DHIL 10-Q Quarterly Report Sept. 30, 2010

DIAMOND HILL INVESTMENT GROUP INC

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10-Q 1 c07855e10vq.htm FORM 10-Q Form 10-Q

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, 2010

Commission file number 000-24498

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, including Zip Code, of principal executive offices)

(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: þ No: o

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 o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No: þ

The number of shares outstanding of the issuer’s common stock, as of November 3, 2010, is 2,794,484 shares.

DIAMOND HILL INVESTMENT GROUP, INC.


	PAGE
Part I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements		3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3. Quantitative and Qualitative Disclosures About Market Risk		22

Item 4. Controls and Procedures		22

Part II: OTHER INFORMATION

Item 1. Legal Proceedings		22

Item 1A. Risk Factors		22

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22

Item 3. Defaults Upon Senior Securities		23

Item 4. (Removed and Reserved)		23

Item 5. Other Information		23

Item 6. Exhibits		24

Signatures		25

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I: FINANCIAL INFORMATION

ITEM 1: Consolidated Financial Statements

Diamond Hill Investment Group, Inc.

Consolidated Balance Sheets


	9/30/2010			12/31/2009
	(Unaudited)
ASSETS
Cash and cash equivalents	$	28,840,495		$	11,513,194
Investment portfolio		13,562,355			16,429,967
Accounts receivable		8,316,700			10,144,004
Prepaid expenses		780,200			724,825
Furniture and equipment, net of depreciation, and other assets		982,151			1,171,670
Income tax receivable		403,492			—
Deferred taxes		940,447			520,965


Total assets	$	53,825,840		$	40,504,625


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable and accrued expenses	$	2,282,006		$	4,465,011
Accrued incentive compensation		12,985,000			12,300,650
Dividend payable		36,263,591			—
Income tax payable		—			758,257


Total liabilities		51,530,597			17,523,918


Commitments and contingencies		—			—

Shareholders’ Equity
Common stock, no par value
7,000,000 shares authorized; 2,789,507 issued and outstanding at September 30, 2010; 2,677,577 issued and outstanding at December 31, 2009		33,892,870			26,922,484
Preferred stock, undesignated, 1,000,000 shares authorized and unissued		—			—
Deferred compensation		(7,401,541	)		(8,070,697	)
Retained earnings (deficit)		(24,196,086	)		4,128,920


Total shareholders’ equity		2,295,243			22,980,707


Total liabilities and shareholders’ equity	$	53,825,840		$	40,504,625


Book value per share	$	0.82		$	8.58

See notes to consolidated financial statements.

Diamond Hill Investment Group, Inc.

Consolidated Statements of Income (unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
REVENUES:
Investment advisory	$	12,215,574		$	9,516,666		$	35,629,445		$	25,773,460
Mutual fund administration, net		1,827,426			1,854,978			5,558,699			4,075,351


Total revenue		14,043,000			11,371,644			41,188,144			29,848,811


OPERATING EXPENSES:
Compensation and related costs		8,095,735			6,744,380			23,707,288			17,267,784
General and administrative		856,058			809,375			2,539,120			2,201,294
Sales and marketing		143,689			157,539			481,709			439,971
Third party distribution		238,890			201,259			756,546			665,672
Mutual fund administration		509,598			610,522			1,473,933			1,765,567


Total operating expenses		9,843,970			8,523,075			28,958,596			22,340,288


NET OPERATING INCOME		4,199,030			2,848,569			12,229,548			7,508,523


Investment return		1,169,916			2,064,283			231,130			4,517,328


INCOME BEFORE TAXES		5,368,946			4,912,852			12,460,678			12,025,851

Income tax provision		(1,930,540	)		(1,708,934	)		(4,522,093	)		(4,154,206	)


NET INCOME	$	3,438,406		$	3,203,918		$	7,938,585		$	7,871,645


Earnings per share
Basic	$	1.24		$	1.23		$	2.88		$	3.06

Diluted	$	1.24		$	1.23		$	2.88		$	3.05


Weighted average shares outstanding
Basic		2,779,345			2,607,129			2,757,539			2,572,006

Diluted		2,779,345			2,611,933			2,759,066			2,576,657

See notes to consolidated financial statements.

Diamond Hill Investment Group, Inc.

Consolidated Statements of Cash Flow (unaudited)


	Nine Months Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	7,938,585		$	7,871,645
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation on furniture and equipment		243,161			188,034
Amortization of deferred compensation		1,767,787			1,241,008
(Increase) decrease in accounts receivable		1,827,304			(2,393,390	)
Change in deferred taxes		(449,201	)		1,112,086
Noncash director fee expense		179,836			150,062
Investment (gain) loss, net		706,745			(2,445,832	)
Increase in accrued liabilities		3,504,491			2,614,770
Other changes in assets and liabilities		(1,175,670	)		2,500,790

Net cash provided by operating activities		14,543,038			10,839,173


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(53,642	)		(575,228	)
Cost of investments purchased and other portfolio activity		(889,133	)		(9,896,273	)
Proceeds from sale of investments		3,050,000			10,460,937

Net cash provided by (used in) investing activities		2,107,225			(10,564	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of taxes withheld on employee stock transactions		(11,360	)		(26,865	)
Proceeds from common stock issuance		688,398			626,037

Net cash provided by financing activities		677,038			599,172


CASH AND CASH EQUIVALENTS
Net change during the period		17,327,301			11,427,781
At beginning of period		11,513,194			15,788,560

At end of period	$	28,840,495		$	27,216,341


Cash paid during the period for:
Interest	$	—		$	—
Income taxes		6,088,700			1,655,900

Noncash transactions during the period for:
Common stock issued as incentive compensation		5,003,146			4,852,216
Dividend payable		36,263,591			—

See notes to consolidated financial statements.

Diamond Hill Investment Group, Inc.
Notes to Consolidated Financial Statements (unaudited)

Note 1 Organization

Diamond Hill Investment Group, Inc. (the “Company”) derives its consolidated revenues and net income primarily from investment advisory and fund administration services that it provides to individual and institutional investors. The Company has four operating subsidiaries.

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”), and also offers advisory services to institutional and individual investors.

Diamond Hill GP (Cayman) Ltd. was incorporated in the Cayman Islands as an exempted company on May 18, 2006 for the purpose of acting as the general partner of a Cayman Islands exempted limited partnership. This limited partnership acts as a master fund for Diamond Hill Offshore Ltd., a Cayman Islands exempted company; and Diamond Hill Investment Partners II, L.P., an Ohio limited partnership. Diamond Hill GP (Cayman) Ltd. has no operating activity.

Beacon Hill Fund Services, Inc. (“BHFS”), an Ohio corporation, is a wholly owned subsidiary of the Company incorporated on January 29, 2008. BHFS provides certain compliance, treasury, and fund administration services to mutual fund companies. BHIL Distributors, Inc. (“BHIL”), an Ohio corporation, is a wholly owned subsidiary of BHFS incorporated on February 19, 2008. BHIL provides underwriting and distribution services to mutual fund companies. BHFS and BHIL collectively operate as Beacon Hill.

Note 2 Significant Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses for the periods. Actual results could differ from those estimates. Certain prior period amounts and disclosures have been reclassified to conform to the current period financial presentation. Book value per share is computed by dividing total shareholders’ equity by the number of shares issued and outstanding at the end of the measurement period. The following is a summary of the Company’s significant accounting policies:

Principles of Consolidation

The accompanying consolidated financial statements include the operations of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

Segment Information

Management has determined that the Company operates in one business segment, namely providing investment management and administration services to mutual funds, separate accounts, and private investment funds. Therefore, no disclosures relating to operating segments are required in the Company’s annual or interim financial statements.

Cash and Cash Equivalents

Cash and cash equivalents include demand deposits and money market funds.

Note 2 Significant Accounting Policies (Continued)

Accounts Receivable

Accounts receivable are recorded when they are due and are presented in 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 those individuals or entities that owe the receivable. No allowance for doubtful accounts was deemed necessary at September 30, 2010 or December 31, 2009.

Valuation of Investment Portfolio

Investments held by the Company are valued based upon the definition of Level 1 inputs and Level 2 inputs. Level 1 inputs are defined as fair values which use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are defined as quoted prices in markets that are not considered to be active for identical assets or liabilities, quoted prices in active markets for similar assets or liabilities and inputs other than quoted prices that are directly observable or indirectly through corroboration with observable market data. At September 30, 2010, $1,178,926 and $12,383,429 in Company investments are valued based upon Level 1 and Level 2 inputs, respectively. At December 31, 2009, $4,108,170 and $12,321,797 in Company investments are valued based upon Level 1 and Level 2 inputs, respectively. Level 1 investments are all registered investment companies (mutual funds). Level 2 investments are all limited partnerships. There were no transfers in or out of the levels.

The changes in market values on the investments are recorded in the Consolidated Statement of Income as investment return.

Limited Partnership Interests

DHCM is the managing member of Diamond Hill General Partner, LLC, the General Partner of Diamond Hill Investment Partners, LP (“DHIP”), Diamond Hill Investment Partners II, LP (“DHIP II”), and Diamond Hill Research Partners, LP (“DHRP”), collectively (the “Partnerships”), each a limited partnership whose underlying assets consist of marketable securities.

DHCM, in its role as managing member of the General Partner, has the power to direct the Partnerships’ economic activities and the right to receive investment advisory and performance incentive fees that are significant to the Partnerships. The Partnerships are subject to investment company accounting and, as a result, they have not been consolidated in presenting the accompanying financial statements. DHCM’s investments in these partnerships are reported as a component of the Company’s investment portfolio, valued at DHCM’s proportionate interest in the net asset value of the marketable securities held by the Partnerships. Gains and losses attributable to changes in the value of DHCM’s interests in the Partnerships are included in the Company’s reported investment return.

The Company’s exposure to loss as a result of its involvement with the Partnerships is limited to the amount of its investments. DHCM is not obligated to provide financial or other support to the Partnerships, other than its investments to date and its contractually provided investment advisory responsibilities, and has not provided such support. The Company has not provided liquidity arrangements, guarantees or other commitments to support the Partnerships’ operations, and the Partnerships’ creditors and interest holders have no recourse to the general credit of the Company.

Several board members, officers and employees of the Company invest in DHIP and DHIP II through Diamond Hill General Partner, LLC. These individuals receive no remuneration as a result of their personal investment in the Partnerships. The capital of Diamond Hill General Partner, LLC is not subject to a management fee or an incentive fee.

Note 2 Significant Accounting Policies (Continued)

Furniture and Equipment

Furniture and equipment, consisting of computer equipment, furniture, and fixtures, are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over estimated lives of three to seven years.

Revenue Recognition — General

The Company earns substantially all of its revenue from investment advisory, distribution, and fund administration services. Mutual fund investment advisory and administration fees, generally calculated as a percentage of assets under management, are recorded as revenue as services are performed. Managed account and private investment fund clients provide for monthly or quarterly management fees, in addition to quarterly or annual performance fees.

Revenue Recognition — Performance Incentive Revenue

The Company’s private investment funds and certain managed accounts provide for performance incentive fees. For management fees based on a formula, there are two methods by which incentive revenue may be recorded. Under “Method 1”, incentive fees are recorded at the end of the contract period; under “Method 2”, the incentive fees are recorded periodically and calculated as the amount that would be due under the formula at any point in time as if the contract was terminated at that date. Management has chosen Method 1, in which incentive fees are recorded at the end of the contract period for the specific client in which the incentive fee applies. The table below shows assets under management (“AUM”) subject to performance incentive fees and the performance incentive fees as calculated under each of the above methods:


	As Of September 30,
	2010		2009
AUM — Contractual Period Ends Quarterly	$	105,112,498	$	106,500,933
AUM — Contractual Period Ends Annually		164,760,591		154,601,503

Total AUM Subject to Performance Incentive	$	269,873,089	$	261,102,436


	For The Three Months Ending Sept. 30,					For The Nine Months Ending Sept. 30,
	2010		2009			2010		2009
Performance Incentive Fees — Method 1	$	3,934	$	—		$	3,934	$	4,645
Performance Incentive Fees — Method 2	$	37,823	$	(20,620	)	$	37,823	$	179,406

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, transfer agency and other related functions. For performing these services, each fund compensates DHCM a fee at an annual rate of 0.30% for Class A and Class C shares and 0.19% for Class I shares times each series’ average daily net assets. 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 fund shareholder mailings, federal and state registrations, legal and audit fees. 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 the Funds pay 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, as it is the appropriate accounting treatment for this agency relationship. In addition, DHCM finances the up-front commissions which are paid by the Fund’s principal underwriter to brokers who sell Class C shares of the Funds. As financer, DHCM advances to the underwriter the commission amount to be paid to the selling broker at the time of sale. 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.

Note 2 Significant Accounting Policies (Continued)

Revenue Recognition — Mutual Fund Administration (Continued)

Beacon Hill has underwriting and administrative service agreements with certain clients, including registered mutual funds. The fee arrangements vary from client to client based upon services provided and are recorded as revenue under Mutual Fund Administration. Part of Beacon Hill’s role as underwriter is 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 amount of 12b-1/service fees and commissions are determined by each mutual fund client and Beacon Hill bears no financial risk related to these services. As a result, 12b-1/service fees and commission revenue has been recorded net of the expense payments to third parties as it is the appropriate accounting treatment for this agency relationship.

Mutual fund administration gross and net revenue are summarized below:


	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
	2010			2009			2010			2009
Mutual fund administration:
Administration revenue, gross	$	2,618,017		$	2,545,453		$	8,180,583		$	6,535,520
12b-1/service fees and commission revenue received from fund clients		1,903,486			1,770,999			6,223,147			3,113,628
12b-1/service fees and commission expense payments to third parties		(1,903,486	)		(1,770,999	)		(6,223,147	)		(3,113,628	)
Fund related expense		(824,032	)		(709,395	)		(2,700,106	)		(2,408,964	)

Revenue, net of fund related expenses		1,793,985			1,836,058			5,480,477			4,126,556

C-Share financing:
Broker commission advance repayments		179,531			108,028			500,895			631,497
Broker commission amortization		(146,090	)		(89,108	)		(422,673	)		(682,702	)

Financing activity, net		33,441			18,920			78,222			(51,205	)


Mutual fund administration revenue, net	$	1,827,426		$	1,854,978		$	5,558,699		$	4,075,351

Third Party Distribution Expense

Third party distribution expenses are earned by various third party financial services firms based on sales and/or assets of the Company’s investment products generated by the respective firms. Expenses recognized represent actual payments made to the third party firms and are recorded in the period earned based on the terms of the various contracts.

Income Taxes

The Company accounts for income taxes through an asset and liability approach. A net deferred tax asset or liability is determined based on the tax effects of the various temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

Note 2 Significant Accounting Policies (Continued)

Income Taxes (Continued)

The Company has analyzed its tax positions taken on federal income tax returns for all open tax years (tax years ended December 31, 2007 through 2009) to determine any uncertainty in income taxes and has recognized no adjustment in the net asset or liability.

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. Diluted EPS reflects the potential dilution of EPS that could occur if outstanding warrants were exercised. At September 30, 2010, there were no warrants outstanding.

Note 3 Investment Portfolio

As of September 30, 2010, the Company held investments worth $13.6 million and a cost basis of $10.2 million. The following table summarizes the market value of these investments as of September 30, 2010 and December 31, 2009:


	September 30,		December 31,
	2010		2009
Diamond Hill Small Cap Fund	$	192,292	$	709,881
Diamond Hill Small-Mid Cap Fund		194,585		785,714
Diamond Hill Large Cap Fund		194,085		684,554
Diamond Hill Select Fund		201,960		705,790
Diamond Hill Long-Short Fund		196,888		606,800
Diamond Hill Strategic Income Fund		199,116		615,431
Diamond Hill Investment Partners, L.P.		2,589,047		2,653,856
Diamond Hill Investment Partners II, L.P.		2,574,785		2,649,665
Diamond Hill Research Partners, L.P.		7,219,597		7,018,276

Total Investment Portfolio	$	13,562,355	$	16,429,967

Note 3 Investment Portfolio (Continued)

DHCM is the managing member of the Diamond Hill General Partner LLC, which is the General Partner of the Partnerships. The underlying assets of the Partnerships are cash and marketable equity securities. Summary financial information, including the Company’s carrying value as of September 30, 2010 and December 31, 2009 and income from the Partnerships for the nine months ended September 30, 2010 and for the year ended December 31, 2009 is as follows:


	September 30,			December 31,
	2010			2009
Total partnership assets	$	155,518,800		$	188,716,374
Total partnership liabilities		18,641,224			40,583,059
Net partnership assets		136,877,576			148,133,315
Net partnership income (loss)		(4,918,663	)		35,193,357

DHCM’s portion of net assets		12,383,429			12,321,797
DHCM’s portion of net income		61,631			4,634,391

DHCM’s income from the Partnerships includes its pro-rata capital allocation and its share of an incentive allocation, if any, from the limited partners.

Note 4 Capital Stock

Common Shares

The Company has only one class of securities, Common Shares.

Authorization of Preferred Shares

The Company’s Articles of Incorporation authorize the issuance of 1,000,000 shares of “blank check” preferred shares with such designations, rights and preferences, as may be determined from time to time by the Company’s Board of Directors. The Board of Directors is authorized, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other rights, which could adversely affect the voting or other rights of the holders of the Common Shares. There were no shares of preferred stock issued or outstanding at September 30, 2010 or December 31, 2009.

Note 5 Stock-Based Compensation

Equity Incentive Plans

2005 Employee and Director Equity Incentive Plan

At the Company’s annual shareholder meeting on May 12, 2005, shareholders approved the 2005 Employee and Director Equity Incentive Plan (“2005 Plan”). The 2005 Plan is intended to facilitate the Company’s ability to attract and retain staff, provide additional incentive to employees, directors and consultants, and to promote the success of the Company’s business. The 2005 Plan authorizes the issuance of Common Shares of the Company in various forms of stock or option grants. As of September 30, 2010, there were 295,050 shares available for issuance under the 2005 Plan. The 2005 Plan provides that the Board of Directors, or a committee appointed by the Board, may grant awards and otherwise administer the 2005 Plan. Restricted stock grants issued under the 2005 Plan, which vest over time, are recorded as deferred compensation in the equity section of the balance sheet on grant date and then recognized as compensation expense based on the grant date price over the vesting period of the respective grant.

401(k) Plan

The Company sponsors a 401(k) plan under which all employees participate. Employees may contribute a portion of their compensation subject to certain limits based on federal tax laws. The Company makes matching contributions of Common Shares of the Company with a value equal to 200 percent of the first six percent of an employee’s compensation contributed to the plan. Employees become fully vested in the matching contributions after six plan years of employment. For the three months ended September 30, 2010 and 2009, expenses attributable to the plan were $224,819 and $188,039, respectively. For the nine months ended September 30, 2010 and 2009, expenses attributable to the plan were $665,897 and $558,598, respectively.

Note 5 Stock-Based Compensation (Continued)

Stock Options and Warrants

There were no stock options outstanding during the periods presented in these financials. There are no warrants outstanding as of September 30, 2010. Warrant transactions during the periods presented in these financials are summarized below:


	Warrants
			Weighted Average
	Shares		Exercise Price
Outstanding December 31, 2008		10,000	$	13.00
Exercisable December 31, 2008		10,000	$	13.00
Granted		—		—
Expired / Forfeited		—		—
Exercised		4,000		16.88


Outstanding September 30, 2009		6,000	$	10.42

Exercisable September 30, 2009		6,000	$	10.42


Outstanding December 31, 2009		6,000	$	10.42
Exercisable December 31, 2009		6,000	$	10.42
Granted		—		—
Expired / Forfeited		4,000		10.00
Exercised		2,000		11.25


Outstanding September 30, 2010		—	$	—

Exercisable September 30, 2010		—	$	—

Note 6 Operating Leases

The Company leases approximately 19,000 square feet of office space at its principal office under an operating lease agreement which terminates on July 31, 2016. In addition, the Company leases approximately 2,200 square feet of office space for a subsidiary company under an operating lease agreement which terminates on February 28, 2011. Total lease and operating expenses for the three months ended September 30, 2010 and 2009 were $145,335 and $142,947 respectively. Total lease and operating expenses for the nine months ended September 30, 2010 and 2009 were $428,340 and $358,730 respectively. The approximate future minimum lease payments under the operating leases are as follows:


2010		2011		2012		2013		2014		Thereafter
$	90,000	$	340,000	$	348,000	$	356,000	$	358,000	$	571,000

In addition to the above rent, the Company will also be responsible for normal operating expenses of the properties. Such operating expenses were approximately $9.79 per square foot in 2009 and are expected to be approximately $9.97 per square foot in 2010 on a combined basis.

Note 7 Income Taxes

The provision for income taxes for the three months and nine months ended September 30, 2010 and 2009 consists of federal, state and city income taxes. As of September 30, 2010, the Company and its subsidiaries had a capital loss carry forward of approximately $3.6 million. The capital loss carry forward is available to offset capital gains in future years.

Note 8 Earnings Per Share

The following table sets forth the computation for basic and diluted earnings per share (“EPS”):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Basic and Diluted net income	$	3,438,406	$	3,203,918	$	7,938,585	$	7,871,645
Weighted average number of outstanding shares
Basic		2,779,345		2,607,129		2,757,539		2,572,006
Diluted		2,779,345		2,611,933		2,759,066		2,576,657
Earnings per share
Basic	$	1.24	$	1.23	$	2.88	$	3.06

Diluted	$	1.24	$	1.23	$	2.88	$	3.05

Note 9 Regulatory Requirements

BHIL, a wholly owned subsidiary of the Company and principal underwriter for mutual funds, is subject to the U.S. Securities and Exchange Commission (“SEC”) uniform net capital rule, which requires the maintenance of minimum net capital. BHIL’s net capital exceeds its minimum net capital requirement at September 30, 2010 and December 31, 2009. The net capital balances, minimum net capital requirements, and ratio of aggregate indebtedness to net capital for BHIL are summarized below as of September 30, 2010 and December 31, 2009:


	September 30,		December 31,
	2010		2009
Net Capital	$	157,509	$	279,718
Minimum Net Capital Requirement		62,814		132,199

Ratio of Aggregate Indebtedness to Net Capital		5.9819 to 1		7.09 to 1

Note 10 Commitments and Contingencies

The Company indemnifies its directors and certain of its officers and employees for certain liabilities that might arise from their performance of their duties to the Company. 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 would 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.

DIAMOND HILL INVESTMENT GROUP, INC.

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 and Section 21E of the Securities Exchange Act of 1934 relating to such matters as anticipated operating results, prospects for achieving the critical threshold of assets under management, technological developments, economic trends (including interest rates and market volatility), expected transactions and acquisitions 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 the Company believes that the assumptions underlying its forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and, accordingly, the actual results and experiences of the Company could differ materially from the anticipated results or other expectations expressed by the Company in its 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 the Company’s products; changes in interest rates; a general or prolonged downturn in the economy; changes in government policy and regulation, including monetary policy; changes in the Company’s 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 the Company’s public documents on file with the SEC.

General

The Company, an Ohio corporation organized in 1990, derives its consolidated revenue and net income from investment advisory and fund administration services provided by its subsidiaries Diamond Hill Capital Management, Inc. (“DHCM”), Beacon Hill Fund Services, Inc. (“BHFS”), and BHIL Distributors, Inc. (“BHIL”). BHFS and BHIL collectively operate as Beacon Hill. DHCM is a registered investment adviser under the Investment Advisers Act of 1940 providing investment advisory services to individuals and institutional investors through Diamond Hill Funds, separate accounts, and private investment funds (generally known as “hedge funds”). Beacon Hill was incorporated during the first quarter of 2008, and provides certain fund administration services and underwriting services to mutual fund companies, including Diamond Hill Funds.

In this section, the Company discusses and analyzes the consolidated results of operations for the three and nine month periods ending September 30, 2010 and 2009 and other factors that may affect future financial performance. The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three and nine month periods ended September 30, 2010, are not necessarily indicative of the results which may be expected for the entire fiscal year.

The Company’s 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 managed by the Company and fluctuate with changes in the total value of the assets under management (“AUM”). Such fees are recognized in the period that the Company manages these assets. Performance incentive fees are generally 20% of the amount of client annual investment performance in excess of a specified hurdle. Because performance incentive fees are based primarily on the performance of client accounts, they can be volatile from period to period. The Company’s primary expense is employee compensation and benefits.

Assets Under Management

As of September 30, 2010, AUM totaled $7.1 billion, a 29% increase in comparison to September 30, 2009. Revenues are highly dependent on both the value and composition of AUM. The following is a summary of the Company’s AUM by product and objective as of September 30, 2010 and 2009 and a roll-forward of AUM activity for the nine months ended September 30, 2010 and 2009:


	Assets Under Management by Product
	As of September 30,
(in millions)	2010		2009		% Change
Mutual funds	$	4,026	$	3,317		21	%
Separate accounts		2,851		1,957		46	%
Private investment funds		203		215		-6	%

Total	$	7,080	$	5,489		29	%


	Assets Under Management by Objective
	As of September 30,
(in millions)	2010		2009		% Change
Small	$	803	$	577		39	%
Small-Mid Cap		167		139		20	%
Large Cap		3,296		2,149		53	%
Select		398		359		11	%
Long-Short		2,235		2,115		6	%
Strategic and fixed income		181		150		21	%

Total	$	7,080	$	5,489		29	%


	Change in Assets Under Management
	For the Nine Months Ended September 30,
(in millions)	2010			2009
AUM at beginning of the period	$	6,283		$	4,510
Net cash inflows (outflows)
mutual funds		415			(229	)
separate accounts		385			423
private investment funds		(9	)		(46	)

		791			148
Net market appreciation and income		6			831

Increase during the period		797			979

AUM at end of the period	$	7,080		$	5,489

Consolidated Results of Operations

The following is a discussion of the consolidated results of operations of the Company and its revenues and expenses.


	Three Months Ended September 30,							Nine Months Ended September 30,
(in thousands, except per share amounts)	2010		2009		% Change			2010		2009		% Change
Net operating income after tax ^(a)	$	2,350	$	1,858		26	%	$	7,790	$	4,915		58	%
Net income	$	3,438	$	3,204		7	%	$	7,938	$	7,872		1	%

Net operating income after tax per share ^(a)
Basic	$	0.85	$	0.71		19	%	$	2.82	$	1.91		48	%
Diluted	$	0.85	$	0.71		19	%	$	2.82	$	1.91		48	%

Net income per share
Basic	$	1.24	$	1.23		1	%	$	2.88	$	3.06		-6	%
Diluted	$	1.24	$	1.23		1	%	$	2.88	$	3.06		-6	%

Weighted average shares outstanding
Basic		2,779		2,607					2,758		2,572
Diluted		2,779		2,612					2,759		2,577


(a)		- Net operating income after tax is a non-GAAP performance measure. See Use of Supplemental Data as Non-GAAP Performance Measure on page 20 of this report.

Three Months Ended September 30, 2010 compared with Three Months Ended September 30, 2009

The Company generated net income of $3,438,406 ($1.24 per diluted share) for the three months ended September 30, 2010, compared with net income of $3,203,918 ($1.23 per diluted share) for the three months ended September 30, 2009. While net income experienced an increase of $230 thousand, revenue for the period increased $2.7 million offset by a $1.4 million increase in compensation and related costs and a decrease in the investment return on the Company’s corporate investments by $894 thousand from the nine months ended September 30, 2009 to the nine months ended September 30, 2010. Excluding the investment return, net operating income after tax increased $492 thousand, or 26%, for the period primarily due to a 29% increase in AUM from September 30, 2009 to September 30, 2010.

Revenue


	Three Months Ended
	September 30,
(in thousands)	2010		2009		% Change
Investment advisory	$	12,216	$	9,517		28	%
Mutual fund administration, net		1,827		1,855		-2	%


Total	$	14,043	$	11,372		23	%

As a percent of total third quarter 2010 revenues, investment advisory fees accounted for 87% and mutual fund administration fees accounted for the remaining 13% compared to the third quarter of 2009 where investment advisory fees accounted for 84% and mutual fund administration fees accounted for the remaining 16% of revenues.

Investment Advisory Fees. Investment advisory fees increased by $2.7 million, or 28%, due to a 29% increase in AUM from September 30, 2009 to September 30, 2010. Investment advisory fees are calculated as a percent of average net AUM at various levels depending on the investment product. The Company’s average advisory fee rate for the three months ended September 30, 2010 was 0.72% compared to 0.74% for the three months ended September 30, 2009. The decrease in the average advisory fee rate is due to an overall change in the composition of AUM where long-short strategies, which pay a higher advisory fee, made up 32% of total AUM as of September 30, 2010 compared to 39% of total AUM as of September 30, 2009 while long only strategies, which have a lower advisory fee, made up 47% of total AUM as of September 30, 2010 compared to only 39% of total AUM as of September 30, 2009. The Company’s average AUM during the quarter ended September 30, 2010 was $6.8 billion compared to $5.1 billion for the quarter ended September 30, 2009. Despite the 0.02% decrease in average advisory fee rate in third quarter 2010, the fee rate was being charged on a greater asset base compared to the same quarter in 2009 resulting in an increase in the overall fees earned during the period.

Mutual Fund Administration Fees. Mutual fund administration fees include administration fees received from Diamond Hill Funds, which are calculated as a percent of average net AUM, and all Beacon Hill fee revenue. Effective April 30, 2010, the administration fee rate for Diamond Hill Funds decreased from 0.34% to 0.30% on Class A and Class C shares and decreased from 0.20% to 0.19% for Class I shares. This decrease represents a sharing of the fund administration economies of scale with mutual fund shareholders. Fund administration revenues decreased by $28 thousand for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009 due to a decrease in the effective blended gross fee rate from 0.29% to 0.24% and an increase in Fund Related expenses associated with a 21% increase in mutual fund AUM. The impact of the 0.05% decrease in the effective blended gross fee rate was partially offset by a 29% increase in the Company’s average mutual fund AUM during the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009.

Expenses


	Three Months Ended
	September 30,
(in thousands)	2010		2009		% Change
Compensation and related costs	$	8,096	$	6,744		20	%
General and administrative		856		809		6	%
Sales and marketing		144		158		-9	%
Third party distribution		239		201		19	%
Mutual fund administration		509		611		-17	%


Total	$	9,844	$	8,523		15	%

Compensation and Related Costs. Employee compensation and benefits increased $1.4 million, or 20%, during the three months ended September 30, 2010 compared to the same period a year ago, primarily due to an increase of $670 thousand, or 16%, in incentive compensation during the period consistent with an increase in AUM and the associated increase in operating income. Further contributors to the overall increase in compensation expense were restricted stock expense, which increased by $187 thousand due to an overall increase in the total amount of long-term equity awards outstanding in 2010 compared to 2009, and base salaries and related benefits, which increased by $181 thousand due to an increase in employee headcount.

General and Administrative. General and administrative expenses increased by $47 thousand, or 6%, period over period. This increase is primarily due to additional research expenses to support the Company’s investment team, expansion of the Company’s office space, and implementation of a new trading system during the second quarter of 2010, partially offset by a reduction in legal costs and the phase-out of the Ohio franchise tax expense.

Sales and Marketing. Sales and marketing expenses decreased by $14 thousand, or 9%. This decrease was primarily due to a reduction in other marketing expenses related to the timing of certain conferences offset by an increase in travel related expenses during the quarter.

Third Party Distribution. Third party distribution expense represents payments made to intermediaries related to sales of the Company’s investment products. The expense is directly correlated with investments in the Company’s private investment funds. The period over period increase or decrease directly corresponds to the increase or decrease in investment advisory fees earned by the Company.

Mutual Fund Administration. Mutual fund administration expense decreased by $509 thousand, or 17%, period over period. The majority of mutual fund administration fees are variable based on the amount of mutual fund AUM. Despite an overall increase in mutual fund AUM of $709 million, or 21%, as of September 30, 2010 compared to September 30, 2009, the decrease in mutual fund administration expenses is primarily due to a third party service provider fee reduction related to bringing certain administration activities in-house.

Nine Months Ended September 30, 2010 compared with Nine Months Ended September 30, 2009

The Company generated net income of $7,938,585 ($2.88 per diluted share) for the nine months ended September 30, 2010, compared with net income of $7,871,645 ($3.05 per diluted share) for the nine months ended September 30, 2009. While net income experienced an increase of only $67 thousand, revenue for the period increased $11.3 million offset by a $6.4 million increase in compensation and related costs and a decrease in the investment return on the Company’s corporate investments by $4.3 million from the nine months ended September 30, 2009 to the nine months ended September 30, 2010. Excluding the investment return, net operating income after tax increased $2.9 million, or 58%, for the period primarily due to a 29% increase in AUM from September 30, 2009 to September 30, 2010.

Revenue


	Nine Months Ended
	September 30,
(in thousands)	2010		2009		% Change
Investment advisory	$	35,629	$	25,774		38	%
Mutual fund administration, net		5,559		4,075		36	%


Total	$	41,188	$	29,849		38	%

As a percent of 2010 year to date revenues, investment advisory fees accounted for 87% and mutual fund administration fees accounted for the remaining 13% compared to the 2009 period where investment advisory fees accounted for 86% and mutual fund administration fees accounted for the remaining 14% of revenues.

Investment Advisory Fees. Investment advisory fees increased by $9.8 million, or 38%, due to a 29% increase in AUM from September 30, 2009 to September 30, 2010. Investment advisory fees are calculated as a percent of average net AUM at various levels depending on the investment product. The Company’s average advisory fee rate for the nine months ended September 30, 2010 was 0.71% compared to 0.74% for the nine months ended September 30, 2009. The decrease in the average advisory fee rate is due to an overall change in the composition of AUM where long-short strategies, which pay a higher advisory fee, made up 32% of total AUM as of September 30, 2010 compared to 39% of total AUM as of September 30, 2009 while long only strategies, which have a lower advisory fee, made up 47% of total AUM as of September 30, 2010 compared to 39% of total AUM as of September 30, 2009. The Company’s average AUM during the nine months ended September 30, 2010 was $6.6 billion compared to $4.6 billion for the nine months ended September 30, 2009. Despite the 0.03% decrease in average advisory fee rate during the nine months ending September 30, 2010, the fee rate was being charged on a greater asset base compared to the same period in 2009 resulting in an increase the overall fees earned during the period.

Mutual Fund Administration Fees. Mutual fund administration fees include administration fees received from Diamond Hill Funds, which are calculated as a percent of average net AUM, and all Beacon Hill fee revenue. Effective April 30, 2010, the administration fee rate for Diamond Hill Funds decreased from 0.34% to 0.30% on Class A and Class C shares and decreased from 0.20% to 0.19% for Class I shares. This decrease represents a sharing of the fund administration economies of scale with mutual fund shareholders. Fund administration revenues increased by $1.5 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 due to a 21% increase in mutual fund AUM, a $227 thousand increase in Beacon Hill revenue, offset by a decrease in the effective blended gross fee rate from 0.28% to 0.26%. Despite the 0.02% decrease in effective blended gross fee rate, the Company’s average mutual fund AUM during the nine months ended September 30, 2010 was $3.7 billion compared to $2.8 billion for the nine months ended September 30, 2009. Therefore, the lower effective blended gross fee rate for the nine months ended September 30, 2010 was being charged on a greater asset base compared to the same period in 2009 resulting in an increase in the overall fees earned during the period.

Expenses


	Nine Months Ended
	September 30,
(in thousands)	2010		2009		% Change
Compensation and related costs	$	23,707	$	17,268		37	%
General and administrative		2,539		2,201		15	%
Sales and marketing		482		440		10	%
Third party distribution		757		666		14	%
Mutual fund administration		1,474		1,765		-16	%


Total	$	28,959	$	22,340		30	%

Compensation and Related Costs. Employee compensation and benefits increased $6.4 million, or 37%, during the nine months ended September 30, 2010 compared to the same period a year ago, primarily due to an increase of $4.5 million in incentive compensation during the period consistent with an increase in AUM and the associated increase in operating income. Further contributors to the overall increase in compensation expense were restricted stock expense, which increased by $512 thousand due to an overall increase in the total amount of long-term equity awards outstanding in 2010 compared to 2009, and base salaries and related benefits, which increased by $673 thousand due to an increase in employee headcount.

General and Administrative. General and administrative expenses increased by $338 thousand, or 15%, period over period. This increase is primarily due to additional research expenses to support the Company’s investment team, expansion of the Company’s office space, implementation of a new trading system, and an increase in systems related expenses to support the investment team, partially offset by a decrease in legal costs and the phase-out of the Ohio franchise tax expense.

Sales and Marketing. Sales and marketing expenses increased by $42 thousand, or 10%, period over period. This increase was primarily due to an increased presence at industry conferences and an increase in travel and sales related expenses.

Mutual Fund Administration. Mutual fund administration expense decreased by $291 thousand, or 16%, period over period. The majority of mutual fund administration fees are variable based on the amount of mutual fund AUM. Despite an overall increase in mutual fund AUM of $709 million, or 21%, as of September 30, 2010 compared to the nine months ended September 30, 2009, the decrease in mutual fund administration expenses is primarily due to a third party service provider fee reduction related to bringing certain administration activities in-house.

Beacon Hill Fund Services

Beacon Hill is currently staffed with twelve full-time equivalent employees, up from eleven at September 30, 2009, and provides compliance, treasurer, and other fund administration services to mutual fund clients and their investment advisers. In addition, through its registered broker/dealer, Beacon Hill also serves as the underwriter for a number of mutual funds. The Company previously expected Beacon Hill to break even in the fourth quarter of 2010, but we now believe revenue will not be sufficient. The following is a summary of Beacon Hill’s performance for the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009, excluding 12b-1/service fees and commission revenue and expenses, which net to zero:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2010			2009			2010			2009
Revenue ¹	$	375		$	330		$	1,158		$	571
Expenses		592			473			1,810			1,393


Net loss	$	(217	)	$	(143	)	$	(652	)	$	(822	)


¹		Beacon Hill’s revenue for the three months ended September 30, 2010 and 2009 includes $119 thousand and $42 thousand, respectively, of inter-company revenue earned from services provided to DHCM. Beacon Hill’s revenue for the nine months ended September 30, 2010 and 2009 includes $360 thousand and $92 thousand, respectively, of inter-company revenue earned from services provided to DHCM. These amounts have been eliminated from the Consolidated Statements of Income.

Liquidity and Capital Resources

The Company’s entire investment portfolio is in readily marketable securities, which provide for cash liquidity, if needed. Investments in mutual funds are valued at their quoted current net asset value. Investments in private investment funds are valued independently based on readily available market quotations. Inflation is expected to have no material impact on the Company’s performance.

As of September 30, 2010, the Company had negative working capital of approximately $811 thousand compared to $20.5 million at December 31, 2009. Working capital includes cash, securities owned and accounts receivable, net of all liabilities. On September 17, 2010 the Company’s board of directors declared a $13 per share dividend payable on December 15, 2010 to shareholders of record on December 1, 2010. This dividend is expected to reduce shareholder equity by approximately $36.3 million. Excluding the dividend payable of $36.3 million, which is not being paid out until December 15, 2010, the Company believes its available working capital is sufficient to cover current expenses. The Company has no debt and does not expect any material capital expenditures during 2010.

During the third quarter of 2007 the Board of Directors authorized management to repurchase up to 350,000 shares of the Company’s common stock. No shares were repurchased during the nine months ended September 30, 2010.

Use of Supplemental Data as Non-GAAP Performance Measure
Net Operating Income After Tax

As supplemental information, we are providing performance measures that are based on methodologies other than generally accepted accounting principles (“non-GAAP”) for “Net Operating Income After Tax” that management uses as benchmarks in evaluating and comparing the period-to-period operating performance of the Company and its subsidiaries.

The Company defines “net operating income after tax” as the Company’s net operating income less income tax provision excluding investment return and the tax impact related to the investment return. The Company believes that “net operating income after tax” provides a good representation of the Company’s operating performance as it excludes the impact of investment return on financial results. The amount of the investment portfolio and market fluctuations on the investments can fluctuate significantly from one period to another, as seen over the past year, which can distort the underlying earnings potential of a company. We also believe “net operating income after tax” is an important metric in estimating the value of an asset management business. This measure is provided in addition to net income and net operating income and is not a substitute for net income or net operating income and may not be comparable to non-GAAP performance measures of other companies.


	Three Months Ended Sept. 30,				Nine Months Ended Sept. 30,
(in thousands)	2010		2009		2010		2009
Net Operating Income, GAAP basis	$	4,199	$	2,849	$	12,230	$	7,509
Non-GAAP Adjustments:
Tax Provision excluding impact of Investment Return		1,849		991		4,440		2,594
Net operating income after tax, non-GAAP basis		2,350		1,858		7,790		4,915

Net operating income after tax per basic share, non-GAAP basis	$	0.85	$	0.71	$	2.82	$	1.91
Net operating income after tax per diluted share, non-GAAP basis	$	0.85	$	0.71	$	2.82	$	1.91

Basic weighted average shares outstanding, GAAP basis		2,779		2,607		2,758		2,572
Diluted weighted average shares outstanding, GAAP basis		2,779		2,612		2,759		2,576

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements with 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.

Critical Accounting Policies and Estimates

There have been no material changes to the Critical Accounting Policies and Estimates provided in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

DIAMOND HILL INVESTMENT GROUP, INC.

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 Annual Report on Form 10-K for the year ended December 31, 2009.

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 Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on such 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 Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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 Securities Exchange Act of 1934 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 not been any changes in the Company’s internal control over financial reporting 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 various legal proceedings that are incidental to its business. The Company believes that none of these matters, either individually or in the aggregate, is reasonably likely to have a material adverse effect on its consolidated financial condition, liquidity or results of operations.

ITEM 1A: Risk Factors

There has been no material change to the information provided in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

The Company did not purchase any shares of its common stock during the nine months ended September 30, 2010. The following table sets forth information regarding the Company’s purchases of its common stock during the third quarter of fiscal year 2010:


					Total Number		Maximum Number
					of Shares Purchased		of Shares That May
					as part of a Publicly		Yet Be Purchased
	Total Number		Average Price		Announced Plans		Under the Plans or
Period	of Shares Purchased		Paid Per Share		or Programs		Programs (1)
July 1, 2010 through July 31, 2010		—		—		16,105		333,895

August 1, 2010 through August 31, 2010		—		—		16,105		333,895

September 1, 2010 through September 30, 2010		—		—		16,105		333,895


(1)		- The Company’s current share repurchase program was announced on August 9, 2007. The board of directors authorized management to repurchase up to 350,000 shares of its common stock in the open market and in private transactions in accordance with applicable securities laws. The Company’s stock repurchase program is not subject to an expiration date.

ITEM 3: Defaults Upon Senior Securities

None

ITEM 4: (Removed and Reserved).

ITEM 5: Other Information

None

DIAMOND HILL INVESTMENT GROUP, INC.

ITEM 6: Exhibits


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

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

November 5, 2010	President, Chief Executive Officer,	/s/ R. H. Dillon

	and a Director	R. H. Dillon

November 5, 2010	Chief Financial Officer, Treasurer,	/s/ James F. Laird

	and Secretary	James F. Laird

TABLE OF CONTENTS

Part I: Financial Information Item 1: Consolidated Financial Statements Note 1 Organization Note 2 Significant Accounting Policies Note 2 Significant Accounting Policies (continued)Note 3 Investment Portfolio Note 3 Investment Portfolio (continued)Note 4 Capital Stock Note 5 Stock-based Compensation Note 5 Stock-based Compensation (continued)Note 6 Operating Leases Note 7 Income Taxes Note 8 Earnings Per Share Note 9 Regulatory Requirements Note 10 Commitments and Contingencies Item 2: Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3: Quantitative and Qualitative Disclosures About Market Risk Item 4: Controls and Procedures Part Ii: Other Information Item 1: Legal Proceedings Item 1A: Risk Factors Item 2: Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3: Defaults Upon Senior Securities None Item 4: (removed and Reserved). Item 5: Other Information None 23 Item 3: Defaults Upon Senior Securities Item 4: (removed and Reserved)Item 5: Other Information Item 6: Exhibits

Exhibits

Exhibit 31.1 Exhibit 31.2 Exhibit 32.1

DHIL 10-Q Quarter ended Sept. 30, 2010

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Exhibits