10-Q 1 dhil-20220630.htm 10-Q dhil-20220630
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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022

OR
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
dhil-20220630_g1.jpg

DIAMOND HILL INVESTMENT GROUP, INC.

(Exact name of registrant as specified in its charter)
Ohio 65-0190407
(State of
incorporation)
 (I.R.S. Employer
Identification No.)
325 John H. McConnell Blvd., Suite 200, Columbus, Ohio 43215
(Address of principal executive offices) (Zip Code)
(614) 255-3333
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valueDHILThe NASDAQ Stock Market LLC
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 (or for such shorter period that the registrant was required to file such reports), 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 (§232.405 of this chapter) 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   Smaller reporting company 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes:      No:  x

The number of shares outstanding of the issuer’s common stock as of July 28, 2022 is 3,098,867 shares.
1


DIAMOND HILL INVESTMENT GROUP, INC.
 
2

PART I:FINANCIAL INFORMATION
 
ITEM 1:Consolidated Financial Statements
Diamond Hill Investment Group, Inc.
Consolidated Balance Sheets
 
6/30/202212/31/2021
 (Unaudited) 
ASSETS
Cash and cash equivalents$58,502,482 $80,550,393 
Investments150,663,308 166,656,001 
Accounts receivable19,207,451 20,443,562 
Prepaid expenses3,103,059 2,555,296 
Income taxes receivable2,206,085  
Property and equipment, net of accumulated depreciation5,171,443 6,100,599 
Deferred taxes13,327,856 9,847,552 
Total assets$252,181,684 $286,153,403 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable and accrued expenses$12,630,728 $8,588,713 
Accrued incentive compensation16,851,674 37,235,418 
Income taxes payable 801,740 
Deferred compensation
29,278,306 37,348,294 
Total liabilities58,760,708 83,974,165 
Redeemable noncontrolling interest22,300,189 17,756,336 
Permanent Shareholders’ equity
Common stock, no par value: 7,000,000 shares authorized; 3,122,317 issued and outstanding at June 30, 2022 (inclusive of 247,416 unvested shares); 3,171,536 issued and outstanding at December 31, 2021 (inclusive of 201,170 unvested shares)
71,099,716 80,434,049 
Preferred stock, undesignated, 1,000,000 shares authorized and unissued
  
Deferred equity compensation(23,250,408)(15,268,705)
Retained earnings123,271,479 119,257,558 
Total permanent shareholders’ equity171,120,787 184,422,902 
Total liabilities and shareholders’ equity$252,181,684 $286,153,403 
Book value per share$54.81 $58.15 
The accompanying notes are an integral part of these consolidated financial statements.
3

Diamond Hill Investment Group, Inc.
Consolidated Statements of Income (unaudited)
 
Three Months Ended 
 June 30,
Six Months Ended 
 June 30,
 2022202120222021
REVENUES:
Investment advisory$36,408,165 $41,716,427 $75,687,051 $78,285,530 
Mutual fund administration, net2,612,949 3,353,226 5,590,449 5,798,556 
Total revenue39,021,114 45,069,653 81,277,500 84,084,086 
OPERATING EXPENSES:
Compensation and related costs, excluding deferred compensation expense (benefit)17,222,243 18,940,034 35,869,137 35,754,975 
Deferred compensation expense (benefit)(4,690,393)1,511,254 (5,868,949)4,614,200 
General and administrative3,513,325 3,870,965 6,699,296 6,686,643 
Sales and marketing1,886,903 2,036,856 3,598,063 3,904,882 
Mutual fund administration837,524 943,669 1,655,402 1,824,390 
Total operating expenses18,769,602 27,302,778 41,952,949 52,785,090 
NET OPERATING INCOME20,251,512 17,766,875 39,324,551 31,298,996 
Investment income (loss), net(17,677,873)5,877,086 (25,270,130)11,540,540 
NET INCOME BEFORE TAXES2,573,639 23,643,961 14,054,421 42,839,536 
Income tax expense(1,357,875)(6,017,423)(4,563,641)(10,950,385)
NET INCOME1,215,764 17,626,538 9,490,780 31,889,151 
Net loss (income) attributable to redeemable noncontrolling interest3,197,122 (761,708)4,052,058 (1,315,810)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS$4,412,886 $16,864,830 $13,542,838 $30,573,341 
Earnings per share attributable to common shareholders
Basic$1.40 $5.28 $4.27 $9.62 
Diluted$1.40 $5.28 $4.27 $9.62 
Weighted average shares outstanding
Basic3,153,084 3,196,501 3,169,416 3,176,744 
Diluted3,153,084 3,196,501 3,169,416 3,176,744 
The accompanying notes are an integral part of these consolidated financial statements.
4

Diamond Hill Investment Group, Inc.
Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interest (unaudited)

Three Months Ended June 30, 2022
Shares
Outstanding
Common
Stock
Deferred Equity
Compensation
Retained
Earnings
TotalRedeemable Noncontrolling Interest
Balance at March 31, 20223,191,487 $83,517,125 $(24,476,298)$123,569,192 $182,610,019 $20,738,520 
Issuance of restricted stock grants9,574 1,665,535 (1,665,535)— — — 
Amortization of restricted stock grants— — 2,891,425 — 2,891,425 — 
Issuance of common stock related to 401(k) plan match103 18,064 — — 18,064 — 
Issuance of common stock related to employee stock purchase plan357 61,989 — — 61,989 — 
Shares withheld related to employee tax withholding(9,511)(1,781,410)— — (1,781,410)— 
Repurchase of common stock(69,693)(12,381,587)— — (12,381,587)— 
Cash dividends paid — — — (4,710,599)(4,710,599)— 
Net income (loss)— — — 4,412,886 4,412,886 (3,197,122)
Net subscriptions of Consolidated Funds — — — — — 4,758,791 
Balance at June 30, 20223,122,317 $71,099,716 $(23,250,408)$123,271,479 $171,120,787 $22,300,189 
Three Months Ended June 30, 2021
Shares
Outstanding
Common
Stock
Deferred Equity
Compensation
Retained
Earnings
TotalRedeemable Noncontrolling Interest
Balance at March 31, 20213,197,634 $85,303,452 $(19,440,920)$128,578,546 $194,441,078 $10,665,146 
Issuance of restricted stock grants15,343 2,551,601 (2,551,601)— — — 
Amortization of restricted stock grants— — 1,711,863 — 1,711,863 — 
Issuance of common stock related to 401(k) plan match142 24,000 — — 24,000 — 
Issuance of common stock related to employee stock purchase plan3,083 525,374 — — 525,374 — 
Shares withheld related to employee tax withholding(2,753)(429,495)— — (429,495)— 
Forfeiture of restricted stock grants(5,197)(1,050,833)1,050,833 — — — 
Repurchase of common stock(230)(35,505)— — (35,505)— 
Cash dividends paid— — — (3,195,610)(3,195,610)— 
Net income— — — 16,864,830 16,864,830 761,708 
Net subscriptions of Consolidated Funds — — — — — 2,793,002 
Balance at June 30, 20213,208,022 $86,888,594 $(19,229,825)$142,247,766 $209,906,535 $14,219,856 
The accompanying notes are an integral part of these consolidated financial statements.


5

Diamond Hill Investment Group, Inc.
Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interest (unaudited)

Six Months Ended June 30, 2022
Shares
Outstanding
Common
Stock
Deferred Equity
Compensation
Retained
Earnings
TotalRedeemable Noncontrolling Interest
Balance at December 31, 20213,171,536 $80,434,049 $(15,268,705)$119,257,558 $184,422,902 $17,756,336 
Issuance of restricted stock grants75,764 13,366,316 (13,366,316)— — — 
Amortization of restricted stock grants— — 5,140,104 — 5,140,104 — 
Common stock issued as incentive compensation2,743 487,870 — — 487,870 — 
Issuance of common stock related to 401k plan match211 37,313 — — 37,313 — 
Issuance of common stock related to employee stock purchase plan2,692 499,335 — — 499,335 — 
Shares withheld related to employee tax withholding(9,511)(1,781,410)— — (1,781,410)— 
Forfeiture of restricted stock grants(1,321)(244,509)244,509 — — — 
Repurchase of common stock(119,797)(21,699,248)— — (21,699,248)— 
Cash dividends paid— — — (9,528,917)(9,528,917)— 
Net income (loss)— — — 13,542,838 13,542,838 (4,052,058)
Net subscriptions of Consolidated Funds — — — — — 8,595,911 
Balance at June 30, 20223,122,317 $71,099,716 $(23,250,408)$123,271,479 $171,120,787 $22,300,189 
Six Months Ended June 30, 2021
Shares
Outstanding
Common
Stock
Deferred Equity
Compensation
Retained
Earnings
TotalRedeemable Noncontrolling Interest
Balance at December 31, 20203,168,823 $80,810,946 $(14,748,118)$118,017,925 $184,080,753 $9,372,333 
Issuance of restricted stock grants67,777 10,712,315 (10,712,315)— — — 
Amortization of restricted stock grants— — 3,108,995 — 3,108,995 — 
Common stock issued as incentive compensation3,681 529,806 — — 529,806 — 
Issuance of common stock related to 401k plan match296 48,000 — — 48,000 — 
Issuance of common stock related to employee stock purchase plan3,083 525,374 — — 525,374 — 
Shares withheld related to employee tax withholding(4,482)(687,583)— — (687,583)— 
Forfeiture of restricted stock grants(18,397)(3,121,613)3,121,613 — — — 
Repurchase of common stock(12,759)(1,928,651)— — (1,928,651)— 
Cash dividend paid — — — (6,343,500)(6,343,500)— 
Net income — — — 30,573,341 30,573,341 1,315,810 
Net subscriptions of Consolidated Funds — — — — — 3,531,713 
Balance at June 30, 20213,208,022 $86,888,594 $(19,229,825)$142,247,766 $209,906,535 $14,219,856 
The accompanying notes are an integral part of these consolidated financial statements.
6

Diamond Hill Investment Group, Inc.
Consolidated Statements of Cash Flows (unaudited)
 
 Six Months Ended 
 June 30,
 20222021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $9,490,780 $31,889,151 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation715,629 577,706 
Share-based compensation5,252,317 3,268,734 
Decrease (increase) in accounts receivable1,236,111 (4,889,865)
Change in current income taxes(3,007,825)460,963 
Change in deferred income taxes(3,480,304)1,365,779 
Net losses (gains) on investments26,202,205 (10,647,261)
Net change in securities held by Consolidated Funds(11,708,223)(14,055,138)
Decrease in accrued incentive compensation(19,895,874)(9,671,157)
Increase (decrease) in deferred compensation(8,069,988)1,638,388 
Other changes in assets and liabilities3,730,692 2,889,156 
Net cash provided by operating activities465,520 2,826,456 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment(22,913)(662,714)
Purchase of Company sponsored investments(2,980,351)(12,433,151)
Proceeds from sale of Company sponsored investments4,479,062 4,566,647 
Net cash provided by (used in) investing activities1,475,798 (8,529,218)
CASH FLOWS FROM FINANCING ACTIVITIES:
Value of shares withheld related to employee tax withholding(1,781,410)(687,583)
Payment of dividends(9,528,917)(6,343,500)
Net subscriptions received from redeemable noncontrolling interest holders8,595,911 3,531,713 
Repurchases of common stock(21,699,248)(1,928,651)
Proceeds received under employee stock purchase plan424,435 413,635 
Net cash used in financing activities(23,989,229)(5,014,386)
CASH AND CASH EQUIVALENTS
Net change during the period(22,047,911)(10,717,148)
At beginning of period80,550,393 98,478,202 
At end of period$58,502,482 $87,761,054 
Supplemental cash flow information:
Income taxes paid$11,051,770 $9,123,643 
Supplemental disclosure of non-cash transactions:
Common stock issued as incentive compensation$487,870 529,806 
Charitable donation of corporate investments $366,555 

The accompanying notes are an integral part of these consolidated financial statements.
7

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 provided by its wholly-owned subsidiary, Diamond Hill Capital Management, Inc., an Ohio corporation (“DHCM”).

DHCM is a registered investment adviser, and is the investment adviser and administrator for the Diamond Hill Funds (the "Funds"), a series of open-end mutual funds. DHCM also provides investment advisory services to Diamond Hill Micro Cap Fund, LP (“DHMF”), a private fund, as well as separately managed accounts, other pooled investment vehicles, and model delivery programs.
Note 2 Significant Accounting Policies
Basis of Presentation
The accompanying unaudited, condensed, and consolidated financial statements for Diamond Hill Investment Group, Inc. and its subsidiaries (referred to in these notes to the condensed consolidated financial statements as "the Company," "we," "us," and "our") as of June 30, 2022 and December 31, 2021, and for the three- and six-month periods ended June 30, 2022 and 2021, have been prepared in accordance with United States generally accepted accounting principles ("GAAP"), the instructions to Form 10-Q, and Article 10 of Securities and Exchange Commission (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 Company management ("management"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the financial condition and results of operations as of the dates, and for the interim periods, presented, have been included. These unaudited, condensed, and consolidated financial statements and footnotes should be read in conjunction with the audited consolidated financial statements of the Company included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the "2021 Form 10-K"), as filed with the SEC.
Operating results for the three- and six-month periods ended June 30, 2022, are not necessarily indicative of the results the Company may expect for the full fiscal year ending December 31, 2022.
For further information regarding the risks to the Company's business, refer to the consolidated financial statements and notes thereto included in the 2021 Form 10-K and in “Part II – Item 1A. – Risk Factors” of this Quarterly Report on Form 10-Q.
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, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenue and expense during the period. Actual results could differ from those estimates.
Reclassification
Certain amounts and disclosures for prior periods 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 DHMF 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"). The Trust is an open-end investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). Each individual Fund represents a separate share class of a legal entity organized under the Trust. DHMF is organized as a Delaware limited partnership and is exempt from registration under the 1940 Act.
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The Company performs its consolidation analysis at the individual Fund level and has concluded that the Funds are voting rights entities (“VREs”) because the structure of the Funds is such that the shareholders are deemed to have the power through voting rights to direct the activities that most significantly impact each Fund’s economic performance. To the extent material, these Funds are consolidated if Company ownership, directly or indirectly, represents a majority interest (greater than 50%). The Company records redeemable noncontrolling interests in consolidated investments for which the Company's ownership is less than 100%. As of June 30, 2022, the Company has consolidated the Diamond Hill International Fund and the Diamond Hill Large Cap Concentrated Fund (together, the "Consolidated Funds").
DHCM is the investment manager of DHMF and is the managing member of Diamond Hill Fund GP, LLC (the “General Partner”), which is the general partner of DHMF. DHCM is wholly owned by, and consolidated with, the Company. Further, DHCM, through its control of the General Partner, has the power to direct DHMF’s economic activities and the right to receive investment advisory fees that may be significant from DHMF. DHMF commenced operations on June 1, 2021, and its underlying assets consist primarily of marketable securities.
The Company concluded DHMF was a variable interest entity (“VIE”) given that: (i) DHCM has disproportionately less voting interest than economic interest, and (ii) DHMF's limited partners have full power to remove the General Partner (which is controlled by the Company) due to the existence of substantive kick-out rights. In addition, substantially all of DHMF'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 DHMF as it lacks the power to control DHMF, since DHMF's limited partners have single-party kick-out rights and can unilaterally remove the General Partner without cause. DHCM’s investments in DHMF are reported as a component of the Company’s investment portfolio and valued at DHCM’s respective share of DHMF's net income or loss.
Gains and losses attributable to changes in the value of DHCM’s interests in DHMF are included in the Company’s reported investment income. The Company’s exposure to loss as a result of its involvement with DHMF is limited to the amount of its investment. DHCM is not obligated to provide, and has not provided, financial or other support to DHMF, except for its investments to date and its contractually provided investment advisory responsibilities. The Company has not provided liquidity arrangements, guarantees, or other commitments to support DHMF’s operations, and DHMF’s creditors and interest holders have no recourse to the general credit of the Company.
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 a single business segment, which is providing investment advisory and related services to clients through pooled investment vehicles, including the Funds and DHMF, separately managed accounts, and model delivery programs. Therefore, the Company does not present disclosures relating to operating segments in 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
The Company records accounts receivable when they are due and presents them 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 individual or entity that owes the receivable. No allowance for doubtful accounts was deemed necessary at either June 30, 2022, or December 31, 2021. Accounts receivable from the Funds were $10.0 million as of June 30, 2022, and $11.8 million as of December 31, 2021.
Investments
Management determines the appropriate classification of its investments at the time of purchase and re-evaluates its determination for each reporting period.
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Company sponsored investments, where the Company has neither the 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 20% to 50% of the outstanding voting interests in the entity or where 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.
Property and Equipment
Property and equipment, consisting of leasehold improvements, right-of-use lease assets, computer equipment, capitalized software, 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.
Implementation costs incurred to develop or obtain internal-use software, including hosting arrangements, are capitalized and expensed on a straight-line basis over either the estimated useful life of the respective software or the term of the hosting arrangement.

Property and equipment is tested for impairment when there is an indication that the carrying amount of an asset may not be recoverable. When an asset is determined to not be recoverable, the impairment loss is measured based on the excess, if any, of the carrying value of the asset over its fair value.
Revenue Recognition – General
The Company recognizes revenue when it satisfies performance obligations under the terms of a contract with a client. The Company earns substantially all of its revenue from DHCM 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 performance-based fees.
Revenue earned during the three months ended June 30, 2022 and 2021 under contracts with clients include:
Three Months Ended June 30, 2022
Investment advisoryMutual fund
administration, net
Total revenue
Proprietary funds$25,447,122 $2,612,949 $28,060,071 
Separately managed accounts6,570,811 — 6,570,811 
Sub-Advised funds2,879,987 — 2,879,987 
Model delivery1,510,245  1,510,245 
$36,408,165 $2,612,949 $39,021,114 
Three Months Ended June 30, 2021
Investment advisoryMutual fund
administration, net
Total revenue
Proprietary funds$30,452,474 $3,353,226 $33,805,700 
Separately managed accounts7,045,816 — 7,045,816 
Sub-Advised funds2,959,663 — 2,959,663 
Model delivery1,258,474  1,258,474 
$41,716,427 $3,353,226 $45,069,653 

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Revenue earned during the six months ended June 30, 2022 and 2021 under contracts with clients include:
Six Months Ended June 30, 2022
Investment advisoryMutual fund
administration, net
Total revenue
Proprietary funds$52,702,050 $5,590,449 $58,292,499 
Separately managed accounts13,763,101  13,763,101 
Sub-Advised funds5,994,491  5,994,491 
Model delivery3,227,409  3,227,409 
$75,687,051 $5,590,449 $81,277,500 
Six Months Ended June 30, 2021
Investment advisoryMutual fund
administration, net
Total revenue
Proprietary funds$56,963,175 $5,798,556 $62,761,731 
Separately managed accounts13,519,085  13,519,085 
Sub-Advised funds5,638,073  5,638,073 
Model delivery2,165,197  2,165,197 
$78,285,530 $5,798,556 $84,084,086 

Revenue Recognition – Investment Advisory Fees
DHCM's investment advisory contracts with clients have a single performance obligation because the contracted services are not separately identifiable from other obligations in the contracts, and therefore, are not distinct. All obligations to provide investment advisory services are satisfied over time by DHCM.
The fees DHCM receives for its services under its investment advisory contracts are based on AUM, which changes based on the value of securities held under each investment advisory contract. These fees are thereby constrained and represent variable consideration, and they are excluded from revenue until the AUM on which DHCM's client is billed is no longer subject to market fluctuations.
DHCM also provides its strategy model portfolios and related services to sponsors of model delivery programs. For its services, DHCM is paid a model delivery fee by the program sponsor at a pre-determined rate based on the amount of assets in the program.
Revenue Recognition – Performance-Based Fees
DHCM manages certain client accounts that pay performance-based fees. These fees are calculated based on client investment results over rolling five-year periods. The Company records performance-based fees when it is probable that a significant reversal of the revenue will not occur. The Company did not record any performance-based fees during the three- and six-month periods ended June 30, 2022 or June 30, 2021. The table below shows AUM subject to performance-based fees and the amount of performance-based fees that would be recognized based upon investment results as of June 30, 2022:
As of June 30, 2022
 AUM subject to performance-based feesUnearned performance-based fees
Contractual Measurement Period Ending:
Quarter Ending September 30, 2022$433,111,355 $1,148,698 
Total$433,111,355 $1,148,698 
The contractual end dates highlight the time remaining until the performance-based fees are scheduled to be earned. The amount of performance-based fees that would be recognized based upon investments results as of June 30, 2022 will increase or decrease based on future client investment results through the end of the contractual period.
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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, such as mutual fund administration, fund accounting, transfer agency, and other related functions. These services are performed concurrently under DHCM's agreement with the Funds, all performance obligations to provide these administrative services are satisfied over time, and the Company recognizes the related revenue as time progresses. Each Fund pays DHCM a fee for performing these services, which is calculated using an annual rate multiplied by the average daily net assets of each respective Fund share class. These fees are thereby constrained and represent variable consideration, and are excluded from revenue until the AUM on which DHCM bills the Funds is no longer subject to market fluctuations.
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. In fulfilling a portion of its role under the administrative and transfer agency services agreement with the Funds, DHCM acts as agent and pays for these services on behalf 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 Funds' management and board of trustees. Each year, the Funds' board of trustees reviews the fee that each Fund pays to DHCM, and specifically considers 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.
Mutual fund administration gross and net revenue are summarized below:
 Three Months Ended 
 June 30,
Six Months Ended 
 June 30,
 2022202120222021
Mutual fund administration:
Administration revenue, gross$6,481,081 $8,103,606 $13,421,253 $15,030,019 
Fund related expense(3,868,132)(4,750,380)(7,830,804)(9,231,463)
Mutual fund administration revenue, net$2,612,949 $3,353,226 $5,590,449 $5,798,556 
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 positions 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740, Income Taxes. The Company records interest and penalties within income tax expense on the income statement. See Note 8.
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 unvested restricted shares. See Note 9.
Recently Adopted Accounting Guidance
The Company did not adopt any new accounting guidance during the three months ended June 30, 2022, that had a material effect on its financial position or results of operations.

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Newly Issued But Not Yet Adopted Accounting Guidance

The Company has considered all newly issued accounting guidance that is applicable to its operations and the preparation of its
consolidated statements, including guidance it has not yet adopted. The Company does not believe that any such guidance had, or will have, a material effect on its financial position or results of operations.
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Note 3 Investments
The following table summarizes the carrying value of the Company's investments as of June 30, 2022, and December 31, 2021:
As of
June 30, 2022December 31, 2021
Fair value investments:
Securities held in Consolidated Funds(a)
$72,048,205 $73,855,204 
Company sponsored investments67,374,521 79,173,437 
Company sponsored equity method investments11,240,582 13,627,360 
Total Investments$150,663,308 $166,656,001 
(a) Of the securities held in the Consolidated Funds as of June 30, 2022, the Company directly held $46.2 million and noncontrolling shareholders held $25.8 million. Of the securities held in the Consolidated Funds as of December 31, 2021, the Company directly held $55.8 million and noncontrolling shareholders held $18.1 million.
The components of net investment income (loss) are as follows:
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Realized gains (losses)$(1,713,218)$1,535,575 $(269,471)$4,059,080 
Change in unrealized(16,769,567)3,756,121 (26,520,423)6,261,465 
Dividends863,575 604,921 1,631,460 1,269,930 
Other(58,663)(19,531)(111,696)(49,935)
Investment income (loss), net$(17,677,873)$5,877,086 $(25,270,130)$11,540,540 
Company Sponsored Equity Method Investments
As of and during the three- and six-month periods ended June 30, 2022, the Company's only equity method investment was DHMF, which commenced operations on June 1, 2021. The Company's ownership percentage in DHMF was 85% as of June 30, 2022, and includes $2.9 million of deferred compensation plan investments.
The following table includes the condensed summary financial information from the Company's equity method investments as of and for the three- and six-month periods ended June 30, 2022:
As of
June 30, 2022
Total assets$13,207,500 
Total liabilities21,075 
Net assets13,186,425 
DHCM's portion of net assets$11,240,582 
For the Three Months EndedFor the Six Months Ended
June 30, 2022June 30, 2022
Investment income$38,092 $75,935 
Expenses17,482 35,149 
Net realized losses (19,569)
Change in unrealized (2,241,515)(3,698,181)
Net loss(2,220,905)(3,676,964)
DHCM's portion of net loss$(1,882,402)$(3,134,123)

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Note 4 Fair Value Measurements
The Company determines the fair value of its cash equivalents and certain investments using the following 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. The Company does not value any investments using Level 3 inputs.
These levels are not necessarily indicative of the risk or liquidity associated with investments.
The following table summarizes investments that are recognized in the Company's consolidated balance sheet using fair value measurements (excluding investments classified as equity method investments) determined based upon the differing levels as of June 30, 2022:
Level 1Level 2Level 3Total
Cash equivalents$54,633,050   $54,633,050 
Fair value investments:
     Securities held in Consolidated Funds(a)
$39,972,007 $32,076,198  $72,048,205 
     Company-sponsored investments$67,374,521   $67,374,521 
(a) Of the securities held in the Consolidated Funds as of June 30, 2022, the Company directly held $46.2 million and noncontrolling shareholders held $25.8 million.
Changes to fair values of the investments are recorded in the Company’s consolidated statements of income as investment income (loss) net.
Note 5 Line of Credit
The Company has a committed Line of Credit Agreement (the "Credit Agreement") with a commercial bank that matures on December 23, 2022, which permits the Company to borrow up to $25.0 million. Borrowings under the Credit Agreement bear interest at a rate equal to the Secured Overnight Financing Rate plus 1.10%. The Company pays a commitment fee on the unused portion of the facility, accruing at a rate per annum of 0.10%.
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 customary representations, warranties, and covenants.
The Company did not borrow under the Credit Agreement during the six months ended June 30, 2022, and no borrowings were outstanding as of June 30, 2022.
Note 6 Compensation Plans
Share-Based Payment Transactions
At the Company's annual shareholder meeting on April 27, 2022, shareholders approved the Diamond Hill Investment Group, Inc. 2022 Equity and Cash Incentive Plan (the "2022 Plan"). The 2022 Plan authorizes the issuance of 300,000 common shares of Company stock in various forms of equity awards. Previously, the Company issued equity awards under the Diamond Hill Investment Group, Inc. 2014 Equity and Cash Incentive Plan (the "2014 Plan"). With the approval of the 2022 Plan, there are no longer any common shares available for issuance under the 2014 Plan, although grants previously made under the 2014 Plan remain issued and outstanding.
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Restricted stock grants represent common shares issued and outstanding upon grant subject to vesting restrictions. The Company has historically issued stock grants that cliff vest after five years to all new employees upon hire and as additional grants to key employees on a periodic basis. While the Company currently plans to continue to issue five-year cliff vest grants to new employees, beginning in 2021, the Company also began making new long-term incentive awards to existing employees in the form of three-year graded vesting stock grants.
Restricted stock grants are valued based upon the fair market value of the common shares on the applicable grant date. The restricted stock grants are recorded as deferred compensation in the equity section of the balance sheet on the grant date and then recognized as compensation expense on a straight-line basis over the vesting period of the respective grant. The Company's policy is to adjust compensation expense for forfeitures as they occur.
The following table represents a roll-forward of outstanding restricted stock and related activity for the six months ended June 30, 2022:
SharesWeighted-Average
Grant Date Price
per Share
Outstanding restricted stock as of December 31, 2021201,170 $165.61 
Grants issued75,764 176.42 
Grants vested(28,197)163.78 
Grants forfeited(1,321)185.09 
Total outstanding restricted stock as of June 30, 2022247,416 $169.02 
As of June 30, 2022, 293,058 common shares remained available for grants under the 2022 Plan.
Total deferred equity compensation related to unvested restricted stock was $23.3 million as of June 30, 2022. The recognition of compensation expense related to deferred compensation over the remaining vesting periods is as follows:
Six Months 
 Remaining In
      
20222023202420252026ThereafterTotal
$5,697,960 $9,574,330 $5,976,136 $1,551,965 $328,299 $121,718 $23,250,408 
Employee Stock Purchase Plan
Under the Diamond Hill Investment Group, Inc. Employee Stock Purchase Plan (the "ESPP"), eligible employees may purchase shares of the Company's common stock at 85% of the fair market value on the last day of each offering period. Each offering period is approximately three months, which coincides with the Company's fiscal quarters. During the six-month period ended June 30, 2022, ESPP participants purchased 2,692 shares of common stock for $0.4 million, and the Company recorded $0.1 million of share-based payment expense related to these purchases. During the six-month period ended June 30, 2021, ESPP participants purchased 3,083 shares of common stock for $0.4 million and the Company recorded $0.1 million of share-based payment expense related to these purchases.
Stock Grant Transactions
The following table represents common shares issued as part of the Company's incentive compensation program during the six-month periods ended June 30, 2022, and 2021:
Shares IssuedGrant Date Value
June 30, 20222,743 $487,870 
June 30, 20213,681 $529,806 
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401(k) Plan
The Company sponsors a 401(k) plan in which all employees are eligible to participate. Employees may contribute a portion of their compensation subject to certain limits based on federal tax laws. The Company matches employee contributions equal to 250.0% of the first 6.0% of an employee’s compensation contributed to the plan. The Company settles the 401(k) plan matching contributions in cash or common shares of the Company based on the election of the employees.
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 (together, the “Plans”). Under the Plans, participants may elect to voluntarily defer, for a minimum of five years, certain incentive compensation that the Company then contributes into the Plans. Participants are responsible for designating investment options for the assets they contribute, and the distribution paid to each participant reflects any gains or losses on the assets realized in connection with 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. Deferred compensation liability was $29.3 million and $37.3 million as of June 30, 2022 and December 31, 2021, respectively.
Note 7 Operating Lease
The Company currently leases office space of approximately 37,829 square feet at a single location.
As of June 30, 2022, the carrying value of this right-of-use asset, which is included in property and equipment, was approximately $1.4 million net of deferred rent on the consolidated balance sheets. As of June 30, 2022, the carrying value of the lease liability was approximately $1.7 million, which is included in accounts payable and accrued expenses on the consolidated balance sheets.
The following table summarizes the total lease and operating expenses for the three- and six-month periods ended June 30, 2022 and 2021:
June 30,
2022
June 30,
2021
Three Months Ended$238,601 $241,190 
Six Months Ended$443,554 $450,232 
The approximate future minimum lease payments under the operating lease are as follows:
Future Minimum Lease Payments
Six Months 
 Remaining In
   
20222023202420252026Total
$312,089 $624,179 $624,179 $156,045 $ $1,716,492 
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Note 8 Income Taxes
The Company has determined its interim tax provision projecting an estimated annual effective tax rate.
A reconciliation of the statutory federal tax rate to the Company’s effective income tax rate is as follows:
Six Months Ended 
 June 30,
20222021
   Statutory U.S. federal income tax rate21.0 %21.0 %
   State and local income taxes, net of federal benefit4.5 %4.5 %
   Internal revenue code section 162 limitations1.5 %0.9 %
   Other(1.8)% %
Unconsolidated effective income tax rate25.2 %26.4 %
   Impact attributable to redeemable noncontrolling interest(a)
7.3 %(0.8)%
Effective income tax rate32.5 %25.6 %
(a) The provision for income taxes includes the impact of the operations of 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 impact attributable to redeemable noncontrolling interest, the estimated unconsolidated effective income tax rate would have been 25.2% for the six months ended June 30, 2022. The Company's actual effective tax rate for fiscal year ending December 31, 2022 could be materially different from the projected rate as of June 30, 2022.
The net temporary differences incurred to date will reverse in future periods as the Company generates taxable earnings. The Company believes that 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 or all of the deferred tax assets will not be realized. As of June 30, 2022 and December 31, 2021, 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 de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  The 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. The Company did not record an accrual for tax-related uncertainties or unrecognized tax positions as of June 30, 2022 or December 31, 2021.
The Company did not recognize any interest and penalties during the six months ended June 30, 2022.
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Note 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. The following table sets forth the computation for basic and diluted EPS:
 Three Months Ended 
 June 30,
Six Months Ended 
 June 30,
 2022202120222021
Net Income $1,215,764 $17,626,538 $9,490,780 $31,889,151 
Less: Net loss (income) attributable to redeemable noncontrolling interest3,197,122 (761,708)4,052,058 (1,315,810)
Net income attributable to common shareholders$4,412,886 $16,864,830 $13,542,838 $30,573,341 
Weighted average number of outstanding shares - Basic3,153,084 3,196,501 3,169,416 3,176,744 
Weighted average number of outstanding shares - Diluted3,153,084 3,196,501 3,169,416 3,176,744 
Earnings per share attributable to common shareholders
Basic$1.40 $5.28 $4.27 $9.62 
Diluted$1.40 $5.28 $4.27 $9.62 
Note 10 Commitments and Contingencies
The Company indemnifies its directors, officers, and certain employees for certain liabilities that may arise from the performance of their duties to the Company. From time to time, the Company may be 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 that provide general 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 of these liabilities.

Note 11 Sale of Diamond Hill's High Yield-Focused Advisory Contracts
DHCM entered into an asset purchase agreement dated February 2, 2021 (the “Purchase Agreement”) with Brandywine Global Investment Management, LLC (“Brandywine Global”), a specialist investment manager of Franklin Resources, Inc. The transaction closed on July 30, 2021, at which time Brandywine Global acquired the investment advisory contracts (the “High Yield-Focused Advisory Contracts”) of DHCM’s two high yield-focused mutual funds - the Corporate Credit Fund and the High Yield Fund. After the closing, the Corporate Credit Fund and the High Yield Fund were renamed as the BrandywineGLOBAL Corporate Credit Fund and the BrandywineGLOBAL High Yield Fund (the “High Yield-Focused Funds”).
DHCM determined the gain on this transaction in accordance with ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets. DHCM received an initial cash payment at closing of $9.0 million, which was included in gain on sale of high yield-focused advisory contracts in the Consolidated Statements of Income during the third quarter of 2021.
Under the terms of the Purchase Agreement, DHCM may receive two additional payments of up to $13.0 million in the aggregate based on the net revenue of the High Yield-Focused Funds on July 30, 2022. Based on the net revenue of the High Yield-Focused Funds as of June 30, 2022, the Company would receive a payment of approximately $5.7 million. The Company has not recorded a gain as of June 30, 2022 for the potential additional payment because this variable consideration is constrained based on movements in the financial markets and the net shareholder flows of the High Yield-Focused Funds through July 30, 2022. Therefore, there can be no reasonable assurance that any additional payment will be received by DHCM.
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Note 12 Subsequent Events
On July 28, 2022, the Company's board of directors ("Board") approved a quarterly cash dividend of $1.50 per share, payable on September 16, 2022, to shareholders of record as of September 1, 2022. This dividend is expected to reduce shareholders' equity by approximately $4.6 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 the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), relating to such matters as anticipated operating results, AUM prospects and levels, 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 the Company believes that the assumptions underlying its forward-looking statements are reasonable, investors are cautioned that any of the assumptions could prove to be inaccurate and, accordingly, actual results and experiences could differ materially from the anticipated results or other expectations expressed in the 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: (i) any reduction in the Company's AUM; (ii) withdrawal, renegotiation, or termination of DHCM's investment advisory agreements; (iii) damage to the Company's reputation; (iv) failure to comply with investment guidelines or other contractual requirements; (v) challenges from the competition the Company faces in its business; (vi) adverse regulatory and legal developments; (vii) unfavorable changes in tax laws or limitations; (viii) interruptions in or failure to provide critical technological service by the Company or third parties; (ix) adverse civil litigation and government investigations or proceedings; (x) risk of loss on the Company's investments; (xi) lack of sufficient capital on satisfactory terms; (xii) losses or costs not covered by insurance; (xiii) impairment of goodwill or intangible assets; (xiv) a decline in the performance of the Company's products; (xv) changes in interest rates; (xvi) changes in national and local economic and political conditions; (xvii) the continuing economic uncertainty in various parts of the world; (xviii) the after-effects of the COVID-19 pandemic; (xix) political uncertainty caused by, among other things, political parties, economic nationalist sentiments, tensions surrounding the current socioeconomic landscape, and other risks identified from time-to-time in other public documents the Company files with the SEC.
General
The Company derives consolidated revenue and net income from investment advisory and fund administration services provided by DHCM. DHCM is a registered investment adviser under the Investment Advisers Act of 1940, as amended. DHCM sponsors, distributes, and provides investment advisory and related services to clients through pooled investment vehicles, including the Funds, DHMF, separately managed accounts, and model delivery programs.
DHCM is committed to generating excellent, long-term investment outcomes and building enduring client partnerships. By committing to shared investment principles, including valuation-disciplined active portfolio management, fundamental bottom-up research, and a long-term business owner mindset, DHCM has created a suite of investment strategies designed for long-term strategic allocations from institutionally-oriented investors. DHCM’s core values of curiosity, ownership, trust, and respect create an environment where investment professionals focus on results and all teammates focus on the overall client experience. The combination of these investment principles and core values creates an aligned boutique model ensuring the Company's associates have a vested interest in the Company's clients’ success. This alignment with clients is emphasized through: (i) personal investment by Company employees in the strategies managed, (ii) a fee philosophy focused on a fair sharing of the economics among clients, employees, and shareholders, (iii) a strict adherence to capacity discipline ensuring the ability to add value for existing clients, and (iv) compensation driven by the value created for clients.
The Company's primary objective is to fulfill its fiduciary duty to its clients. The Company believes this focus on generating excellent, long-term investment outcomes and building enduring client partnerships will enable it to grow its intrinsic value to achieve a compelling, long-term return for its shareholders.
Assets Under Management
The Company derives revenue primarily from DHCM's investment advisory and administration fees. Investment advisory and administration fees paid to DHCM are generally based on the value of the investment portfolios it manages and fluctuate with changes in the total value of its AUM. The Company, through DHCM, recognizes revenue when it satisfies its performance obligations under the terms of a contract with a client.
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The Company's revenues are highly dependent on both the value and composition of AUM. The following is a summary of the Company's AUM by product and investment objective, as well as a roll-forward of the change in AUM, for the three- and six-month periods ended June 30, 2022 and 2021:
Assets Under Management
As of June 30,
(in millions, except percentages)20222021% Change
Proprietary funds$16,494 $22,004 (25)%
Sub-advised funds3,137 3,651 (14)%
Separately managed accounts6,158 6,705 (8)%
Total AUM$25,789 $32,360 (20)%
Assets Under Management
by Investment Strategy
As of June 30,
(in millions, except percentages)20222021% Change
U.S. Equity