United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)~~(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2018~~2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-24498

DIAMOND HILL INVESTMENT GROUP ~~INC.~~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, Ohio43215

(Address of principal executive offices) (Zip Code)

~~(614)~~ (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 every Interactive Data File required to be submitted 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 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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	DHIL	The NASDAQ Stock Market LLC

The number of shares outstanding of the issuer’s common stock, as of October ~~30, 2018,~~29, 2019, is ~~3,511,541~~3,384,158 shares.

Table of Contents

DIAMOND HILL INVESTMENT GROUP, INC.



		PAGE

Part I: FINANCIAL INFORMATION		3

Item 1.	Consolidated Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

~~Item 4.~~	~~Controls and Procedures~~	27

~~Part II: OTHER INFORMATION~~		28

~~Item 1.~~	~~Legal Proceedings~~	28

~~Item 1A.~~	~~Risk Factors~~	28

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	28

~~Item 3.~~	~~Defaults Upon Senior Securities~~	28

~~Item 4.~~	~~Mine Safety Disclosures~~	29

Item 5.4.	~~Other Information~~Controls and Procedures	29

Part II: OTHER INFORMATION		29

Item 6.1.	~~Exhibits~~Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	30

Item 4.	~~Signatures~~Mine Safety Disclosures	30

Item 5.	Other Information	30

Item 6.	Exhibits	31

Signatures		32

Table of Contents



PART I:	FINANCIAL INFORMATION



ITEM 1:	Consolidated Financial Statements

Diamond Hill Investment Group, Inc.

Consolidated Balance Sheets


	9/30/2018			12/31/2017			9/30/2019			12/31/2018
	(Unaudited)						(Unaudited)
ASSETS
Cash and cash equivalents	$	100,619,433		$	76,602,108		$	118,113,741		$	84,430,059
Investment portfolio	212,389,477			138,476,022
Investments							133,978,699			203,488,217
Accounts receivable	19,365,969			19,220,279			16,269,731			20,290,283
Prepaid expenses	2,305,652			2,073,343			2,941,894			2,372,712
Income taxes receivable	—			4,114,962
Property and equipment, net of depreciation	3,908,750			4,057,901			6,018,420			3,680,472
Deferred taxes	7,553,479			5,843,704			12,388,377			11,466,100
Total assets	$	346,142,760		$	250,388,319		$	289,710,862		$	325,727,843
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable and accrued expenses	$	13,654,401		$	11,890,403		$	7,651,105		$	15,561,491
Accrued incentive compensation	21,709,000			25,496,500			18,342,000			26,754,167
Income taxes payable							1,416,612			2,768,681
Deferred compensation	25,432,661			20,480,790			28,416,798			22,387,874
Income taxes payable	640,811			—
Total liabilities	61,436,873			57,867,693			55,826,515			67,472,213
Redeemable noncontrolling interest	60,714,693			20,076,806			10,662,345			62,679,687
Permanent Shareholders’ equity
Common stock, no par value 7,000,000 shares authorized; 3,534,148 issued and outstanding at September 30, 2018 (inclusive of 207,500 unvested shares); 3,470,428 issued and outstanding at December 31, 2017 (inclusive of 191,900 unvested shares)	130,555,846			118,209,111
Common stock, no par value: 7,000,000 shares authorized; 3,403,739 issued and outstanding at September 30, 2019 (inclusive of 235,144 unvested shares); 3,499,285 issued and outstanding at December 31, 2018 (inclusive of 211,575 unvested shares)							111,265,293			124,933,060
Preferred stock, undesignated, 1,000,000 shares authorized and unissued	—			—			—			—
Deferred equity compensation	(22,502,206		)	(19,134,963		)	(22,239,482		)	(22,008,054		)
Retained earnings	115,937,554			73,369,672			134,196,191			92,650,937
Total permanent shareholders’ equity	223,991,194			172,443,820			223,222,002			195,575,943
Total liabilities and shareholders’ equity	$	346,142,760		$	250,388,319		$	289,710,862		$	325,727,843

Book value per share	$	63.38		$	49.69		$	65.58		$	55.89

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,						Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018
REVENUES:
Investment advisory	$	34,928,205		$	33,782,603		$	103,085,767		$	98,105,905		$	32,498,101		$	34,928,205		$	94,521,491		$	103,085,767
Mutual fund administration, net	2,543,442			2,989,026			8,095,596			9,247,339			2,094,271			2,543,442			6,195,272			8,095,596
Total revenue	37,471,647			36,771,629			111,181,363			107,353,244			34,592,372			37,471,647			100,716,763			111,181,363
OPERATING EXPENSES:
Compensation and related costs	15,441,623			14,446,102			44,401,217			42,438,985			16,071,176			15,441,623			47,665,109			44,401,217
General and administrative	2,962,220			3,088,000			8,748,419			9,556,585			3,543,236			2,962,220			10,331,295			8,748,419
Sales and marketing	1,281,856			1,230,306			3,793,382			3,612,877			1,443,328			1,281,856			4,261,311			3,793,382
Mutual fund administration	870,103			1,119,889			2,769,009			3,149,242			778,093			870,103			2,488,809			2,769,009
Total operating expenses	20,555,802			19,884,297			59,712,027			58,757,689			21,835,833			20,555,802			64,746,524			59,712,027
NET OPERATING INCOME	16,915,845			16,887,332			51,469,336			48,595,555			12,756,539			16,915,845			35,970,239			51,469,336
Investment income, net	5,210,332			2,767,747			7,216,278			9,673,720			2,822,947			5,210,332			23,627,419			7,216,278
INCOME BEFORE TAXES	22,126,177			19,655,079			58,685,614			58,269,275			15,579,486			22,126,177			59,597,658			58,685,614
Income tax expense	(5,726,807		)	(6,496,980		)	(14,446,092		)	(19,018,708		)	(4,062,849		)	(5,726,807		)	(14,367,605		)	(14,446,092		)
NET INCOME	16,399,370			13,158,099			44,239,522			39,250,567			11,516,637			16,399,370			45,230,053			44,239,522
Less: Net income attributable to redeemable noncontrolling interest	(1,191,317		)	(459,252		)	(1,671,640		)	(1,156,385		)
Net income attributable to redeemable noncontrolling interest													(99,177		)	(1,191,317		)	(3,684,799		)	(1,671,640		)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	15,208,053		$	12,698,847		$	42,567,882		$	38,094,182		$	11,417,460		$	15,208,053		$	41,545,254		$	42,567,882
Earnings per share attributable to common shareholders
Basic	$	4.31		$	3.68		$	12.12		$	11.07		$	3.35		$	4.31		$	12.00		$	12.12
Diluted	$	4.31		$	3.67		$	12.11		$	11.05		$	3.35		$	4.31		$	12.00		$	12.11
Weighted average shares outstanding
Basic	3,530,586			3,454,178			3,512,547			3,442,402			3,411,632			3,530,586			3,460,959			3,512,547
Diluted	3,532,346			3,461,418			3,514,517			3,447,976			3,411,632			3,532,346			3,461,159			3,514,517

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		Three Months Ended September 30, 2019
Balance at December 31, 2017	3,470,428		$	118,209,111		$	(19,134,963	)	$	73,369,672	$	172,443,820		$	20,076,806
																Shares Outstanding		Common Stock			Deferred Equity Compensation			Retained Earnings		Total			Redeemable Noncontrolling Interest
Balance at June 30, 2019																3,443,464		$	116,835,709		$	(21,919,702	)	$	122,778,731	$	217,694,738		$	34,076,350
Issuance of restricted stock grants	63,950		12,298,334			(12,298,334		)	—		—			—		23,219		3,207,195			(3,207,195		)	—		—			—
Amortization of restricted stock grants	—		—			4,814,465			—		4,814,465			—		—		—			1,498,405			—		1,498,405			—
Issuance of stock grants	20,153		4,109,197			—			—		4,109,197			—
Issuance of common stock related to 401k plan match																4,551		628,465			—			—		628,465			—
Shares withheld related to employee tax withholding																(3,088	)	(437,631		)	—			—		(437,631		)	—
Forfeiture of restricted stock grants																(7,200	)	(1,389,010		)	1,389,010			—		—			—
Repurchase of common stock																(57,207	)	(7,579,435		)	—			—		(7,579,435		)	—
Net income																—		—			—			11,417,460		11,417,460			99,177
Net subscriptions of Consolidated Funds																—		—			—			—		—			538,128
Net deconsolidations of Company sponsored investments																—		—			—			—		—			(24,051,310		)
Balance at September 30, 2019																3,403,739		$	111,265,293		$	(22,239,482	)	$	134,196,191	$	223,222,002		$	10,662,345

																Three Months Ended September 30, 2018
																Shares Outstanding		Common Stock			Deferred Equity Compensation			Retained Earnings		Total			Redeemable Noncontrolling Interest
Balance at June 30, 2018																3,532,634		$	130,369,411		$	(24,019,869	)	$	100,729,501	$	207,079,043		$	50,777,801
Issuance of restricted stock grants																2,300		380,397			(380,397		)	—		—			—
Amortization of restricted stock grants																—		—			1,798,230			—		1,798,230			—
Issuance of common stock related to 401k plan match	8,481		1,658,358			—			—		1,658,358			—		3,239		591,232			—			—		591,232			—
Shares withheld related to employee tax withholding	(7,964	)	(1,602,528		)	—			—		(1,602,528		)	—		(3,525	)	(685,364		)	—			—		(685,364		)	—
Forfeiture of restricted stock grants	(20,900	)	(4,116,626		)	4,116,626			—		—			—		(500	)	(99,830		)	99,830			—		—			—
Net income	—		—			—			42,567,882		42,567,882			1,671,640		—		—			—			15,208,053		15,208,053			1,191,317
Net subscriptions of Consolidated Funds	—		—			—			—		—			22,521,607
New consolidations of Company sponsored investments	—		—			—			—		—			16,444,640
Net subscriptions of consolidated funds																—		—			—			—		—			8,745,575
Balance at September 30, 2018	3,534,148		$	130,555,846		$	(22,502,206	)	$	115,937,554	$	223,991,194		$	60,714,693	3,534,148		$	130,555,846		$	(22,502,206	)	$	115,937,554	$	223,991,194		$	60,714,693

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~~Shareholders’ Equity and Redeemable Noncontrolling Interest (unaudited) (Continued)

Nine Months Ended
September 30,
2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 44,239,522
$ 39,250,567
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 868,243
659,707
Share-based compensation 6,472,823
6,258,112
(Increase) decrease in accounts receivable (90,525 ) 143,920
Change in current income taxes 4,755,773
(432,068 )
Change in deferred income taxes (1,709,775 ) (1,653,524 )
Net gains on investments (3,184,197 ) (7,829,950 )
Net change in securities held by Consolidated Funds (47,246,344 ) (5,639,151 )
Increase in accrued incentive compensation 321,697
2,268,924
Increase in deferred compensation 4,951,871
5,388,568
Other changes in assets and liabilities 252,238
2,188,850
Net cash provided by operating activities 9,631,326
40,603,955
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (699,917 ) (509,750 )
Purchase of Company sponsored investments (4,362,077 ) (13,372,301 )
Proceeds from sale of Company sponsored investments 1,789,359
2,745,690
Net cash used in investing activities (3,272,635 ) (11,136,361 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Value of shares withheld related to employee tax withholding (1,602,528 ) (2,789,949 )
Net subscriptions received from redeemable noncontrolling interest holders 19,261,162
6,022,875
Net cash provided by financing activities 17,658,634
3,232,926
CASH AND CASH EQUIVALENTS
Net change during the period 24,017,325
32,700,520
At beginning of period 76,602,108
57,189,876
At end of period $ 100,619,433
$ 89,890,396
Supplemental cash flow information:
Income taxes paid $ 11,400,094
$ 21,104,300
Supplemental disclosure of non-cash transactions:
Common stock issued as incentive compensation $ 4,109,197
$ 3,892,424
Charitable donation of corporate investments and property and equipment 1,989,803
1,748,841
Net subscriptions (redemptions) of ETF shares for marketable securities 3,260,445
(1,555,305 )



	Nine Months Ended September 30, 2019
	Shares Outstanding		Common Stock			Deferred Equity Compensation			Retained Earnings		Total			Redeemable Noncontrolling Interest
Balance at December 31, 2018	3,499,285		$	124,933,060		$	(22,008,054	)	$	92,650,937	$	195,575,943		$	62,679,687
Issuance of restricted stock grants	52,269		7,233,016			(7,233,016		)	—		—			—
Amortization of restricted stock grants	—		—			4,874,121			—		4,874,121			—
Issuance of stock grants	24,048		3,655,296			—			—		3,655,296			—
Issuance of common stock related to 401k plan match	13,027		1,850,080			—			—		1,850,080			—
Shares withheld related to employee tax withholding	(7,388	)	(1,039,631		)	—			—		(1,039,631		)	—
Forfeiture of restricted stock grants	(11,700	)	(2,127,467		)	2,127,467			—		—			—
Repurchase of common stock	(165,802	)	(23,239,061		)	—			—		(23,239,061		)	—
Net income	—		—			—			41,545,254		41,545,254			3,684,799
Net subscriptions of Consolidated Funds	—		—			—			—		—			5,689,957
Net deconsolidations of Company sponsored investments	—		—			—			—		—			(61,392,098		)
Balance at September 30, 2019	3,403,739		$	111,265,293		$	(22,239,482	)	$	134,196,191	$	223,222,002		$	10,662,345

	Nine Months Ended September 30, 2018
	Shares Outstanding		Common Stock			Deferred Equity Compensation			Retained Earnings		Total			Redeemable Noncontrolling Interest
Balance at December 31, 2017	3,470,428		$	118,209,111		$	(19,134,963	)	$	73,369,672	$	172,443,820		$	20,076,806
Issuance of restricted stock grants	63,950		12,298,334			(12,298,334		)	—		—			—
Amortization of restricted stock grants	—		—			4,814,465			—		4,814,465			—
Issuance of stock grants	20,153		4,109,197			—			—		4,109,197			—
Issuance of common stock related to 401k plan match	8,481		1,658,358			—			—		1,658,358			—
Shares withheld related to employee tax withholding	(7,964	)	(1,602,528		)	—			—		(1,602,528		)	—
Forfeiture of restricted stock grants	(20,900	)	(4,116,626		)	4,116,626			—		—			—
Net income	—		—			—			42,567,882		42,567,882			1,671,640
Net subscriptions of consolidated funds	—		—			—			—		—			22,521,607
Net consolidations of Company sponsored investments	—		—			—			—		—			16,444,640
Balance at September 30, 2018	3,534,148		$	130,555,846		$	(22,502,206	)	$	115,937,554	$	223,991,194		$	60,714,693

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,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	45,230,053		$	44,239,522
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	892,463			868,243
Share-based compensation	6,724,201			6,472,823
Increase in accounts receivable	(4,067,885		)	(90,525		)
(Decrease) increase in current income taxes payable	(1,352,069		)	4,755,773
Change in deferred income taxes	(922,277		)	(1,709,775		)
Net gains on investments	(17,465,565		)	(3,184,197		)
Net change in securities held by Consolidated Funds	10,149,201			(47,246,344		)
(Decrease) increase in accrued incentive compensation	(4,756,871		)	321,697
Increase in deferred compensation	6,028,924			4,951,871
Other changes in assets and liabilities	(388,751		)	252,238
Net cash provided by operating activities	40,071,424			9,631,326
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(609,836		)	(699,917		)
Purchases of Company sponsored investments	(10,955,556		)	(4,362,077		)
Proceeds from sale of Company sponsored investments	43,245,298			1,789,359
Net cash on deconsolidation of Company sponsored investments	(22,723,853		)	—
Net cash provided by (used in) investing activities	8,956,053			(3,272,635		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Value of shares withheld related to employee tax withholding	(1,039,631		)	(1,602,528		)
Net subscriptions received from redeemable noncontrolling interest holders	8,934,897			19,261,162
Repurchase of common stock	(23,239,061		)	—
Net cash (used in) provided by financing activities	(15,343,795		)	17,658,634
CASH AND CASH EQUIVALENTS
Net change during the period	33,683,682			24,017,325
At beginning of period	84,430,059			76,602,108
At end of period	$	118,113,741		$	100,619,433
Supplemental cash flow information:
Income taxes paid	$	16,641,951		$	11,400,094
Supplemental disclosure of non-cash transactions:
Common stock issued as incentive compensation	$	3,655,296		$	4,109,197
Charitable donation of corporate investments	—			1,989,803
Net (redemptions) subscriptions of ETF shares for marketable securities	(3,244,940		)	3,260,445

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, a private investment ~~funds ("Private Funds"), an exchange traded~~ fund, ~~(the "ETF"),~~ and other ~~institutional~~separately managed accounts. ~~In addition,~~ DHCM is also administrator for the Funds.

Note 2 Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, and for the three- and nine-month periods ended September 30, ~~2018~~2019 and ~~2017,~~2018, 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"~~(the "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, ~~2017 ("2017~~2018 (the "2018 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.

The Company holds certain investments in the Funds, and previously held an investment in an exchange traded fund (the "ETF") advised by the ~~ETF~~Company, 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 iswas an individual series of ETF Series Solutions which iswas also an open-end investment company registered under the 1940 Act. The ETF liquidated and its assets were distributed to its shareholders on April 5, 2019. Each of the individual mutual funds ~~and~~represents (and the ETF ~~represents~~represented) a separate share class of a legal entity organized under the Trust. The Company performs its analysis at the individual mutual fund and ETF level and has concluded the mutual funds are, and the ETF ~~are~~was, voting rights entities ("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

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than 100%. The Company has consolidated ~~the ETF,~~

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the Diamond Hill ~~Core Bond Fund, the Diamond Hill High Yield~~International Fund and the Diamond Hill Global Fund (collectively the "Consolidated Funds") as of September 30, ~~2018.~~2019. The Company deconsolidated the ETF, the Diamond Hill Core Bond Fund and the Diamond Hill High Yield Fund during the nine months ended September 30, 2019, as the Company's ownership declined to less than 50%.

DHCM is the managing member of Diamond Hill General Partner, LLC (the “General Partner”), which is the general partner of Diamond Hill Investment Partners, L.P. (“DHIP”~~), 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~~DHIP's economic activities and the right to receive investment advisory fees that may be significant to ~~the LPs.~~DHIP.

The Company concluded it 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 DHIEF was a variable interest entity ("VIE") as DHCM has disproportionately less voting interest than economic interest, given that 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 DHIEF's activities are conducted on behalf of the General Partner which has disproportionately few voting rights. The Company concluded it is not the primary beneficiary of DHIEF as we lack the power to control the entity 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 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 DHIEF.

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 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 recorded at redemption value, which approximates the fair value each reporting period.

Segment Information

Management has determined that the Company operates in ~~one~~1 business segment, providing investment management and administration services to mutual funds, ~~institutional~~separately managed accounts, and a private investment ~~funds.~~fund. 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 held by DHCM.

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~~individual or ~~entities~~entity that ~~owe~~owes the receivable. No allowance for doubtful accounts was deemed necessary at September 30, ~~2018~~2019 or December 31, ~~2017.~~2018. Accounts receivable from the Funds were ~~$10.8~~$9.9 million as of September 30, ~~2018~~2019 and ~~$11.6~~$9.4 million as of December 31, ~~2017.~~

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2018.

Investments

Management determines the appropriate classification of its investments at the time of purchase and re-evaluates its determination at each reporting period.

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, 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.~~

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, 2018:

Level 1 Level 2 Level 3 Total
Cash equivalents $ 98,886,472
$ —
$ —
$ 98,886,472
Fair value investments
Securities held in Consolidated Funds^(a)
43,884,224
109,615,566
—
153,499,790
Company sponsored investments 38,757,226
—
—
38,757,226

~~(a) Of the securities held in the Consolidated Funds as of September 30, 2018, $85.9 million were held directly by the Company and $67.6 million were held by noncontrolling shareholders.~~

Level 1 investments are comprised of investments in registered investment companies (mutual funds) or equity securities held in the Consolidated Funds and $98.9 million of investments in money market mutual funds owned by DHCM that the Company classifies as cash equivalents.

Level 2 investments are comprised of investments in foreign equity securities and debt securities held in the Consolidated Funds, 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, 2018.

~~Changes in fair values of the investments are recorded in the Company's consolidated statements of income as investment income (loss), net.~~

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Property and Equipment

Property and equipment, consisting of leasehold improvements, right-of use lease assets, 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.

~~New Accounting Guidance~~

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. Our implementation efforts included a detailed review of revenue contracts within the scope of the guidance and an evaluation of the impact on the Company's revenue recognition policies. No transition-related practical expedients were applied. The Company adopted this ASU on its effective date, January 1, 2018, and it had no impact on the timing of the Company's revenue recognition.

Revenue Recognition – General

Revenue is recognized when performance obligations under the terms of a contract with a client are satisfied. The Company earns substantially all of its revenue from investment advisory and fund administration contracts. 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 rate fees.

Revenue earned during the three months ended September 30, ~~2018~~2019 and ~~2017~~2018 under contracts with clients include:



	Three Months Ended September 30, 2019
	Investment advisory		Mutual fund administration, net		Total revenue
Proprietary funds	$	24,178,440	$	2,094,271	$	26,272,711
Sub-advised funds and separately managed accounts	8,319,661		—		8,319,661
	$	32,498,101	$	2,094,271	$	34,592,372


	Three Months Ended September 30, 2018						Three Months Ended September 30, 2018
	Investment advisory		Mutual fund administration, net		Total revenue		Investment advisory		Mutual fund administration, net		Total revenue
Proprietary funds	$	26,864,835	$	2,543,442	$	29,408,277	$	26,864,835	$	2,543,442	$	29,408,277
Sub-advised funds and institutional accounts	8,063,370		—		8,063,370
Sub-advised funds and separately managed accounts							8,063,370		—		8,063,370
	$	34,928,205	$	2,543,442	$	37,471,647	$	34,928,205	$	2,543,442	$	37,471,647

Three Months Ended September 30, 2017
Investment advisory
Mutual fund
administration, net
Total revenue
Proprietary funds $ 26,571,891
$ 2,989,026
$ 29,560,917
Sub-advised funds and institutional accounts 7,210,712
—
7,210,712
$ 33,782,603
$ 2,989,026
$ 36,771,629

Revenue earned during the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 under contracts with clients include:


	Nine Months Ended September 30, 2018						Nine Months Ended September 30, 2019
	Investment advisory		Mutual fund administration, net		Total revenue		Investment advisory		Mutual fund administration, net		Total revenue
Proprietary funds	$	80,464,941	$	8,095,596	$	88,560,537	$	72,093,686	$	6,195,272	$	78,288,958
Sub-advised funds and institutional accounts	22,620,826		—		22,620,826
Sub-advised funds and separately managed accounts							22,427,805		—		22,427,805
	$	103,085,767	$	8,095,596	$	111,181,363	$	94,521,491	$	6,195,272	$	100,716,763



	Nine Months Ended September 30, 2018
	Investment advisory		Mutual fund administration, net		Total revenue
Proprietary funds	$	80,464,941	$	8,095,596	$	88,560,537
Sub-advised funds and separately managed accounts	22,620,826		—		22,620,826
	$	103,085,767	$	8,095,596	$	111,181,363

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Nine Months Ended September 30, 2017
Investment advisory Mutual fund
administration, net Total revenue
Proprietary funds $ 76,975,740
$ 9,247,339
$ 86,223,079
Sub-advised funds and institutional accounts 21,130,165
—
21,130,165
$ 98,105,905
$ 9,247,339
$ 107,353,244

Revenue Recognition – Investment Advisory Fees

The Company's investment advisory contracts have a single performance obligation (the investment advisory services provided to the client) as the promised services are not separately identifiable from other promises in the contracts and, therefore, are not distinct. All performance obligations to provide advisory services are satisfied over time and the Company recognizes revenue as time passes.

The fees we receive for our services under our investment advisory contracts are based on our AUM, which changes based on the value of securities held under each advisory contract. These fees are thereby constrained and represent variable consideration, and are excluded from revenue until the AUM on which our client is billed is no longer subject to market fluctuations.

Revenue Recognition – Variable Rate Fees

The Company manages certain client accounts that provide for variable rate fees. These fees are calculated based on client investment results over rolling ~~five-year~~5-year periods. The Company records variable rate fees at the end of the contract measurement period because the variable fees earned are constrained based on movements in the financial markets. During the three and nine months ended September 30, 2019, the Company recorded $0.9 million in variable rate fees. During the three and nine months ended September 30, 2018, the Company recorded $0.6 million in variable rate fees. ~~No variable rate fees were earned during the three and nine months ended September 30, 2017.~~ The table below shows AUM subject to variable rate fees and the amount of variable rate fees that would be recognized based upon investment results as of September 30, ~~2018:~~2019:


	As of September 30, 2018				As of September 30, 2019
	AUM subject to variable rate fees		Unearned variable rate fees		AUM subject to variable rate fees		Unearned variable rate fees
Contractual Period Ends:
Quarter Ending December 31, 2018	$	61,028,560	$	1,416,398
Quarter Ending September 30, 2019	36,681,776		708,542
Contractual Period Ending:
Quarter Ending December 31, 2019					$	62,831,955	$	612,273
Quarter Ending March 31, 2020	13,336,076		—		13,476,137		—
Quarter Ending September 30, 2020					37,469,889		179,474
Quarter Ending September 30, 2021	284,788,511		4,145,635		284,414,344		6,328,189
Total	$	395,834,923	$	6,270,575	$	398,192,325	$	7,119,936

The contractual end dates highlight the time remaining until the variable rate fees are scheduled to be earned. The amount of variable rate fees that would be recognized based upon investment results as of September 30, ~~2018~~2019, 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 performance obligations, ~~including~~such as mutual fund administration, fund accounting, transfer agency, and other related functions. These services are performed concurrently under our agreement with the Funds, ~~and~~ all performance obligations to provide these administrative services are satisfied over time, and the Company recognizes revenue as time passes. 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. These fees are thereby constrained and represent variable consideration, and are excluded from revenue until the AUM on which we bill the Funds is no longer subject to market fluctuations.

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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 its fees and terms directly 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 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.

Mutual fund administration gross and net revenue are summarized below:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Mutual fund administration:
Administration revenue, gross	$	5,677,414		$	6,169,984		$	16,599,581		$	18,771,040
Fund related expense	(3,589,273		)	(3,638,618		)	(10,430,419		)	(10,702,498		)
Revenue, net of related expenses	2,088,141			2,531,366			6,169,162			8,068,542
DHCM C-Share financing:
Broker commission advance repayments	57,908			84,248			176,901			264,107
Broker commission amortization	(51,778		)	(72,172		)	(150,791		)	(237,053		)
Financing activity, net	6,130			12,076			26,110			27,054
Mutual fund administration revenue, net	$	2,094,271		$	2,543,442		$	6,195,272		$	8,095,596

Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Mutual fund administration:
Administration revenue, gross $ 6,169,984
$ 6,557,054
$ 18,771,040
$ 19,432,002
Fund related expense (3,638,618 ) (3,576,598 ) (10,702,498 ) (10,214,948 )
Revenue, net of related expenses 2,531,366
2,980,456
8,068,542
9,217,054
DHCM C-Share financing:
Broker commission advance repayments 84,248
101,238
264,107
315,283
Broker commission amortization (72,172 ) (92,668 ) (237,053 ) (284,998 )
Financing activity, net 12,076
8,570
27,054
30,285
Mutual fund administration revenue, net $ 2,543,442
$ 2,989,026
$ 8,095,596
$ 9,247,339

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, and 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~~Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740, Income Taxes. ~~As of September 30, 2018, the Company has recorded approximately $0.8 million for uncertain tax positions in the state and city jurisdictions in which we do business.~~ The Company records interest and penalties 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 8.9.

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Newly Issued But Not Yet Adopted Accounting Guidance

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. We will adopt this standard on its effective date, January 1, 2019. While we continue evaluating the full impact this standard will have on our consolidated financial statements, we expect the most significant impact will be the recognition of a lease liability and right of use asset on our consolidated balance sheets for our office operating lease.

In August 2018, the FASB issued ~~ASU~~Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurements.” This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. ASU 2018-13 does not change fair value measurements already required or permitted by existing standards. ASU 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Management does not believe that adoption of ASU 2018-13 will materially impact the Company’s financial statements.

Note 3 ~~Investment Portfolio~~Investments

~~As of September 30, 2018, the Company held investments (excluding money market funds, which are included with cash and cash equivalents) of $212.4 million.~~ The following table summarizes the carrying value of these investments as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:



	As of
	September 30, 2019		December 31, 2018
Fair value investments:
Securities held in Consolidated Funds^(a)	$	29,635,079	$	153,730,480
Company sponsored investments	43,200,396		33,418,088
Company sponsored equity method investments	61,143,224		16,339,649
Total Investments	$	133,978,699	$	203,488,217

As of
September 30, 2018 December 31, 2017
Fair value investments:
Securities held in Consolidated Funds^(a)
$ 153,499,790
$ 65,890,500
Company sponsored investments 38,757,226
36,541,818
Company sponsored equity method investments 20,132,461
36,043,704
Total Investment portfolio $ 212,389,477
$ 138,476,022

(a) Of the securities held in the Consolidated Funds as of September 30, ~~2018, $85.9~~2019, $18.8 million were held directly by the Company and ~~$67.6~~$10.8 million were held by noncontrolling shareholders. Of the securities held in the Consolidated Funds as of December 31, ~~2017, $42.6~~2018, $84.7 million were held directly by the Company and ~~$23.3~~$69.0 million were held by noncontrolling shareholders.

~~New consolidations of~~The Company ~~sponsored investments of $16.4 million during 2018 included~~deconsolidated the ~~consolidation of the~~ETF, Diamond Hill ~~Global~~Core Bond Fund and the Diamond Hill High Yield ~~Fund. As of December 31, 2017, these investments~~Fund during the nine months ended September 30, 2019. The ETF liquidated and its assets were ~~classified as equity method investments.~~distributed to its shareholders on April 5, 2019.

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As of September 30, ~~2018,~~2019, our equity method investments consisted of the Diamond Hill Research Opportunities Fund and ~~DHIEF,~~the Diamond Hill Core Bond Fund, and our ownership percentage in each of these investments was ~~approximately 30%.~~ 22% and 38%, respectively. During the first half of 2019 there were periods of time where our ownership in the Diamond Hill International Equity Fund, L.P. and the Diamond Hill High Yield Fund was between 20% and 50% thus, a portion of their income is included in the table below for the nine months ended September 30, 2019.

The following table includes the condensed summary financial information from the Company's equity method investments as of and for the ~~period~~periods ended September 30, ~~2018:~~2019:



			As of
			September 30, 2019
Total assets			$	236,700,619
Total liabilities			41,168,623
Net assets			195,531,996
DHCM's portion of net assets			61,143,224

	For the Three Months Ended		For the Nine Months Ended
	September 30, 2019		September 30, 2019
Investment income	$	962,281	$	4,148,489
Expenses	345,111		955,320
Net realized gains	858,741		5,243,737
Net change in unrealized appreciation	1,719,459		11,782,498
Net income	3,195,370		20,219,404
DHCM's portion of net income	1,196,750		7,014,994

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Note 4 Fair Value Measurements

The Company determines the fair value of our cash equivalents and certain investments using the following broad levels listed below:

Level 1 - Unadjusted quoted prices for identical instruments in active markets.

Level 3 - Valuations derived from techniques in which significant inputs are unobservable. We do not value any investments using Level 3 inputs.

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 (excluding investments classified as equity method investments) determined based upon the differing levels as of September 30, 2019:

As of
September 30, 2018
Total assets $ 99,404,580
Total liabilities 31,473,525
Net assets 67,931,055
DHCM's portion of net assets 20,132,461

For the Three Months Ended For the Nine Months Ended
September 30, 2018 September 30, 2018
Investment income $ 261,767
$ 817,862
Expenses 228,936
712,938
Net realized gains 829,029
476,343
Net change in unrealized appreciation 1,374,838
1,688,384
Net income 2,236,698
2,269,651
DHCM's portion of net income 668,226
742,944



	Level 1		Level 2		Level 3		Total
Cash equivalents (money market mutual funds)	$	116,193,674	$	—	$	—	$	116,193,674
Fair value investments
Securities held in Consolidated Funds^(a)	15,480,312		14,154,767		—		$	29,635,079
Company sponsored investments	43,200,396		—		—		$	43,200,396

(a) Of the securities held in the Consolidated Funds as of September 30, 2019, $18.8 million were held directly by the Company and $10.8 million were held by noncontrolling shareholders.

Changes to fair values of the investments are recorded in the Company’s consolidated statements of income as investment income (loss), net.

Note 4 5 Line of Credit

The Company has ~~an uncommitted~~a committed Line of Credit Agreement (the "Credit Agreement") with a commercial bank that matures inon December ~~of 2018~~27, 2019 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%~~1.00%. The Company pays a commitment fee on the unused portion of the facility, accruing at a rate per annum of 0.10%.

The Company has ~~not~~0t borrowed under the Credit Agreement as of and for the ~~nine-month~~ period ended September 30, ~~2018. No interest is payable on the unused portion of the Credit Agreement.~~2019.

The proceeds of the Credit Agreement may be used by the Company and its subsidiaries for ongoing working capital needs, to seed new and existing investment strategies, and for other general corporate purposes. The Credit Agreement contains representations, warranties and covenants that are customary for agreements of this type.

Note 5 6 Compensation Plans

Share-Based Payment Transactions

The Company issues restricted stock ~~units and restricted stock~~ awards ~~(collectively, "Restricted Stock")~~ under its 2014 Equity and Cash Incentive Plan ~~("2014~~(the "2014 Plan"). Restricted ~~stock units represent common 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~~restricted stock and related activity during the nine months ended September 30, ~~2018:~~2019:

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Shares
Weighted-Average
Grant Date Price
per Share
Outstanding Restricted Stock as of December 31, 2017 197,900
$ 165.60
Grants issued 60,950
201.78
Grants vested (27,450 ) 77.81
Grants forfeited (20,900 ) 196.97
Total Outstanding Restricted Stock as of September 30, 2018 210,500
$ 176.75



	Shares		Weighted-Average Grant Date Price per Share
Outstanding restricted stock as of December 31, 2018	214,575		$	177.22
Grants issued	49,269		146.81
Grants vested	(17,000	)	126.13
Grants forfeited	(11,700	)	181.83
Total outstanding restricted stock as of September 30, 2019	235,144		$	174.44

As of September 30, ~~2018,~~2019, there were ~~296,429~~230,242 common shares available for awards under the 2014 Plan.

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Total deferred equity compensation related to unvested ~~Restricted Stock grants~~restricted stock was ~~$22.5~~$22.2 million as of September 30, ~~2018.~~2019. Compensation expense related to ~~Restricted Stock grants~~restricted stock 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
2019		2020		2021		2022		2023		Thereafter		Total
$	1,888,550	$	6,533,106	$	5,252,547	$	4,270,399	$	2,174,456	$	2,120,424	$	22,239,482

Three Months
Remaining In
2018 2019 2020 2021 2022 Thereafter Total
$ 1,850,410
$ 6,863,879
$ 5,399,940
$ 4,087,381
$ 3,100,248
$ 1,200,348
$ 22,502,206

Stock Grant Transactions

The following table represents common shares issued as part of our incentive compensation program during the nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:

Shares Issued Grant Date Value
September 30, 2018 20,153
$ 4,109,197
September 30, 2017 19,219
3,892,424

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 ~~$25.4~~$28.4 million and ~~$20.5~~$22.4 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

Note 6 7 Operating ~~Leases~~Lease

The Company currently leases office space of approximately 37,829 square feet at ~~one~~1 location.

In February 2016, the FASB issued ASU 2016-02, "Leases", which, among other things, requires lessees to recognize most leases on-balance sheet. The Company adopted this ASU on its effective date, January 1, 2019, using a modified retrospective approach without restating prior comparative periods. Upon implementation, the Company recorded a right-of use asset of approximately $2.9 million, which includes the lease liability amount less deferred rent liabilities and lease incentives received, and a lease liability of approximately $3.6 million related to our office lease. As of September 30, 2019, the carrying value of the right-of use asset, which is included in property and equipment, net of deferred rent on the consolidated balance sheets, was approximately $2.6 million. As of September 30, 2019, the carrying value of the lease liability, which is included in accounts payable and accrued expenses on the consolidated balance sheets, was approximately $3.2 million. The adoption of this ASU had no impact on our consolidated statements of income and cash flows and there was no cumulative-effect adjustment required to opening retained earnings.

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The following table summarizes the total lease and operating expenses for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:


	September 30, 2018		September 30, 2017		September 30, 2019		September 30, 2018
Three Months Ended	$	238,014	$	235,272	$	239,838	$	238,014
Nine Months Ended	$	732,318	$	700,926	$	731,366	$	732,318

The approximate future minimum lease payments under the operating lease are as follows:



Future Minimum Lease Payments
Three Months Remaining In
2019		2020		2021		2022		2023		Thereafter		Total
$	146,587	$	614,721	$	624,179	$	624,179	$	624,179	$	780,223	$	3,414,068

Future Minimum Lease Payments
Three Months
Remaining In
2018 2019 2020 2021 2022 Thereafter Total
$ 146,587
$ 586,350
$ 614,721
$ 624,179
$ 624,179
$ 1,404,000
$ 4,000,016

In addition to the above lease payments, the Company is also responsible for normal operating expenses of the leased property. ~~Such~~These operating expenses were approximately $0.4 million in ~~2017,~~2018, and are expected to be approximately the same in ~~2018.~~2019.

~~Table of Contents~~

Note 7 8 Income Taxes

The Company has determined its interim tax provision projecting an estimated annual effective tax rate. The Tax Cuts and Jobs Act was passed on December 22, 2017. Among other federal tax law changes, for taxable years beginning after December 31, 2017, the new law establishes a flat corporate income tax rate of 21% to replace our prior year rate of 35% and eliminates the corporate alternative minimum tax.

For the ~~three~~nine months ended September 30, ~~2018,~~2019, the Company recorded income tax expense of ~~$5.7~~$14.4 million, yielding an effective tax rate of ~~25.9%~~24.1%. The effective tax rate of ~~25.9%~~24.1% differed from the federal statutory tax rate of 21% due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do business, including new jurisdictions in which we are filing in ~~2018, which~~2019. This was partially offset by ~~$0.2 million~~the benefit attributable to redeemable noncontrolling interests. The provision for income taxes includes a benefit attributable to the fact that the Company's operations include the Consolidated Funds which are not subject to federal income taxes. Accordingly, a portion of ~~excess~~the Company's earnings are not subject to corporate tax ~~benefits from~~levels. Absent the ~~vesting of stock awards.~~benefit attributable to redeemable noncontrolling interests, the effective tax rate ("unconsolidated effective tax rate") would have been 25.7%.

For the nine months ended September 30, 2018, the Company recorded income tax expense of $14.4 million, yielding an effective tax rate of 24.6%. The effective tax rate of 24.6% differed from the federal statutory tax rate of 21% due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do business, including new jurisdictions in which we ~~are filing~~filed in 2018, which was partially offset by $0.7 million of excess tax benefits from the vesting of stock ~~awards.~~

~~For~~awards and the ~~three months ended September 30, 2017,~~benefit attributable to redeemable noncontrolling interests. The provision for income taxes includes a benefit attributable to the ~~Company recorded~~fact that the Company's operations include the Consolidated Funds which are not subject to federal income taxes. Accordingly, a portion of the Company's earnings are not subject to corporate tax ~~expense of $6.5 million, yielding an~~levels. Absent the benefit attributable to redeemable noncontrolling interests, the effective tax rate ~~of 33.1%. The~~("unconsolidated 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%~~rate") would have been 25.3%. 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 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, ~~2018~~2019 and December 31, ~~2017,~~2018, 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. AsThe Company recognizes tax benefits related to positions taken, or expected to be taken, on its tax returns, only if the positions are "more-likely-than-not" sustainable. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its financial statements.

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During the nine months ended September 30, 2019, the Company completed our open examination for tax years 2014 through 2016 with the New York State Department of Finance and Taxation. During the period the Company also filed a Voluntary Disclosure Agreement with the New York City Department of Finance. The Company remains under audit with the California Franchise Tax Board for the Company's 2015 and 2016 tax years.

The outcome of open examinations is not expected to have a material impact on the Company's financial statements. The Company believes that some of these audits and negotiations will conclude within the next 12 months and that any change in the amount of uncertain tax positions, including interest due to the settlement of audits, would be immaterial.

The amount of uncertain tax positions as of September 30, ~~2018,~~2019, which would impact the ~~Company has recorded approximately $0.8 million for~~Company’s effective tax rate if recognized and a reconciliation of the beginning and ending amounts of uncertain tax positions, ~~in the state and city jurisdictions in which we do business.~~ is as follows:



	Nine Months Ended September 30, 2019
Uncertain tax positions, as of January 1, 2019	$	2,982,337
Gross addition for tax positions of the current year	—
Gross additions for tax positions of prior years	—
Reductions of tax positions of prior years for:
Lapses of applicable statutes of limitations	—
Settlements during the period	(2,331,711		)
Changes in judgment/excess reserve	10,241
Uncertain tax positions, as of September 30, 2019	$	660,867

The Company did not ~~record an accrual for~~recognize additional interest and penalties during the nine months ended September 30, 2019, related to uncertain tax ~~related uncertainties or unrecognized tax positions as of December 31, 2017.~~positions.

~~Table of Contents~~

Note 8 9 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,
	2019			2018			2019			2018
Net Income	$	11,516,637		$	16,399,370		$	45,230,053		$	44,239,522
Less: Net income attributable to redeemable noncontrolling interest	(99,177		)	(1,191,317		)	(3,684,799		)	(1,671,640		)
Net income attributable to common shareholders	$	11,417,460		$	15,208,053		$	41,545,254		$	42,567,882

Weighted average number of outstanding shares - Basic	3,411,632			3,530,586			3,460,959			3,512,547
Dilutive impact of restricted stock units	—			1,760			200			1,970
Weighted average number of outstanding shares - Diluted	3,411,632			3,532,346			3,461,159			3,514,517

Earnings per share attributable to common shareholders
Basic	$	3.35		$	4.31		$	12.00		$	12.12
Diluted	$	3.35		$	4.31		$	12.00		$	12.11

Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Net Income $ 16,399,370
$ 13,158,099
$ 44,239,522
$ 39,250,567
Less: Net income attributable to redeemable noncontrolling interest (1,191,317 ) (459,252 ) (1,671,640 ) (1,156,385 )
Net income attributable to common shareholders $ 15,208,053
$ 12,698,847
$ 42,567,882
$ 38,094,182

Weighted average number of outstanding shares - Basic 3,530,586
3,454,178
3,512,547
3,442,402
Dilutive impact of restricted stock units 1,760
7,240
1,970
5,574
Weighted average number of outstanding shares - Diluted 3,532,346
3,461,418
3,514,517
3,447,976

Earnings per share attributable to common shareholders
Basic $ 4.31
$ 3.68
$ 12.12
$ 11.07
Diluted $ 4.31
$ 3.67
$ 12.11
$ 11.05

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Note 9 10 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.~~indemnification obligations. 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~~of these ~~indemnities.~~liabilities.

Note 10 11 Subsequent Event

On October ~~30, 2018,~~29, 2019, the Company’s board of directors approved a special cash dividend of ~~$8.00~~$9.00 per share payable December ~~11, 2018~~10, 2019 to shareholders of record on December ~~3, 2018.~~2, 2019. This dividend will reduce shareholders' equity by approximately ~~$28.1~~$30.5 million.

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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, and other publicly available documents, including the documents incorporated herein by reference, 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,” "may," "will," "likely," "project," “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; our inability 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. DHCM is registered with the SEC as an investment adviser under the 1940 Act. DHCM sponsors, distributes, and provides investment advisory and related services to various clients through the Funds, ~~institutional~~separately managed accounts, ~~the ETF,~~ and ~~the Partnerships.~~DHIP.

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 our 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 (94%) is valued based on readily available market quotations. AUM~~Fees are recognized in the ~~fixed income strategies (6%) is valued using evaluated prices from independent third-party providers.~~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, ~~2018~~2019 and ~~2017:~~2018:


	Assets Under Management						Assets Under Management
	As of September 30,						As of September 30,
(in millions, except percentages)	2018		2017		% Change		2019		2018		% Change
Proprietary funds	$	16,148	$	15,417	5	%	$	15,320	$	16,148	(5	)%
Sub-advised funds	1,595		1,411		13	%	1,850		1,595		16	%
Institutional accounts	4,886		4,627		6	%
Separately managed accounts							5,033		4,886		3	%
Total AUM	$	22,629	$	21,455	5	%	$	22,203	$	22,629	(2	)%

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	Assets Under Management by Investment Strategy								Assets Under Management by Investment Strategy
	As of September 30,								As of September 30,
(in millions, except percentages)	2018			2017			% Change		2019			2018			% Change
Small Cap	$	1,452		$	1,549		(6	)%	$	793		$	1,452		(45	)%
Small-Mid Cap	3,419			3,482			(2	)%	3,081			3,419			(10	)%
Mid Cap	135			121			12	%	480			135			256	%
Large Cap	11,654			10,153			15	%	11,609			11,654			—	%
All Cap Select	503			390			29	%	505			503			—	%
Long-Short	4,281			4,943			(13	)%	3,582			4,281			(16	)%
Global/International	19			6			217	%	29			19			53	%
Short Duration Fixed Income	490			296			66	%	738			490			51	%
Core Fixed Income	53			44			20	%	294			53			455	%
Long Duration Fixed Income	25			—			NM		54			25			NM
Corporate Credit	773			658			17	%	1,074			773			39	%
High Yield	54			29			86	%	123			54			128	%
(Less: Investments in affiliated funds)^(a)	(229		)	(216		)	6	%	(159		)	(229		)	(31	)%
Total AUM	$	22,629		$	21,455		5	%	$	22,203		$	22,629		(2	)%

(a) Certain of the Funds own shares of the Diamond Hill Short Duration Total Return Fund. The Company reduces its total AUM by these investments held in this affiliated fund.



	Change in Assets Under Management						Change in Assets Under Management
	For the Three Months Ended September 30,						For the Three Months Ended September 30,
(in millions)	2018			2017			2019			2018
AUM at beginning of the period	$	21,827		$	20,924		$	21,612		$	21,827
Net cash inflows (outflows)
proprietary funds	(158		)	106			327			(158		)
sub-advised funds	(130		)	(65		)	50			(130		)
institutional accounts	(82		)	1
separately managed accounts							(45		)	(82		)
	(370		)	42			332			(370		)
Net market appreciation and income	1,172			489			259			1,172
Increase during the period	802			531			591			802
AUM at end of the period	$	22,629		$	21,455		$	22,203		$	22,629


	Change in Assets Under Management						Change in Assets Under Management
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
(in millions)	2018			2017			2019			2018
AUM at beginning of the period	$	22,317		$	19,381		$	19,108		$	22,317
Net cash inflows (outflows)
proprietary funds	(332		)	805			(488		)	(332		)
sub-advised funds	(3		)	(197		)	185			(3		)
institutional accounts	(171		)	(206		)
separately managed accounts							(216		)	(171		)
	(506		)	402			(519		)	(506		)
Net market appreciation and income	818			1,672			3,614			818
Increase during the period	312			2,074			3,095			312
AUM at end of the period	$	22,629		$	21,455		$	22,203		$	22,629

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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,							Three Months Ended September 30,							Nine Months Ended September 30,
(in thousands, except per share amounts and percentages)	2018			2017			% Change	2018			2017			% Change	2019			2018			% Change	2019			2018			% Change
Total revenue	$	37,472		$	36,772		2%	$	111,181		$	107,353		4%	$	34,592		$	37,472		(8)%	$	100,717		$	111,181		(9)%
Net operating income	$	16,916		$	16,887		—%	$	51,469		$	48,596		6%	$	12,757		$	16,916		(25)%	$	35,970		$	51,469		(30)%
Net operating income, as adjusted^(a)															$	13,114		$	17,899		(27)%	$	40,022		$	52,392		(24)%
Net income attributable to common shareholders	$	15,208		$	12,699		20%	$	42,568		$	38,094		12%	$	11,417		$	15,208		(25)%	$	41,545		$	42,568		(2)%
Earnings per share attributable to common shareholders (Diluted)	$	4.31		$	3.67		17%	$	12.11		$	11.05		10%
Earnings per share attributable to common shareholders (diluted)															$	3.35		$	4.31		(22)%	$	12.00		$	12.11		(1)%
Operating profit margin	45		%	46		%		46		%	45		%		37		%	45		%		36		%	46		%
Operating profit margin, as adjusted^(a)	48		%	47		%		47		%	47		%		38		%	48		%		40		%	47		%

(a) ~~Operating~~Net operating income, as adjusted, and operating profit margin, as adjusted, ~~is a~~are non-GAAP performance ~~measure.~~measurements. See the ~~Use~~"Use of Supplemental Data as Non-GAAP Performance ~~Measure~~Measure" section within this report.

Three Months Ended September 30, ~~2018~~2019 compared with Three Months Ended September 30, ~~2017~~2018

The Company generated net income attributable to common shareholders of $11.4 million ($3.35 per diluted share) for the three months ended September 30, 2019, compared with net income attributable to common shareholders of $15.2 million ($4.31 per diluted share) for the three months ended September 30, ~~2018, compared with net income attributable to common shareholders of $12.7 million ($3.67 per diluted share) for the three months ended September 30, 2017.~~2018. Revenue ~~increased $0.7~~decreased $2.9 million period over period, primarily due to ~~an increase~~a decrease in average ~~AUM. The revenue increase was primarily offset~~AUM and a decrease in the average advisory fee rate. Operating expenses increased period over period by ~~an increase in operating expenses of $0.7~~$1.3 million, primarily related to increases in compensation expense and ~~related costs.~~general and administrative expenses. The Company had ~~$5.2~~$2.8 million in investment income due to market appreciation for the three months ended September 30, ~~2018,~~2019, compared to investment income of ~~$2.8~~$5.2 million for the three months ended September 30, ~~2017.~~2018.

Income tax expense decreased ~~$0.8~~$1.7 million from the three months ended September 30, ~~2017~~2018, to the three months ended September 30, ~~2018~~2019, due primarily to ~~the~~ the reduction of ~~the effective tax rate from 33.1% to 25.9%. This reduction was primarily due to the impact of the Tax Cuts and Jobs Act, passed on December 22, 2017, which reduced our corporate~~pretax income ~~tax rate from 35% to 21% quarter~~period over ~~quarter.~~period. The effective tax rate of ~~25.9%~~26.1% differed from the federal statutory tax rate of 21% due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do ~~business, which was~~business. This is partially offset by ~~$0.2 million~~the benefit attributable to redeemable noncontrolling interests. The provision for income taxes includes a benefit attributable to the fact that the Company's operations include the Consolidated Funds which are not subject to federal income taxes. Accordingly, a portion of ~~excess~~the Company's earnings are not subject to corporate tax ~~benefits from~~levels. Absent the ~~vesting of stock awards.~~benefit attributable to redeemable noncontrolling interests, the effective tax rate ("unconsolidated effective tax rate") would have been 26.2%.

Operating profit margin was 37% for the three months ended September 30, 2019 and 45% for the three months ended September 30, ~~2018 and 46%~~2018. Operating profit margin, as adjusted, decreased to 38% for the three months ended September 30, ~~2017. Operating profit margin, as adjusted, increased to~~2019 from 48% for the three months ended September 30, ~~2018 from 47% for the three months ended September 30, 2017. See Use of Supplemental Data as Non-GAAP Performance Measure section within this report.~~2018. We expect that our operating margin may fluctuate from period-to-period based on various factors, including revenues; investment results; employee performance; staffing levels; gains and losses on investments held in deferred compensation plans; and development of investment strategies, products, or ~~channels;~~channels. Our portfolio managers are compensated based on long-term performance, so when revenues and ~~industry comparisons.~~long-term performance are misaligned, our operating margins can fluctuate materially.

See "Use of Supplemental Data as Non-GAAP Performance Measure" section within this report.

Revenue


	Three Months Ended September 30,						Three Months Ended September 30,
(in thousands, except percentages)	2018		2017		% Change		2019		2018		% Change
Investment advisory	$	34,928	$	33,783	3	%	$	32,498	$	34,928	(7	)%
Mutual fund administration, net	2,544		2,989		(15	)%	2,094		2,544		(18	)%
Total	$	37,472	$	36,772	2	%	$	34,592	$	37,472	(8	)%

Investment Advisory Fees. Investment advisory fees ~~increased $1.1~~decreased $2.4 million, or 3%7%, from the three months ended September 30, ~~2017~~2018, to the three months ended September 30, ~~2018.~~2019. 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~~decrease in investment

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advisory fees was ~~driven by an increase~~primarily due to a decrease of 7%3% in average AUM quarter over quarter ~~which was partially offset by~~and a decrease of ~~two~~three basis points in the average advisory fee rate from ~~0.64% for the three months ended September 30, 2017 to~~ 0.62% for the three months ended September 30, ~~2018.~~2018 to 0.59% for the three months ended September 30, 2019. The decrease in average advisory fee rate was driven by ~~a shift~~an increase in the mix of assets held in lower fee rate strategies during the three months ended September 30, 2019, compared to the three months ended September 30, 2018.

Mutual Fund Administration Fees. Mutual fund administration fees decreased $0.4 million, or 18%, from the three months ended September 30, 2018, to the three months ended September 30, 2019. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of average Funds' AUM. The decrease was primarily due to a 6% decrease in average Funds' AUM from the three months ended September 30, 2018, to the three months ended September 30, 2019 along with an increase in administrative expenses paid on behalf of the Funds.

Expenses



	Three Months Ended September 30,
(in thousands, except percentages)	2019		2018		% Change
Compensation and related costs, excluding deferred compensation expense	$	15,714	$	14,459	9	%
Deferred compensation expense	357		983		(64	)%
General and administrative	3,543		2,962		20	%
Sales and marketing	1,443		1,282		13	%
Mutual fund administration	779		870		(10	)%
Total	$	21,836	$	20,556	6	%

Compensation and Related Costs, Excluding Deferred Compensation Expense. Employee compensation and benefits increased by $1.3 million, or 9%, from the three months ended September 30, 2018, compared to the three months ended September 30, ~~2017.~~2019. This increase was primarily due to an increase in incentive compensation of $1.1 million and an increase in salary and related benefits of $0.5 million, partially offset by a decrease in restricted stock expense of $0.3 million. Incentive compensation expense can fluctuate significantly period over period as we evaluate investment performance, individual performance, Company performance and other factors.

Deferred Compensation Expense. Deferred compensation expense decreased by $0.6 million from the three months ended September 30, 2018, to the three months ended September 30, 2019. The gain on deferred compensation plan investments increases the deferred compensation expense included in operating income. Deferred compensation expense is offset by an equal amount in investment income below net operating income on the consolidated statements of income, and thus has no impact on net income attributable to the Company.

~~Table of Contents~~

~~Mutual Fund Administration Fees.~~ ~~Mutual fund administration fees decreased $0.4~~General and Administrative. General and administrative expenses increased by $0.6 million, or ~~15%~~20%, from the three months ended September 30, ~~2017~~2018, to the three months ended September 30, 2019. This increase was due primarily to corporate recruiting fees of $0.4 million and an increase in IT software expense of $0.2 million.

Sales and Marketing. Sales and marketing expenses increased by $0.2 million from the three months ended September 30, 2018, to the three months ended September 30, 2019. The increase was primarily due to our branding and public relations initiatives, which were primarily focused on our fixed income strategies, and additional sales data costs.

Mutual Fund Administration. Mutual fund administration expenses decreased by $0.1 million, or 10%, from the three months ended September 30, 2018, to the three months ended September 30, 2019. 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. The decrease was primarily due to a 6% decrease in average Funds' AUM from the three months ended September 30, 2018, to the three months ended September 30, 2019.

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Nine Months Ended September 30, 2019 compared with Nine Months Ended September 30, 2018

The Company generated net income attributable to common shareholders of $41.5 million ($12.00 per diluted share) for the nine months ended September 30, 2019, compared with net income attributable to common shareholders of $42.6 million ($12.11 per diluted share) for the nine months ended September 30, 2018. Revenue decreased $10.5 million period over period, primarily due to decreases in average AUM and in the average advisory fee rate. Operating expenses increased $5.0 million, primarily due to increases in compensation expense and general and administrative costs. The Company had $23.6 million in investment income due to market appreciation for the nine months ended September 30, 2019, compared to investment income of $7.2 million for the nine months ended September 30, 2018.

Income tax expense remained flat from the nine months ended September 30, 2018, to the nine months ended September 30, 2019. This was due to an increase in pretax income which was offset by a decrease of the Company's effective tax rate from 24.6% to 24.1%. The effective tax rate of 24.1% differed from the federal statutory tax rate of 21% due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do business. This is partially offset by the benefit attributable to redeemable noncontrolling interests. The provision for income taxes includes a benefit attributable to the fact that the Company's operations include the Consolidated Funds which are not subject to federal income taxes. Accordingly, a portion of the Company's earnings are not subject to corporate tax levels. Absent the benefit attributable to redeemable noncontrolling interests, the effective tax rate would have been 25.7%.

Operating profit margin was 36% for the nine months ended September 30, 2019, and 46% for the nine months ended September 30, 2018. Operating profit margin, as adjusted, was 40% for the nine months ended September 30, 2019 and 47% for the nine months ended September 30, 2018. We expect that our operating margin will fluctuate from period to period based on various factors, including revenues; investment results; employee performance; staffing levels; gains and losses on investments held in deferred compensation plans; and development of investment strategies, products, or channels. Our portfolio managers are compensated based on long-term performance, so when revenues and long-term performance are misaligned, our operating margins can fluctuate materially.

See "Use of Supplemental Data as Non-GAAP Performance Measure" section within this report.

Revenue



	Nine Months Ended September 30,
(in thousands, except percentages)	2019		2018		% Change
Investment advisory	$	94,521	$	103,086	(8	)%
Mutual fund administration, net	6,196		8,095		(23	)%
Total	$	100,717	$	111,181	(9	)%

Investment Advisory Fees. Investment advisory fees decreased $8.6 million, or 8%, from the nine months ended September 30, 2018, to the nine months ended September 30, 2019. 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 decrease in investment advisory fees was primarily due to decreases of 5% in average AUM period over period and a decrease of three basis points in the average advisory fee rate from 0.62% for the nine months ended September 30, 2018, to 0.59% for the nine months ended September 30, 2019. The decrease in average advisory fee rate was driven by an increase in the mix of assets held in lower fee rate strategies during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018.

Mutual Fund Administration Fees. Mutual fund administration fees decreased $1.9 million, or 23%, from the nine months ended September 30, 2018 to the nine months ended September 30, 2019. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of average Funds' AUM. The decrease was due to a reduction in the administration fee rates paid by the Funds and ~~an increase in shareholder servicing expenses and required shareholder mailings that DHCM pays on behalf of the Funds. This was partially offset by the 6% increase~~a 7% decrease in average Funds' AUM from the ~~three~~nine months ended September 30, ~~2017~~2018, to the ~~three~~nine months ended September 30, ~~2018.~~2019, along with an increase in administrative expenses paid on behalf of the Funds. The table below summarizes the decreases in the administration fee rates during the periods indicated:

Class A & C Class I Class Y
1/1/2017 - 5/31/2017 0.24% 0.19% 0.09%
6/1/2017 - 2/27/2018 0.23% 0.18% 0.08%
2/28/2018 - 9/30/2018 0.21% 0.17% 0.05%



	Class A & C	Class I	Class Y
1/1/2018 - 2/27/2018	0.23%	0.18%	0.08%
2/28/2018 - 9/30/19	0.21%	0.17%	0.05%

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Expenses


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except percentages)	2018		2017		% Change		2019		2018		% Change
Compensation and related costs	$	15,442	$	14,446	7	%
Compensation and related costs, excluding deferred compensation expense							$	43,614	$	43,478	NM
Deferred compensation expense (benefit)							4,052		923		339	%
General and administrative	2,962		3,088		(4	)%	10,331		8,749		18	%
Sales and marketing	1,282		1,230		4	%	4,261		3,793		12	%
Mutual fund administration	870		1,120		(22	)%	2,489		2,769		(10	)%
Total	$	20,556	$	19,884	3	%	$	64,747	$	59,712	8	%

Compensation and Related ~~Costs.~~Costs, Excluding Deferred Compensation Expense. Employee compensation and benefits increased by ~~$1.0~~$0.1 million ~~or 7%,~~ from the ~~three~~nine months ended September 30, ~~2017 compared~~2018, to the ~~three~~nine months ended September 30, ~~2018.~~2019. This slight increase is ~~primarily~~ due to an increase in salary and related benefits and restricted stock expense of $2.0 million, partially offset by a decrease in incentive compensation of $1.9 million. Incentive compensation expense can fluctuate significantly period over period as we evaluate investment performance, individual performance, Company performance and other factors.

Deferred Compensation Expense (Benefit). Deferred compensation expense (benefit) increased by $3.1 million from the nine months ended September 30, 2018, to the nine months ended September 30, 2019. The gain on deferred compensation plan investments increases deferred compensation expense included in operating income. Deferred compensation expense is offset by an equal amount in investment income below net operating income on the consolidated statements of income statement, and thus has no impact on net income attributable to the Company.

General and Administrative. General and administrative expenses increased by $1.6 million, or 18%, from the nine months ended September 30, 2018, to the nine months ended September 30, 2019. This increase was primarily due to corporate recruiting fees of $0.8 million, an increase in research expenses to support our investment team of $0.5 million, and an increase in ~~deferred compensation~~IT software expense of ~~$0.5~~$0.3 million.

~~General and Administrative.~~ General and administrative expenses decreased 4%, from the three months ended September 30, 2017 to the three months ended September 30, 2018. This decrease is due primarily to a decrease in information technology consulting expense.

Sales and Marketing. Sales and marketing expenses increased 4%by $0.5 million, or 12%, from the ~~three~~nine months ended September 30, ~~2017~~2018, to the ~~three~~nine months ended September 30, ~~2018.~~2019. The increase was ~~primarily~~ due to our branding and public relations initiatives, which were primarily focused on our fixed income strategies, and additional ~~payments made to third-party intermediaries related to the sale of our proprietary funds.~~sales data costs.

Mutual Fund Administration. Mutual fund administration expenses decreased by ~~$0.2~~$0.3 million, or ~~22%~~10%, from the ~~three~~nine months ended September 30, ~~2017~~2018 to the ~~three~~nine months ended September 30, ~~2018.~~2019. 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. The decrease was primarily due to a reduction in outsourced administration ~~services.~~

~~Nine Months Ended September 30, 2018 compared with Nine Months Ended September 30, 2017~~

The Company generated net income attributable to common shareholders of $42.6 million ($12.11 per diluted share) for the nine months ended September 30, 2018, compared with net income attributable to common shareholders of $38.1 million ($11.05 per diluted share) for the nine months ended September 30, 2017. Revenue increased $3.8 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 $1.0 million primarily related to increases in compensationservices and related costs. The Company had $7.2 million in investment income due to market appreciation for the nine months ended September 30, 2018 compared to investment income of $9.7 million for the nine months ended September 30, 2017.

Income tax expense decreased $4.6 million from the nine months ended September 30, 2017 to the nine months ended September 30, 2018 due to the reduction of the Company's effective tax rate from 32.6% to 24.6%. This reduction was primarily due to the impact of the Tax Cuts and Jobs Act. The effective tax rate of 24.6% differed from the federal statutory tax rate of 21% 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 $0.7 million of excess tax benefits from the vesting of stock awards.

~~Table of Contents~~

Operating profit margin was 46% for the nine months ended September 30, 2018 and 45% for the nine months ended September 30, 2017. Operating profit margin, as adjusted, was 47% for both the nine months ended September 30, 2018 and 2017. 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) 2018 2017 % Change
Investment advisory $ 103,086
$ 98,106
5 %
Mutual fund administration, net 8,095
9,247
(12 )%
Total $ 111,181
$ 107,353
4 %

~~Investment Advisory Fees.~~ ~~Investment advisory fees increased $5.0 million, or 5%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. 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 8% in average AUM period over period, and was partially offset by a7% decrease of two basis points in the average advisory fee rate from 0.64% for the nine months ended September 30, 2017 to 0.62% for the nine months ended September 30, 2018. The decrease in average advisory fee rate was driven by a shift in the mix of assets held in lower fee rate strategies during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

~~Mutual Fund Administration Fees.~~ Mutual fund administration fees decreased $1.2 million, or 12%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of average Funds' AUM. The decrease was due to a reduction in the administration fee rates paid by the Funds and an increase in shareholder servicing expenses and required shareholder mailings that DHCM pays on behalf of the Funds. This was partially offset by the 9% increase in average Funds' AUM from the nine months ended September 30, ~~2017~~2018, to the nine months ended September 30, ~~2018. The table below summarizes the decreases in the administration fee rates during the periods indicated:~~

Class A & C Class I Class Y
1/1/2017 - 5/31/2017 0.24% 0.19% 0.09%
6/1/2017 - 2/27/2018 0.23% 0.18% 0.08%
2/28/2018 - 9/30/2018 0.21% 0.17% 0.05%

~~Expenses~~

Nine Months Ended
September 30,
(in thousands, except percentages) 2018 2017 % Change
Compensation and related costs $ 44,401
$ 42,439
5 %
General and administrative 8,749
9,557
(8 )%
Sales and marketing 3,793
3,613
5 %
Mutual fund administration 2,769
3,149
(12 )%
Total $ 59,712
$ 58,758
2 %

~~Compensation and Related Costs.~~ Employee compensation and benefits increased by $2.0 million, or 5%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. This increase is primarily due to increases in salary and related benefits of $2.3 million and in incentive compensation and restricted stock expense of $0.2 million. These increases were partially offset by a decrease in deferred compensation expense of $0.5 million. Incentive compensation expense can fluctuate significantly period over period as we evaluate investment performance, individual performance, Company performance and other factors.

~~Table of Contents~~

~~General and Administrative.~~ General and administrative expenses decreased by $0.8 million, or 8%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. This decrease was primarily due to decreases in charitable donations of $1.0 million and information technology consulting expense of $0.4 million, which were partially offset by an increase in research expenses to support our investment team of $0.4 million and depreciation expense of $0.2 million.

~~Sales and Marketing.~~ Sales and marketing expenses increased by $0.2 million, or 5%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. 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 decreased by $0.4 million, or 12%, from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. 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. The decrease was primarily due to a reduction in outsourced administration services.2019.

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, accounts receivable, and ~~accounts receivable.~~other current assets. Our main source of liquidity is cash flows from operating activities, which are generated from investment advisory and mutual fund administration fees. Cash and cash equivalents, investments held directly by DHCM, accounts receivable, and ~~investments~~other current assets represented ~~approximately 96%~~$232.0 million and ~~94%~~$216.5 million of total assets as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 our 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.

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Our board of directors and management regularly review various factors to determine whether we have capital in excess of that required for our 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. Our board of directors has also authorized management to repurchase the Company's common shares having an aggregate purchase price up to $50.0 ~~million.~~million, of which $19.5 million is remaining as of September 30, 2019. The authority to repurchase shares ~~will~~may be exercised from time to time as market conditions warrant and is subject to regulatory considerations. ~~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, ~~2018,~~2019, the Company had working capital of approximately ~~$213~~$204.8 million, compared to ~~$163~~$180.4 million at December 31, ~~2017.~~2018. Working capital includes cash ~~securities owned by common shareholders, prepaid expenses~~ and cash equivalents, accounts receivable, investments, and other current ~~receivables,~~assets of DHCM, net of ~~all~~accounts payable and accrued expenses, accrued incentive compensation, deferred compensation and other current liabilities ~~and redeemable noncontrolling interest.~~ of DHCM.

The Company has no debt, and we believe our available working capital is sufficient to cover current expenses and presently anticipated capital expenditures.

~~Table of Contents~~

Below is a summary of securities owned by the Company as of September 30, ~~2018~~2019 and December 31, ~~2017.~~

2018.


	As of				As of
	September 30, 2018		December 31, 2017		September 30, 2019		December 31, 2018
Corporate Investments:
Diamond Hill Core Bond Fund	$	36,394,830	$	30,529,852	$	43,824,406	$	37,197,134
Diamond Hill High Yield Fund	25,571,852		14,200,885		18,493,568		25,931,879
Diamond Hill Research Opportunities Fund					14,970,772		12,912,291
Diamond Hill Global Fund					10,135,814		8,482,790
Diamond Hill International Fund^(a)					7,325,924		—
Diamond Hill International Equity Fund, L.P.^(a)					—		1,057,445
Diamond Hill Mid Cap Fund	17,929,066		19,270,451		—		15,035,251
Diamond Hill Research Opportunities Fund	16,022,598		15,409,571
Diamond Hill Valuation-Weighted 500 ETF	12,190,658		12,096,719
Diamond Hill Global Fund	10,086,637		—
Diamond Hill Global Fund, L.P.	—		2,055,196
Diamond Hill International Equity Fund, L.P.	1,193,456		1,173,870
Diamond Hill Valuation-Weighted 500 ETF^(b)					—		11,497,699
Total Corporate Investments	119,389,097		94,736,544		94,750,484		112,114,489
Deferred Compensation Plan Investments in the Funds	25,432,661		20,480,790		28,416,798		22,387,874
Total investments held by DHCM	144,821,758		115,217,334		123,167,282		134,502,363
Redeemable noncontrolling interest in Consolidated Funds(c)	67,567,719		23,258,688		10,811,417		68,985,854
Total Investment Portfolio	$	212,389,477	$	138,476,022	$	133,978,699	$	203,488,217

(a) As of June 28, 2019, the Company converted the Diamond Hill International Equity Fund, L.P. into the Diamond Hill International Fund.

(b) The ETF liquidated on April 5, 2019.

(c) The Company deconsolidated the ETF, Diamond Hill Core Bond Fund and the Diamond Hill High Yield Fund during the nine months ended September 30, 2019, as the Company's ownership in each declined to less than 50%.

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. 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, 2019, net cash provided by operating activities totaled $40.1 million. Cash inflows provided by operating activities was primarily driven by net income of $45.2 million, the add back of share-based compensation of $6.7 million, depreciation of $0.9 million, and net redemptions of securities held in the underlying investment portfolios of the Consolidated Funds of $10.1 million. These cash inflows were partially offset by a decrease in accrued incentive compensation of $4.8 million, and the cash impact of timing differences in the settlement of assets and liabilities of $18.0 million. Absent the cash used by Consolidated Funds to purchase securities into their investment portfolios, cash flow provided by operations was $33.5 million.

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For the nine months ended September 30, 2018, net cash provided by operating activities totaled $9.6 million. Cash inflows provided by operating activities was primarily driven by net income of $44.2 million, the add back of share-based compensation of $6.5 million, depreciation of $0.9 million, and the cash impact of timing differences in the settlement of assets and liabilities of $5.2 million. These cash inflows were partially offset by net purchases of trading securities held in the underlying investment ~~portfolios~~portfolio of the Consolidated Funds of $47.2 million. Absent the cash used by Consolidated Funds to purchase securities into their investment portfolios, cash flow provided by operations ~~was~~would have been $55.9 ~~million.~~

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 $39.2 million and the add-back of share-based compensation of $6.2 million, depreciation of $0.7 million, and the cash impact of timing differences in the settlement of assets and liabilities of $0.1 million. These cash inflows were partially offset by the net change in trading securities held in the underlying investment portfolios of the Consolidated Funds of $5.6 million. Absent the cash used by the Consolidated Funds to purchase securities into their investment portfolios, cash flow provided by operations was approximately $43.5 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 provided by investing activities totaled $9.0 million for the nine months ended September 30, 2019. Cash flows provided by investing activity were primarily driven by proceeds from the sale of investments of $43.2 million. The cash inflows were partially offset by investments purchased of $11.0 million and property and equipment purchased of $0.6 million. The remaining change in reported cash flows from investing activities was attributable to $22.7 million in net cash that was removed from our balance sheet due to the deconsolidation of the ETF during the period.

Cash flows used in investing activities totaled $3.3 million for the nine months ended September 30, 2018. The Company purchased investments of $4.4 million and purchased $0.7 million of property and equipment during the period. These cash outflows were partially offset by proceeds from ~~the~~ sale of investments of $1.8 million.

Cash flows used in investing activities totaled $11.1 million for the nine months ended September 30, 2017. The Company purchased investments of $13.3 million and $0.5 million of property and equipment during the period. These cash outflows were partially offset by proceeds from sales of investments of $2.7 million.

~~Table of Contents~~

Cash Flows from Financing Activities

The Company’s cash flows from financing activities consist primarily of the payment of special dividends, the repurchase of its common shares, shares withheld related to employee tax withholding, and distributions to, or contributions from, redeemable noncontrolling interest holders.

For the nine months ended September 30, 2019, net cash used in financing activities totaled $15.3 million, consisting of repurchases of the Company’s common shares of $23.2 million and the value of shares withheld related to employee tax withholding of $1.0 million, which were partially offset by net subscriptions received in the Consolidated Funds from redeemable noncontrolling interest holders of $8.9 million.

For the nine months ended September 30, 2018, net cash provided by financing activities totaled $17.7 million, consisting of net subscriptions received in the Consolidated Funds from redeemable noncontrolling interest holders of $19.3 million, which were partially offset by the value of shares withheld related to employee tax withholding of $1.6 ~~million.~~

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, which were partially offset by the value of shares withheld related to employee tax withholding of $2.8 million.

Supplemental Consolidated Cash Flow Statement

Our consolidated balance sheets reflect 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.

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The following table summarizes the condensed cash flows for the nine months ended September 30, ~~2018,~~2019, 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, 2018												Nine Months Ended September 30, 2019
	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 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	$	42,567,882		$	3,549,489		$	(1,877,849	)	$	44,239,522		$	41,545,254		$	9,184,253		$	(5,499,454	)	$	45,230,053
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation	868,243			—			—			868,243			892,463			—			—			892,463
Share-based compensation	6,472,823			—			—			6,472,823			6,724,201			—			—			6,724,201
Net (gains)/losses on investments	(1,512,557		)	(3,549,489		)	1,877,849			(3,184,197		)	(13,780,766		)	(9,184,253		)	5,499,454			(17,465,565		)
Net change in securities held by Consolidated Funds	—			(47,246,344		)	—			(47,246,344		)	—			10,149,201			—			10,149,201
Other changes in assets and liabilities	7,505,048			976,231			—			8,481,279			(1,924,789		)	(3,534,140		)	—			(5,458,929		)
Net cash provided by (used in) operating activities	55,901,439			(46,270,113		)	—			9,631,326
Net cash used in investing activities	(30,281,588		)	—			27,008,953			(3,272,635		)
Net cash provided by (used in) financing activities	(1,602,526		)	46,270,113			(27,008,953		)	17,658,634
Net cash provided by operating activities													33,456,363			6,615,061			—			40,071,424
Net cash provided by (used in) investing activities													24,506,012			(22,723,853		)	7,173,894			8,956,053
Net cash (used in) provided by financing activities													(24,278,693		)	16,108,792			(7,173,894		)	(15,343,795		)
Net change during the period	24,017,325			—			—			24,017,325			33,683,682			—			—			33,683,682
Cash and cash equivalents at beginning of period	76,602,108			—			—			76,602,108			84,430,059			—			—			84,430,059
Cash and cash equivalents at end of period	$	100,619,433		$	—		$	—		$	100,619,433		$	118,113,741		$	—		$	—		$	118,113,741

2527

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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, ~~2018~~2019 and ~~2017,~~2018, respectively.


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except percentages and per share data)	2018			2017			2018			2017			2019			2018			2019			2018
Total revenue	$	37,472		$	36,772		$	111,181		$	107,353		$	34,592		$	37,472		$	100,717		$	111,181

Net operating income, GAAP basis	$	16,916		$	16,887		$	51,469		$	48,596		$	12,757		$	16,916		$	35,970		$	51,469
Non-GAAP adjustment:
Gains on deferred compensation plan investments, net⁽¹⁾	983			451			923			1,472			357			983			4,052			923
Net operating income, as adjusted, non-GAAP basis⁽²⁾	17,899			17,338			52,392			50,068			13,114			17,899			40,022			52,392
Non-GAAP adjustment:
Tax provision on net operating income, as adjusted, non-GAAP basis⁽³⁾	(4,633		)	(5,731		)	(12,897		)	(16,342		)	(3,442		)	(4,896		)	(10,284		)	(13,275		)
Net operating income, as adjusted, after tax, non-GAAP basis⁽⁴⁾	$	13,266		$	11,607		$	39,495		$	33,726		$	9,672		$	13,003		$	29,738		$	39,117

Net operating income, as adjusted after tax per diluted share, non-GAAP basis⁽⁵⁾	$	3.76		$	3.35		$	11.24		$	9.78		$	2.83		$	3.68		$	8.59		$	11.13
Diluted weighted average shares outstanding, GAAP basis	3,532			3,461			3,515			3,448			3,412			3,532			3,461			3,515

Operating profit margin, GAAP basis	45		%	46		%	46		%	45		%	37		%	45		%	36		%	46		%
Operating profit margin, as adjusted, non-GAAP basis⁽⁶⁾	48		%	47		%	47		%	47		%	38		%	48		%	40		%	47		%

⁽¹⁾Gains on deferred compensation plan investments, net: The gain on deferred compensation plan investments, which increases 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 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 as~~represents 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 is calculated by applying the unconsolidated effective tax rate ~~from the actual tax provision~~ to net operating income, as adjusted.

⁽⁴⁾Net operating income, as adjusted, after tax: Thisnon-GAAP measure deducts from the net operating income, as adjusted, 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.

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Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements. We do not have any ~~obligations~~obligation under a guarantee ~~contracts, any~~contract, or a retained or contingent ~~interests~~interest in assets or similar ~~arrangements~~arrangement that ~~serve~~serves as credit, liquidity, or market risk support for such assets, or any other obligation, including ~~any~~a contingent obligation, under a contract that would be accounted for as a derivative instrument or arising out of a variable interest.

~~Table of Contents~~

Critical Accounting Policies and Estimates

~~Consolidation. We consolidate all subsidiaries and certain investments in which we have~~For a ~~controlling interest. We are generally deemed to have a controlling interest when we own the majority~~summary of the ~~voting interest of a VRE or are deemed~~critical accounting policies important to beunderstanding the primary beneficiary of a VIE. VIEs are entities that lack sufficient equity to finance their activities or the equity holders do not have defined power to direct the activities of the entity normally associated with an equity investment. Our analysis to determine whether an entity is a VIE or a VRE involves judgment and considers several factors, including an entity's legal organization, equity structure, the rights of the investment holders, our ownership interestcondensed consolidated financial statements, please see Note 2, Significant Accounting Policies, in the entity, and our contractual involvement with the entity. We continually review and reconsider our VIE or VRE conclusions upon the occurrence of certain events, such as changes to our ownership interest or amendments to contract documents. Our VIEs are primarily sponsored investment entities and our variable interest consists of our equity ownership in these entities. The Company concluded we are not the primary beneficiary of any of these VIEs as of September 30, 2018, as we lack the power to control these entities.

~~Provisions for Income Taxes~~. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’scondensed consolidated financial statements ~~or tax returns. Judgment is required~~contained in ~~assessing the future tax consequences~~Part I, Item 1 of ~~events that have been recognized~~this Form 10-Q, and Critical Accounting Policies in ~~our financial statements or tax returns.~~

~~Revenue Recognition on Performance-Based Advisory Contracts.~~ ~~We have certain investment advisory contracts in which a portion~~Management’s Discussion and Analysis of ~~the fees are based on investment performance achieved~~Financial Condition and Results of Operations in the respective client portfolio in excess of a specified hurdle rate. These fees are calculated based on client investment results over rolling five-year periods. The Company records variable performance fees at the end of the contract measurement period because the variable fees earned are constrained based on movements2018 Annual Report, and Note 2, Significant Accounting Policies, in the ~~financial markets.~~

~~Revenue Recognition when Acting as an Agent vs. Principal.~~ 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, registration services, 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 responsible2018 Annual Report 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 expenses, as it is the appropriate accounting treatment for this agency relationship.

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 ~~2017~~2018 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, ~~2018~~2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Table of Contents~~



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 ~~2017~~2018 Annual Report.



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

During the quarter ended September 30, ~~2018,~~2019, 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 during the ~~third~~ quarter ~~of fiscal year 2018:~~September 30, 2019:

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Period
Total Number of Shares Purchased for Employee Tax Withholdings^(a)

Total Number
of Shares
Purchased
as part of Publicly
Announced Program^(b)

Average Price
Paid Per Share

Purchase Price of Shares
Purchased
Under the Program
Aggregate Purchase Price Yet To Be Purchased Under the Program
July 1, 2018 through
   July 31, 2018
3,525
—
$ —
—
50,000,000
August 1, 2018 through
   August 31, 2018
—
—
$ —
—
50,000,000
September 1, 2018 through
   September 30, 2018
—
—
$ —
—
50,000,000
Total 3,525
—
$ —

—



Period	Total Number of Shares Purchased for Employee Tax Withholdings^(a)	Total Number of Shares Purchased as part of Publicly Announced Program^(b)	Average Price Paid Per Share Purchased Under the Program		Purchase Price of Shares Purchased Under the Program		Aggregate Purchase Price Yet To Be Purchased Under the Program
July 1, 2019 through July 31, 2019	3,088	197	$	134.62	$	26,520	$	27,084,605
August 1, 2019 through August 31, 2019	—	50,105	$	132.14	$	6,620,855	$	20,463,750
September 1, 2019 through September 30, 2019	—	6,905	$	134.98	$	932,060	$	19,531,690
Total	3,088	57,207	$	132.49	$	7,579,435

~~a.)~~(a)

The Company regularly withholds shares for tax payments due upon employee restricted stock vestings. During the quarter ended September 30, ~~2018,~~2019, the Company purchased ~~3,525~~3,088 shares ~~of the Company's common shares~~for employee tax withholdings at an average price paid per share of ~~$194.43. Those repurchases consisted solely of shares withheld for tax payments due upon employee Restricted Stock which vested during the quarter.~~$141.72.

~~b.)~~(b)

The Company's current share repurchase program was announced on September 25, 2018. ~~The Board~~Our board of ~~Directors~~directors authorized management to repurchase up to $50,000,000 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 will expire in September 2020. ~~The Company's previous program, announced on August 9, 2007, was terminated effective with the adoption of the current program.~~

The Company has entered into a Rule 10b5-1 repurchase plan in connection with its ~~currently effective~~ repurchase program. This plan is intended to qualify for the safe harbor under Rule 10b5-1 of the Securities Exchange Act of 1934. A Rule 10b5-1 plan allows a company to purchase its shares at times when it would not ordinarily be in the market due to its trading policies or the possession of material nonpublic information. Purchases may be made in the open market or through privately negotiated transactions. Purchases in the open market will be made in compliance with Rule 10b-18 under the Exchange Act. Because the repurchases under the 10b5-1 plan ~~will be~~are subject to specified parameters and certain price, timing and volume restraints specified in the plan, there is no guarantee as to the exact number of shares that will be repurchased, or that there will be any repurchases at all pursuant to the plan.

Through September 30, 2019, the Company has repurchased 211,272 of the Company's common shares under the repurchase program at a total cost of $30.5 million.



ITEM 3:	Defaults Upon Senior Securities

None

~~Table of Contents~~



ITEM 4:	Mine Safety Disclosures

None



ITEM 5:	Other Information

None

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ITEM 6:	Exhibits



3.1		Amended and Restated Articles of Incorporation of the Company (Incorporated by reference from Form 8-K Current Report for the event on May 2, 2002 filed with the SEC on May 7, 2002; File No. 000-24498.)

3.2		Certificate of Amendment by Shareholders to the Articles of Incorporation of the Company (Incorporated by reference from Form 8-K Current Report for the event on April 28, 2017; File No. 000-24498.)

3.3		Amended and Restated Code of Regulations of the Company (Incorporated by reference from Form 8-K Current Report, Exhibit 3.2, filed with the SEC on April 28, 2017; File No. 000-24498.)

10.1		Employment Agreement between Heather E. Brilliant and Diamond Hill Capital Management, Inc., dated July 5, 2019 (Incorporated by reference from Form 8-K Current Report, Exhibit 10.1, filed with the SEC on July 10, 2019; 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. (Furnished herewith)

101.INS		XBRL Instance ~~Document.~~Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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.

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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 ~~30, 2018~~29, 2019	Chief Executive Officer and President	/s/ ~~Christopher M. Bingaman~~Heather E. Brilliant
		~~Christopher M. Bingaman~~Heather E. Brilliant

October ~~30, 2018~~29, 2019	Chief Financial Officer and Treasurer	/s/ Thomas E. Line
		Thomas E. Line

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	Three Months Ended September 30, 2017
	Investment advisory		Mutual fund administration, net		Total revenue
Proprietary funds	$	26,571,891	$	2,989,026	$	29,560,917
Sub-advised funds and institutional accounts	7,210,712		—		7,210,712
	$	33,782,603	$	2,989,026	$	36,771,629



	Nine Months Ended September 30, 2017
	Investment advisory		Mutual fund administration, net		Total revenue
Proprietary funds	$	76,975,740	$	9,247,339	$	86,223,079
Sub-advised funds and institutional accounts	21,130,165		—		21,130,165
	$	98,105,905	$	9,247,339	$	107,353,244

Shares Issued

Grant Date Value

September 30, 2019

September 30, 2018