funds, and the related eliminations required in preparing the consolidated statements.
 
Nine Months Ended September 30, 2017
 
Cash flow attributable to Diamond Hill Investment Group, Inc.
 
Cash flow attributable to Consolidated Funds
 
Eliminations
 
As reported on the Consolidated Statement of Cash Flows
Cash flows from Operating Activities:
 
 
 
 
 
 
 
Net Income
$
38,094,182

 
$
4,243,172

 
$
(3,086,787
)
 
$
39,250,567

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Depreciation
659,707

 

 

 
659,707

Share-based compensation
6,258,112

 

 

 
6,258,112

Net (gains)/losses on investments
(6,673,565
)
 
(4,243,172
)
 
3,086,787

 
(7,829,950
)
Net change in trading securities held by Consolidated Funds

 
(5,639,151
)
 

 
(5,639,151
)
Other changes in assets and liabilities
5,181,406

 
2,723,264

 

 
7,904,670

Net cash provided by (used in) operating activities
43,519,842

 
(2,915,887
)
 

 
40,603,955

Net cash used in investing activities
(7,916,696
)
 

 
(3,219,665
)
 
(11,136,361
)
Net cash provided by (used in) financing activities
(2,789,948
)
 
2,803,209

 
3,219,665

 
3,232,926

Net change during the period
32,813,198

 
(112,678
)
 

 
32,700,520

Cash and cash equivalents at beginning of period
57,077,198

 
112,678

 

 
57,189,876

Cash and cash equivalents at end of period
$
89,890,396

 
$

 
$

 
$
89,890,396


26

Table of Contents


Use of Supplemental Data as Non-GAAP Performance Measure
As supplemental information, we are providing performance measures that are based on methodologies other than U.S. generally accepted accounting principles (“non-GAAP”). We believe the non-GAAP measures below are useful measures of our core business activities, are important metrics in estimating the value of an asset management business and may enable more appropriate comparison to our peers. These non-GAAP measures should not be a substitute for financial measures calculated in accordance with GAAP, and may be calculated differently by other companies. The following schedule reconciles GAAP measures to non-GAAP measures for the three and nine months ended September 30, 2017 and 2016, respectively.

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except percentages and per share data)
2017
 
2016
 
2017
 
2016
Total revenue
$
36,772

 
$
32,937

 
$
107,353

 
$
96,064

 
 
 
 
 
 
 
 
Net operating income, GAAP basis
$
16,887

 
$
15,139

 
$
48,596

 
$
43,542

Non-GAAP adjustment:
 
 
 
 
 
 
 
Gains (losses) on deferred compensation plan investments, net(1)
451

 
818

 
1,472

 
1,025

Net operating income, as adjusted, non-GAAP basis(2)
17,338

 
15,957

 
50,068

 
44,567

Non-GAAP adjustment:
 
 
 
 
 
 
 
Tax provision on net operating income, as adjusted, non-GAAP basis(3)
(5,731
)
 
(5,750
)
 
(16,342
)
 
(16,097
)
Net operating income, as adjusted, after tax, non-GAAP basis(4)
$
11,607

 
$
10,207

 
$
33,726

 
$
28,470

 


 


 


 


Net operating income, as adjusted after tax per diluted share, non-GAAP basis(5)
$
3.35

 
$
2.98

 
$
9.78

 
$
8.35

Diluted weighted average shares outstanding, GAAP basis
3,461

 
3,420

 
3,448

 
3,410

 
 
 
 
 
 
 
 
Operating profit margin, GAAP basis
46
%
 
46
%
 
45
%
 
45
%
Operating profit margin, as adjusted, non-GAAP basis(6)
47
%
 
48
%
 
47
%
 
46
%
(1) Gains (losses) on deferred compensation plan investments, net: The gain (loss) on deferred compensation plan investments, which increases (decreases) deferred compensation expense included in operating income, is removed from operating income in the calculation because it is offset by an equal amount in investment income (loss) below net operating income on the income statement, and thus has no impact on net income attributable to the Company.
(2) Net operating income, as adjusted: This non-GAAP measure was calculated by taking the Company’s net operating income adjusted to exclude the impact on compensation expense of gains and losses on investments in the deferred compensation plan.
(3) Tax provision on net operating income, as adjusted: This non-GAAP measure represents the tax provision excluding the impact of investment related activity and the sale of subsidiary and is calculated by applying the tax rate from the actual tax provision to net operating income, as adjusted.
(4) Net operating income, as adjusted, after tax: This non-GAAP measure was calculated by taking the net operating income, as adjusted, less the tax provision on net operating income, as adjusted.
(5) Net operating income, as adjusted after tax per diluted share: This non-GAAP measure was calculated by dividing the net operating income, as adjusted after tax, by diluted weighted average shares outstanding.
(6) Operating profit margin, as adjusted: This non-GAAP measure was calculated by dividing the net operating income, as adjusted, by total revenue.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements. We do not have any obligation under a guarantee contract, or a retained or contingent interest in assets or similar arrangement that serves as credit, liquidity or market risk support for such assets, or any other obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument or arising out of a variable interest.

27

Table of Contents


Critical Accounting Policies and Estimates
For a summary of the critical accounting policies important to understanding the condensed consolidated financial statements see Note 2, Significant Accounting Policies, in the condensed consolidated financial statements contained in Part I, Item 1 of this filing and Critical Accounting Policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2016 Annual Report and Note 2, Significant Accounting Policies, in the 2016 Annual Report for further information.
ITEM 3:
Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the information provided in Item 7A of the Company’s 2016 Annual Report.

ITEM 4:
Controls and Procedures
Management, including the Chief Executive Officer and the Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II:
OTHER INFORMATION
 
ITEM 1:
Legal Proceedings
From time to time, the Company is party to ordinary, routine litigation that is incidental to its business. There are currently no such matters pending that the Company believes could have a material adverse effect on its consolidated financial statements.

ITEM 1A:
Risk Factors
There has been no material change to the information provided in Item 1A of the Company’s 2016 Annual Report.

ITEM 2:
Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended September 30, 2017, the Company did not purchase any of its Common Shares and did not sell any Common Shares that were not registered under the Securities Act of 1933. The following table sets forth information regarding the Company’s repurchase program of its Common Shares and shares withheld for tax payments due upon employee Restricted Stock which vested during the third quarter of fiscal year 2017:
 

28

Table of Contents


Period
Total Number
of Shares Purchased(a)
 
Average Price
Paid Per Share
 
Total Number
of Shares Purchased
as part of Publicly
Announced Plans
or Programs
 
Maximum Number
of Shares That May
Yet Be Purchased
Under the Plans or
Programs(b)
July 1, 2017 through July 31, 2017
4,545

 
$
199.40

 

 
318,433

August 1, 2017 through August 31, 2017

 
$

 

 
318,433

September 1, 2017 through September 30, 2017

 
$

 

 
318,433

Total
4,545

 
$
199.40



 
318,433

 
(a)
All of the 4,545 shares of the Company's common shares purchased during the quarter ended September 30, 2017 represented shares withheld for tax payments due upon employee Restricted Stock which vested during the quarter.
(b)
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 the Company’s Common Shares in the open market and in private transactions in accordance with applicable securities laws. The Company’s share repurchase program is not subject to an expiration date.

ITEM 3:
Defaults Upon Senior Securities
None

ITEM 4:
Mine Safety Disclosures
None

ITEM 5:
Other Information
None


29

Table of Contents


ITEM 6:
Exhibits
3.1
  
 
 
 
3.2
 
 
 
 
3.3
  
 
 
 
31.1
  
 
 
 
31.2
  
 
 
 
32.1
  
 
 
 
101.INS
  
XBRL Instance Document.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF
  
XBRL Taxonomy Definition Linkbase Document.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.


30

Table of Contents


DIAMOND HILL INVESTMENT GROUP, INC.
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.
DIAMOND HILL INVESTMENT GROUP, INC.
 
Date
 
Title
 
Signature
 
 
 
 
 
October 26, 2017
 
Chief Executive Officer and President
 
/s/ Christopher M. Bingaman
 
 
 
 
Christopher M. Bingaman
 
 
 
 
 
October 26, 2017
 
Chief Financial Officer and Treasurer
 
/s/ Thomas E. Line
 
 
 
 
Thomas E. Line


31
(Back To Top)

Section 2: EX-31.1 (EXHIBIT 31.1)

Exhibit


CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-Q
I, Christopher M. Bingaman, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Diamond Hill Investment 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.
Date: October 26, 2017
 
/s/ Christopher M. Bingaman
 
 
Christopher M. Bingaman
 
 
Chief Executive Officer




(Back To Top)

Section 3: EX-31.2 (EXHIBIT 31.2)

Exhibit


CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-Q
I, Thomas E. Line, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Diamond Hill Investment 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.
Date: October 26, 2017
 
/s/ Thomas E. Line
 
 
Thomas E. Line
 
 
Chief Financial Officer



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Section 4: EX-32.1 (EXHIBIT 32.1)

Exhibit


CERTIFICATION PURSUANT TO
TITLE 18, UNITED STATES CODE, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Diamond Hill Investment Group, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Christopher M. Bingaman, Chief Executive Officer of the Company, and Thomas E. Line, Chief Financial Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Christopher M. Bingaman
Print Name: Christopher M. Bingaman
Title: Chief Executive Officer
Date: October 26, 2017
 
/s/ Thomas E. Line
Print Name: Thomas E. Line
Title: Chief Financial Officer
Date: October 26, 2017




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