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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 September 30, 2021
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

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 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 26, 2021 is 3,171,695 shares.
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

1

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 | 20
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 33
Item 4. | Controls and Procedures | 33
Part II: OTHER INFORMATION | 33
Item 1. | Legal Proceedings | 33
Item 1A. | Risk Factors | 33
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33
Item 3. | Defaults Upon Senior Securities | 34
Item 4. | Mine Safety Disclosures | 34
Item 5. | Other Information | 34
Item 6. | Exhibits | 36
Signatures | 37

2

Table of Contents

PART I: | FINANCIAL INFORMATION

ITEM 1: | Consolidated Financial Statements

Diamond Hill Investment Group, Inc.
Consolidated Balance Sheets

| 9/30/2021 |  | 12/31/2020
| (Unaudited) |  |
ASSETS |  |  |
Cash and cash equivalents | $ | 98,580,247 |  |  | $ | 98,478,202 |
Investments | 167,692,971 |  |  | 128,401,136 |
Accounts receivable | 33,233,682 |  |  | 17,805,864 |
Prepaid expenses | 2,661,426 |  |  | 2,977,759 |
Income taxes receivable | — |  |  | 256,538 |
Property and equipment, net of accumulated depreciation | 6,492,621 |  |  | 6,740,396 |
Deferred taxes | 8,083,072 |  |  | 8,437,446 |
Total assets | $ | 316,744,019 |  |  | $ | 263,097,341 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |
Liabilities |  |  |
Accounts payable and accrued expenses | $ | 10,572,810 |  |  | $ | 8,002,303 |
Accrued incentive compensation | 28,830,744 |  |  | 28,400,000 |
Income taxes payable | 1,032,435 |  |  | — |
Deferred compensation | 34,883,646 |  |  | 33,241,952 |
Total liabilities | 75,319,635 |  |  | 69,644,255 |
Redeemable noncontrolling interest | 13,367,474 |  |  | 9,372,333 |
Permanent Shareholders’ equity |  |  |
Common stock, no par value: 7,000,000 shares authorized; 3,172,252 issued and outstanding at September 30, 2021 (inclusive of 202,630 unvested shares); 3,168,823 issued and outstanding at December 31, 2020 (inclusive of 183,718 unvested shares) | 80,555,674 |  |  | 80,810,946 |
Preferred stock, undesignated, 1,000,000 shares authorized and unissued | — |  |  | — |
Deferred equity compensation | (17,188,383) |  |  | (14,748,118) |
Retained earnings | 164,689,619 |  |  | 118,017,925 |
Total permanent shareholders’ equity | 228,056,910 |  |  | 184,080,753 |
Total liabilities and shareholders’ equity | $ | 316,744,019 |  |  | $ | 263,097,341 |
Book value per share | $ | 71.89 |  |  | $ | 58.09 |

The accompanying notes are an integral part of these consolidated financial statements.
3

Table of Contents
Diamond Hill Investment Group, Inc.
Consolidated Statements of Income (unaudited)

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
REVENUES: |  |  |  |  |  |  |
Investment advisory | $ | 51,848,379 |  |  | $ | 29,362,652 |  |  | $ | 130,133,909 |  |  | $ | 86,219,325 |
Mutual fund administration, net | 3,206,175 |  |  | 1,813,103 |  |  | 9,004,731 |  |  | 5,131,104 |
Total revenue | 55,054,554 |  |  | 31,175,755 |  |  | 139,138,640 |  |  | 91,350,429 |
OPERATING EXPENSES: |  |  |  |  |  |  |
Compensation and related costs, excluding deferred compensation expense (benefit) | 20,432,734 |  |  | 13,704,075 |  |  | 56,187,709 |  |  | 41,679,020 |
Deferred compensation expense (benefit) | 3,305 |  |  | 1,961,361 |  |  | 4,617,505 |  |  | (2,368,980) |
General and administrative | 3,637,166 |  |  | 3,096,115 |  |  | 10,323,809 |  |  | 7,924,624 |
Sales and marketing | 1,766,943 |  |  | 1,581,142 |  |  | 5,671,825 |  |  | 4,185,606 |
Mutual fund administration | 893,417 |  |  | 863,463 |  |  | 2,717,807 |  |  | 2,467,732 |
Total operating expenses | 26,733,565 |  |  | 21,206,156 |  |  | 79,518,655 |  |  | 53,888,002 |
NET OPERATING INCOME | 28,320,989 |  |  | 9,969,599 |  |  | 59,619,985 |  |  | 37,462,427 |
Investment income (loss), net | (2,629,589) |  |  | 5,052,794 |  |  | 8,910,951 |  |  | (5,782,674) |
Gain on sale of high yield-focused advisory contracts | 9,000,000 |  |  | — |  |  | 9,000,000 |  |  | — |
NET INCOME BEFORE TAXES | 34,691,400 |  |  | 15,022,393 |  |  | 77,530,936 |  |  | 31,679,753 |
Income tax expense | (9,815,605) |  |  | (3,881,810) |  |  | (20,765,990) |  |  | (9,429,059) |
NET INCOME | 24,875,795 |  |  | 11,140,583 |  |  | 56,764,946 |  |  | 22,250,694 |
Net loss (income) attributable to redeemable noncontrolling interest | 751,850 |  |  | (575,068) |  |  | (563,960) |  |  | 2,045,619 |
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 25,627,645 |  |  | $ | 10,565,515 |  |  | $ | 56,200,986 |  |  | $ | 24,296,313 |
Earnings per share attributable to common shareholders |  |  |  |  |  |  |
Basic | $ | 8.03 |  |  | $ | 3.30 |  |  | $ | 17.66 |  |  | $ | 7.52 |
Diluted | $ | 8.03 |  |  | $ | 3.30 |  |  | $ | 17.66 |  |  | $ | 7.52 |
Weighted average shares outstanding |  |  |  |  |  |  |
Basic | 3,192,535 |  |  | 3,200,957 |  |  | 3,182,065 |  |  | 3,231,452 |
Diluted | 3,192,535 |  |  | 3,200,957 |  |  | 3,182,065 |  |  | 3,231,452 |

The accompanying notes are an integral part of these consolidated financial statements.
4

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

| Three Months Ended September 30, 2021
| Shares Outstanding |  | Common Stock |  | Deferred Equity Compensation |  | Retained Earnings |  | Total |  | Redeemable Noncontrolling Interest
Balance at June 30, 2021 | 3,208,022 |  |  | $ | 86,888,594 |  |  | $ | (19,229,825) |  |  | $ | 142,247,766 |  |  | $ | 209,906,535 |  |  | $ | 14,219,856 |
Issuance of restricted stock grants | 812 |  |  | 142,636 |  |  | (142,636) |  |  | — |  |  | — |  |  | — |
Amortization of restricted stock grants | — |  |  | — |  |  | 2,058,064 |  |  | — |  |  | 2,058,064 |  |  | — |
Issuance of common stock related to 401(k) plan match | 68 |  |  | 11,542 |  |  | — |  |  | — |  |  | 11,542 |  |  | — |
Issuance of common stock related to employee stock purchase plan | 485 |  |  | 85,195 |  |  | — |  |  | — |  |  | 85,195 |  |  | — |
Shares withheld related to employee tax withholding | (4,967) |  |  | (831,029) |  |  | — |  |  | — |  |  | (831,029) |  |  | — |
Forfeiture of restricted stock grants | (700) |  |  | (126,014) |  |  | 126,014 |  |  | — |  |  | — |  |  | — |
Repurchase of common stock | (31,468) |  |  | (5,615,250) |  |  | — |  |  | — |  |  | (5,615,250) |  |  | — |
Cash dividends paid | — |  |  | — |  |  | — |  |  | (3,185,792) |  |  | (3,185,792) |  |  | — |
Net income (loss) | — |  |  | — |  |  | — |  |  | 25,627,645 |  |  | 25,627,645 |  |  | (751,850) |
Net redemptions of consolidated funds | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (100,532) |
Balance at September 30, 2021 | 3,172,252 |  |  | $ | 80,555,674 |  |  | $ | (17,188,383) |  |  | $ | 164,689,619 |  |  | $ | 228,056,910 |  |  | $ | 13,367,474 |
| Three Months Ended September 30, 2020
| Shares Outstanding |  | Common Stock |  | Deferred Equity Compensation |  | Retained Earnings |  | Total |  | Redeemable Noncontrolling Interest
Balance at June 30, 2020 | 3,212,924 |  |  | $ | 86,189,846 |  |  | $ | (17,103,472) |  |  | $ | 131,064,892 |  |  | $ | 200,151,266 |  |  | $ | 9,571,722 |
Issuance of restricted stock grants | 1,884 |  |  | 237,987 |  |  | (237,987) |  |  | — |  |  | — |  |  | — |
Amortization of restricted stock grants | — |  |  | — |  |  | 1,447,155 |  |  | — |  |  | 1,447,155 |  |  | — |
Issuance of common stock related to 401(k) plan match | 5,323 |  |  | 645,349 |  |  | — |  |  | — |  |  | 645,349 |  |  | — |
Shares withheld related to employee tax withholding | (803) |  |  | (91,277) |  |  | — |  |  | — |  |  | (91,277) |  |  | — |
Forfeiture of restricted stock grants | (800) |  |  | (158,718) |  |  | 158,718 |  |  | — |  |  | — |  |  | — |
Repurchase of common stock | (53,735) |  |  | (6,662,509) |  |  | — |  |  | — |  |  | (6,662,509) |  |  | — |
Net income | — |  |  | — |  |  | — |  |  | 10,565,515 |  |  | 10,565,515 |  |  | 575,068 |
Net redemptions of consolidated funds | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (2,110,673) |
Balance at September 30, 2020 | 3,164,793 |  |  | $ | 80,160,678 |  |  | $ | (15,735,586) |  |  | $ | 141,630,407 |  |  | $ | 206,055,499 |  |  | $ | 8,036,117 |

The accompanying notes are an integral part of these consolidated financial statements.
5

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

| Nine Months Ended September 30, 2021
| Shares Outstanding |  | Common Stock |  | Deferred Equity Compensation |  | Retained Earnings |  | Total |  | Redeemable Noncontrolling Interest
Balance at December 31, 2020 | 3,168,823 |  |  | $ | 80,810,946 |  |  | $ | (14,748,118) |  |  | $ | 118,017,925 |  |  | $ | 184,080,753 |  |  | $ | 9,372,333 |
Issuance of restricted stock grants | 68,589 |  |  | 10,854,951 |  |  | (10,854,951) |  |  | — |  |  | — |  |  | — |
Amortization of restricted stock grants | — |  |  | — |  |  | 5,167,059 |  |  | — |  |  | 5,167,059 |  |  | — |
Common stock issued as incentive compensation | 3,681 |  |  | 529,806 |  |  | — |  |  | — |  |  | 529,806 |  |  | — |
Issuance of common stock related to 401k plan match | 364 |  |  | 59,542 |  |  | — |  |  | — |  |  | 59,542 |  |  | — |
Issuance of common stock related to employee stock purchase plan | 3,568 |  |  | 610,569 |  |  | — |  |  | — |  |  | 610,569 |  |  | — |
Shares withheld related to employee tax withholding | (9,449) |  |  | (1,518,612) |  |  | — |  |  | — |  |  | (1,518,612) |  |  | — |
Forfeiture of restricted stock grants | (19,097) |  |  | (3,247,627) |  |  | 3,247,627 |  |  | — |  |  | — |  |  | — |
Repurchase of common stock | (44,227) |  |  | (7,543,901) |  |  | — |  |  | — |  |  | (7,543,901) |  |  | — |
Cash dividends paid | — |  |  | — |  |  | — |  |  | (9,529,292) |  |  | (9,529,292) |  |  | — |
Net income | — |  |  | — |  |  | — |  |  | 56,200,986 |  |  | 56,200,986 |  |  | 563,960 |
Net subscriptions of consolidated Funds | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 3,431,181 |
Balance at September 30, 2021 | 3,172,252 |  |  | $ | 80,555,674 |  |  | $ | (17,188,383) |  |  | $ | 164,689,619 |  |  | $ | 228,056,910 |  |  | $ | 13,367,474 |
| Nine Months Ended September 30, 2020
| Shares Outstanding |  | Common Stock |  | Deferred Equity Compensation |  | Retained Earnings |  | Total |  | Redeemable Noncontrolling Interest
Balance at December 31, 2019 | 3,294,672 |  |  | $ | 95,853,477 |  |  | $ | (20,331,890) |  |  | $ | 117,334,094 |  |  | $ | 192,855,681 |  |  | $ | 14,178,824 |
Issuance of restricted stock grants | 18,749 |  |  | 2,048,386 |  |  | (2,048,386) |  |  | — |  |  | — |  |  | — |
Amortization of restricted stock grants | — |  |  | — |  |  | 3,793,978 |  |  | — |  |  | 3,793,978 |  |  | — |
Common stock issued as incentive compensation | 23,640 |  |  | 3,396,359 |  |  | — |  |  | — |  |  | 3,396,359 |  |  | — |
Issuance of common stock related to 401k plan match | 17,042 |  |  | 1,934,457 |  |  | — |  |  | — |  |  | 1,934,457 |  |  | — |
Shares withheld related to employee tax withholding | (16,235) |  |  | (1,574,307) |  |  | — |  |  | — |  |  | (1,574,307) |  |  | — |
Forfeiture of restricted stock grants | (15,325) |  |  | (2,850,712) |  |  | 2,850,712 |  |  | — |  |  | — |  |  | — |
Repurchase of common stock | (157,750) |  |  | (18,646,982) |  |  | — |  |  | — |  |  | (18,646,982) |  |  | — |
Net income (loss) | — |  |  | — |  |  | — |  |  | 24,296,313 |  |  | 24,296,313 |  |  | (2,045,619) |
Net redemptions of consolidated Funds | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (4,097,088) |
Balance at September 30, 2020 | 3,164,793 |  |  | $ | 80,160,678 |  |  | $ | (15,735,586) |  |  | $ | 141,630,407 |  |  | $ | 206,055,499 |  |  | $ | 8,036,117 |

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,
| 2021 |  | 2020
CASH FLOWS FROM OPERATING ACTIVITIES: |  |  |
Net Income | $ | 56,764,946 |  |  | $ | 22,250,694 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Depreciation | 930,990 |  |  | 750,524 |
Share-based compensation | 5,351,120 |  |  | 5,728,435 |
Decrease (increase) in accounts receivable | (15,427,818) |  |  | 2,352,406 |
Change in current income taxes | 1,288,973 |  |  | 3,016,015 |
Change in deferred income taxes | 354,374 |  |  | 713,277 |
Gain on sale of high yield-focused advisory contracts | (9,000,000) |  |  | — |
Net (gains) losses on investments | (7,612,174) |  |  | 7,542,988 |
Net change in securities held by Consolidated Funds | (23,532,392) |  |  | 3,033,304 |
Increase (decrease) in accrued incentive compensation | 960,550 |  |  | (3,983,248) |
Increase (decrease) in deferred compensation | 1,641,694 |  |  | (1,688,130) |
Other changes in assets and liabilities | 3,599,730 |  |  | (1,514,223) |
Net cash provided by operating activities | 15,319,993 |  |  | 38,202,042 |
CASH FLOWS FROM INVESTING ACTIVITIES: |  |  |
Purchase of property and equipment | (1,029,550) |  |  | (1,733,656) |
Purchase of Company sponsored investments | (17,011,517) |  |  | (12,353,841) |
Proceeds from sale of Company sponsored investments | 8,497,693 |  |  | 24,781,251 |
Proceeds from sale of high yield-focused advisory contracts | 9,000,000 |  |  | — |
Net cash provided by (used in) investing activities | (543,374) |  |  | 10,693,754 |
CASH FLOWS FROM FINANCING ACTIVITIES: |  |  |
Value of shares withheld related to employee tax withholding | (1,518,612) |  |  | (1,574,307) |
Payment of dividends | (9,529,292) |  |  | — |
Net subscriptions (redemptions) received from redeemable noncontrolling interest holders | 3,431,181 |  |  | (4,097,088) |
Repurchase of common stock | (7,543,901) |  |  | (18,646,982) |
Proceeds received under employee stock purchase plan | 486,050 |  |  | — |
Net cash used in financing activities | (14,674,574) |  |  | (24,318,377) |
CASH AND CASH EQUIVALENTS |  |  |
Net change during the period | 102,045 |  |  | 24,577,419 |
At beginning of period | 98,478,202 |  |  | 93,176,253 |
At end of period | $ | 98,580,247 |  |  | $ | 117,753,672 |
Supplemental cash flow information: |  |  |
Income taxes paid | $ | 19,122,643 |  |  | $ | 5,699,767 |
Supplemental disclosure of non-cash transactions: |  |  |
Common stock issued as incentive compensation | $ | 529,806 |  |  | $ | 3,396,359 |
Charitable donation of corporate investments | $ | 366,555 |  |  | — |

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 consolidated revenue 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 and administrator for the Diamond Hill Funds (the "Funds"), a series of open-end mutual funds. DHCM also provides investment advisory services to a private investment fund, separately managed accounts, and other mutual funds.
Note 2 Significant Accounting Policies
Basis of Presentation
The accompanying unaudited, condensed, consolidated financial statements as of September 30, 2021 and December 31, 2020, and for the three- and nine-month periods ended September 30, 2021 and 2020, 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"), with the instructions to Form 10-Q, and with 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 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, 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, 2020 (the "2020 Form 10-K"), as filed with the SEC.
Operating results for the three- and nine-month periods ended September 30, 2021 are not necessarily indicative of the results the Company may expect for the full fiscal year ending December 31, 2021.
For further information regarding the risks to the Company's business, refer to the consolidated financial statements and notes thereto included in the 2020 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 and 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 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 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").
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,
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the Funds are consolidated if Company ownership, directly or indirectly, represents a majority interest (greater than 50%). The Company records redeemable noncontrolling interest in consolidated investments for which the Company's ownership is less than 100%. The Company has consolidated the Diamond Hill Large Cap Concentrated Fund, the Diamond Hill International Fund, and the Diamond Hill Global Fund (collectively, the "Consolidated Funds") as of September 30, 2021.
DHCM is the investment manager of Diamond Hill Micro Cap Fund, LP (“DHMF”), a Delaware limited partnership, 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 one business segment, which is providing investment management and administration services to mutual funds, separately managed accounts, sub-advised funds, and a private fund. 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 September 30, 2021, or December 31, 2020. Accounts receivable from the Funds were $11.2 million as of September 30, 2021, and $10.5 million as of December 31, 2020.
Investments
Management determines the appropriate classification of its investments at the time of purchase and re-evaluates its determination for each reporting period.
Investments in the Funds that DHCM advises, 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.
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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 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.
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 September 30, 2021 and 2020 under contracts with clients include:

| Three Months Ended September 30, 2021
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 28,605,297 |  |  | $ | 3,206,175 |  |  | $ | 31,811,472 |
Sub-advised funds and separately managed accounts (including $11.9 million of performance-based fees) | 23,243,082 |  |  | — |  |  | 23,243,082 |
| $ | 51,848,379 |  |  | $ | 3,206,175 |  |  | $ | 55,054,554 |

| Three Months Ended September 30, 2020
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 21,435,758 |  |  | $ | 1,813,103 |  |  | $ | 23,248,861 |
Sub-advised funds and separately managed accounts | 7,926,894 |  |  | — |  |  | 7,926,894 |
| $ | 29,362,652 |  |  | $ | 1,813,103 |  |  | $ | 31,175,755 |

Revenue earned during the nine months ended September 30, 2021 and 2020 under contracts with clients include:

| Nine Months Ended September 30, 2021
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 85,568,472 |  |  | $ | 9,004,731 |  |  | $ | 94,573,203 |
Sub-advised funds and separately managed accounts (including $11.9 million of performance-based fees) | 44,565,437 |  |  | — |  |  | 44,565,437 |
| $ | 130,133,909 |  |  | $ | 9,004,731 |  |  | $ | 139,138,640 |

| Nine Months Ended September 30, 2020
| Investment advisory |  | Mutual fund administration, net |  | Total revenue
Proprietary funds | $ | 64,613,063 |  |  | $ | 5,131,104 |  |  | $ | 69,744,167 |
Sub-advised funds and separately managed accounts | 21,606,262 |  |  | — |  |  | 21,606,262 |
| $ | 86,219,325 |  |  | $ | 5,131,104 |  |  | $ | 91,350,429 |

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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 performance obligations to provide investment advisory services are satisfied over time by DHCM and the Company recognizes revenue through DHCM as time passes.
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 portfolio and related services to sponsors of model delivery programs. DHCM is paid a model delivery fee for its services by the program sponsor at a pre-determined rate based on the amount of assets in the program. Model delivery program revenues were $1.4 million and $0.7 million for the three months ended September 30, 2021 and 2020, respectively, and $3.5 million and $1.9 million for the nine months ended September 30, 2021 and 2020, respectively. Model delivery program revenue is included in investment advisory fees in the consolidated statements of income.
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 recorded $11.9 million of performance-based fees during the three- and nine-month periods ended September 30, 2021 as a significant performance-based agreement reached its first five-year measurement term on September 30, 2021. The Company did not record any performance-based fees during either of the three- and nine-month periods ended September 30, 2020. The table below shows AUM subject to performance-based fees and the amount of unearned performance-based fees that would be recognized based upon investment results as of September 30, 2021:

| As of September 30, 2021
| AUM subject to performance-based fees |  | Unearned performance-based fees
Contractual Measurement Period Ending: |  |  |
Quarter Ending September 30, 2022 | $ | 390,974,947 |  |  | $ | — |
Total | $ | 390,974,947 |  |  | $ | — |

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 September 30, 2021, will increase or decrease based on future client investment results through the end of the contractual period.
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 they are excluded from revenue until the AUM on which DHCM bills 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. In fulfilling a portion of its role under the administration 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 management and board of trustees of the Funds. 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. In addition, prior to Funds' elimination of Class C Shares, DHCM advanced the upfront commissions that were paid to brokers who sold those Class C shares. These advances were capitalized and amortized over 12 months to correspond with the repayments DHCM received from the principal underwriter to recoup this commission advancement. During the first quarter of 2021, Class C shares were liquidated with the proceeds transferring to Investor Class shares. As a result, no financing activity will be recognized in future periods.
Mutual fund administration gross and net revenue are summarized below:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Mutual fund administration: |  |  |  |  |  |  |
Administration revenue, gross | $ | 7,436,287 |  |  | $ | 5,571,022 |  |  | $ | 22,466,306 |  |  | $ | 16,144,295 |
Fund related expense | (4,230,112) |  |  | (3,766,667) |  |  | (13,446,649) |  |  | (11,028,882) |
Revenue, net of related expenses | 3,206,175 |  |  | 1,804,355 |  |  | 9,019,657 |  |  | 5,115,413 |
C-Share financing: |  |  |  |  |  |  |
Broker commission advance repayments | — |  |  | 60,634 |  |  | 33,595 |  |  | 190,993 |
Broker commission amortization | — |  |  | (51,886) |  |  | (48,521) |  |  | (175,302) |
Financing activity, net | — |  |  | 8,748 |  |  | (14,926) |  |  | 15,691 |
Mutual fund administration revenue, net | $ | 3,206,175 |  |  | $ | 1,813,103 |  |  | $ | 9,004,731 |  |  | $ | 5,131,104 |

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.
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Note 3 Investments
The following table summarizes the carrying value of the Company's investments as of September 30, 2021 and December 31, 2020:

| As of
| September 30, 2021 |  | December 31, 2020
Fair value investments: |  |  |
Securities held in Consolidated Funds(a) | $ | 59,329,410 |  |  | $ | 33,233,307 |
Company sponsored investments | 96,127,928 |  |  | 95,167,829 |
Company sponsored equity method investments | 12,235,633 |  |  | — |
Total Investments | $ | 167,692,971 |  |  | $ | 128,401,136 |

(a) Of the securities held in the Consolidated Funds as of September 30, 2021, the Company directly held $45.2 million and noncontrolling shareholders held $14.1 million. Of the securities held in the Consolidated Funds as of December 31, 2020, the Company directly held $23.6 million and noncontrolling shareholders held $9.6 million.
The components of net investment income (loss) are as follows:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Realized gains (losses) | $ | 1,185,429 |  |  | $ | 512,265 |  |  | $ | 5,244,509 |  |  | $ | (1,231,163) |
Unrealized gains (losses) | (4,689,325) |  |  | 4,040,917 |  |  | 1,572,140 |  |  | (6,478,411) |
Dividends | 971,107 |  |  | 518,472 |  |  | 2,241,037 |  |  | 1,983,423 |
Other | (96,800) |  |  | (18,860) |  |  | (146,735) |  |  | (56,523) |
Investment income (loss), net | $ | (2,629,589) |  |  | $ | 5,052,794 |  |  | $ | 8,910,951 |  |  | $ | (5,782,674) |

Company Sponsored Equity Method Investments
During the three- and nine-month periods ended September 30, 2021, the Company's only equity method investment was DHMF, and the Company's ownership percentage in DHMF was 89% as of September 30, 2021. DHMF commenced operations on June 1, 2021.
The following table includes the condensed summary financial information from the Company's equity method investments as of and for the three- and nine-month periods ended September 30, 2021:

|  |  | As of
|  |  | September 30, 2021
Total assets |  |  | $ | 14,189,835 |
Total liabilities |  |  | 423,056 |
Net assets |  |  | 13,766,779 |
DHCM's portion of net assets |  |  | $ | 12,235,633 |
| For the Three Months Ended |  | For the Nine Months Ended
| September 30, 2021 |  | September 30, 2021
Investment income | $ | 54,530 |  |  | $ | 60,130 |
Expenses | 5,486 |  |  | 14,343 |
Net unrealized loss | (473,618) |  |  | (591,514) |
Net loss | (424,574) |  |  | (545,727) |
DHCM's portion of net loss | $ | (380,062) |  |  | $ | (476,872) |

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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 September 30, 2021:

| Level 1 | Level 2 | Level 3 | Total
Cash equivalents | $ | 95,578,124 |  | $ | — |  | $ | — |  | $ | 95,578,124 |
Fair value investments: |  |  |  |
Securities held in Consolidated Funds(a) | $ | 37,441,497 |  | $ | 21,887,913 |  | — |  | $ | 59,329,410 |
Company-sponsored investments | $ | 96,127,928 |  | $ | — |  | $ | — |  | $ | 96,127,928 |

(a) Of the securities held in the Consolidated Funds as of September 30, 2021, the Company directly held $45.2 million and noncontrolling shareholders held $14.1 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 24, 2021, which permits the Company to borrow up to $25.0 million. Borrowings under the Credit Agreement bear interest at a rate equal to LIBOR plus 1.00%. 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 for the period ended September 30, 2021, and no borrowings were outstanding as of September 30, 2021.
Note 6 Compensation Plans
Share-Based Payment Transactions
The Company issues restricted stock grants under the 2014 Equity and Cash Incentive Plan (the "2014 Plan"). 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 issued under the 2014 Plan 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.
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The following table represents a roll-forward of outstanding restricted stock and related activity for the nine months ended September 30, 2021:

| Shares |  | Weighted-Average Grant Date Price per Share
Outstanding restricted stock as of December 31, 2020 | 183,718 |  |  | $ | 173.80 |
Grants issued | 68,589 |  |  | 158.26 |
Grants vested | (30,580) |  |  | 180.22 |
Grants forfeited | (19,097) |  |  | 170.06 |
Total outstanding restricted stock as of September 30, 2021 | 202,630 |  |  | $ | 165.76 |

As of September 30, 2021, 178,933 common shares remained available for grants under the 2014 Plan.
Total deferred equity compensation related to unvested restricted stock was $17.2 million as of September 30, 2021. The recognition of compensation expense related to deferred compensation over the remaining vesting periods is as follows:

Three Months Remaining In |  |  |  |  |  |  |  |  |  |  |  |
2021 |  | 2022 |  | 2023 |  | 2024 |  | 2025 |  | Thereafter |  | Total
$ | 2,122,796 |  |  | $ | 7,350,636 |  |  | $ | 5,425,275 |  |  | $ | 1,917,736 |  |  | $ | 340,773 |  |  | $ | 31,167 |  |  | $ | 17,188,383 |

Employee Stock Purchase Plan
The Company adopted the Diamond Hill Investment Group, Inc. Employee Stock Purchase Plan (the "ESPP") effective October 27, 2020. Under 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 nine-month period ended September 30, 2021, ESPP participants purchased 3,568 shares of common stock for $0.5 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 nine-month period ended September 30, 2021, and 2020:

| Shares Issued |  | Grant Date Value
September 30, 2021 | 3,681 |  |  | $ | 529,806 |
September 30, 2020 | 23,640 |  |  | $ | 3,396,359 |

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. Since January 1, 2021, the Company has settled the 401(k) plan matching contributions in cash or common shares of the Company based on the election of the employees. Prior to January 1, 2021, the Company made all matching contributions in common shares of the Company.
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 $34.9 million and $33.2 million as of September 30, 2021 and December 31, 2020, respectively.
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Note 7 Operating Lease
The Company currently leases office space of approximately 37,829 square feet at one location.
As of September 30, 2021, the carrying value of this right-of-use asset, which is included in property and equipment, was approximately $1.7 million net of deferred rent on the consolidated balance sheets. As of September 30, 2021, the carrying value of the lease liability was approximately $2.1 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 nine-month periods ended September 30, 2021 and 2020:

| September 30, 2021 |  | September 30, 2020
Three Months Ended | $ | 241,200 |  |  | $ | 241,050 |
Nine Months Ended | $ | 691,432 |  |  | $ | 706,538 |

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

Future Minimum Lease Payments
Three Months Remaining In |  |  |  |  |  |  |  |  |  |  |  |
2021 |  | 2022 |  | 2023 |  | 2024 |  | 2025 |  |  |  | Total
$ | 156,045 |  |  | $ | 624,179 |  |  | $ | 624,179 |  |  | $ | 624,179 |  |  | $ | 156,045 |  |  |  |  | $ | 2,184,627 |

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:

| Nine Months Ended September 30,
| 2021 |  | 2020
Statutory U.S. federal income tax rate | 21.0 | % |  | 21.0 | %
State and local income taxes, net of federal benefit | 5.2 | % |  | 4.3 | %
Internal revenue code section 162 limitations | 0.7 | % |  | 1.3 | %
Other | 0.1 | % |  | 1.4 | %
Unconsolidated effective income tax rate | 27.0 | % |  | 28.0 | %
Impact attributable to redeemable noncontrolling interest(a) | (0.2) | % |  | 1.8 | %
Effective income tax rate | 26.8 | % |  | 29.8 | %

(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 27.0%. The Company's actual effective tax rate for fiscal year ending December 31, 2021 could be materially different from the projected rate as of September 30, 2021.
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 portion or all of the deferred tax assets will not be realized. As of September 30, 2021 and December 31, 2020, no valuation allowance was deemed necessary.
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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 September 30, 2021 or December 31, 2020.
The Company did not recognize any interest and penalties during the nine months ended September 30, 2021.
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 September 30, |  | Nine Months Ended September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Net Income | $ | 24,875,795 |  |  | $ | 11,140,583 |  |  | $ | 56,764,946 |  |  | $ | 22,250,694 |
Less: Net loss (income) attributable to redeemable noncontrolling interest | 751,850 |  |  | (575,068) |  |  | (563,960) |  |  | 2,045,619 |
Net income attributable to common shareholders | $ | 25,627,645 |  |  | $ | 10,565,515 |  |  | $ | 56,200,986 |  |  | $ | 24,296,313 |
Weighted average number of outstanding shares - Basic | 3,192,535 |  |  | 3,200,957 |  |  | 3,182,065 |  |  | 3,231,452 |
Weighted average number of outstanding shares - Diluted | 3,192,535 |  |  | 3,200,957 |  |  | 3,182,065 |  |  | 3,231,452 |
Earnings per share attributable to common shareholders |  |  |  |  |  |  |
Basic | $ | 8.03 |  |  | $ | 3.30 |  |  | $ | 17.66 |  |  | $ | 7.52 |
Diluted | $ | 8.03 |  |  | $ | 3.30 |  |  | $ | 17.66 |  |  | $ | 7.52 |

Note 10 Commitments and Contingencies
The Company indemnifies its directors, officers, and certain employees for certain liabilities that may arise from 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 Investment 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 ("Closing Date"), at which time, Brandywine Global acquired the investment advisory contracts of DHCM’s two high yield-focused mutual funds - the Corporate Credit Fund and the High Yield Fund (the “High Yield-Focused Advisory Contracts”).
DHCM has 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 is included in gain on sale of high yield-focused advisory contracts in the Consolidated Statements of Income during the third quarter of 2021.
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DHCM may receive two additional payments of up to $13.0 million in the aggregate based on the net revenue of the the Corporate Credit Fund and the High Yield Fund on the one-year anniversary of the Closing Date. The Company has not recorded any additional gain for the two potential additional payments because this variable consideration is constrained based on movements in the financial markets and the net shareholder flows of the the Corporate Credit Fund and the High Yield Fund. Therefore, there can be no reasonable assurance that all or any of these additional payments will be received by DHCM.
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Note 12 Subsequent Events
On October 26, 2021, the Company's board of directors ("Board") approved a regular quarterly dividend for the fourth quarter of 2021 of $1.00 per share. The Board also approved a special cash dividend of $19.00 per share. Both the fourth quarter regular dividend and the special dividend will be paid on December 10, 2021, to shareholders of record as of November 29, 2021. These dividends are expected to reduce shareholders' equity by approximately $63.4 million.
The Board also approved an increase in the regular quarterly dividend beginning in the first quarter of 2022. Subject to the Board's approval each quarter and compliance with applicable legal requirements, the Company expects to increase the regular quarterly dividend from $1.00 per share to $1.50 per share in the first quarter of 2022. Although the Company currently expects to pay the regular quarterly dividends, depending on the circumstances and the Board's judgment, the Company may not pay such dividends as described.
In addition to the regular quarterly dividends, the Board will decide whether to approve and pay an additional special dividend in the fourth quarter of each fiscal year.
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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 our 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 effects of the COVID-19 pandemic and the actions taken in connection therewith; (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 the Funds, sub-advised mutual funds, a private investment fund, and separately managed accounts.
DHCM is a client-centric organization committed to a set of shared investment principles and core values intended to enable excellent investment outcomes for clients. By committing to 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 can focus on results and all teammates focus on the overall client experience. The combination of these investment principles and core values create an aligned boutique model ensuring that associates succeed when clients succeed. 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.
The Company's primary objective is to fulfill its fiduciary duty to its clients. The Company's secondary objective is to grow its intrinsic value to achieve an adequate long-term return for our 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 nine-months ended September 30, 2021 and 2020:

| Assets Under Management
| As of September 30,
(in millions, except percentages) | 2021 |  | 2020 |  | % Change
Proprietary funds | $ | 18,750 |  |  | $ | 14,761 |  |  | 27 | %
Sub-advised funds | 3,665 |  |  | 2,750 |  |  | 33 | %
Separately managed accounts | 6,771 |  |  | 4,772 |  |  | 42 | %
Total AUM | $ | 29,186 |  |  | $ | 22,283 |  |  | 31 | %

| Assets Under Management by Investment Strategy
| As of September 30,
(in millions, except percentages) | 2021 |  | 2020 |  | % Change
Small Cap | $ | 595 |  |  | $ | 478 |  |  | 24 | %
Small-Mid Cap | 3,031 |  |  | 2,366 |  |  | 28 | %
Mid Cap | 1,086 |  |  | 858 |  |  | 27 | %
Large Cap | 19,651 |  |  | 12,626 |  |  | 56 | %
Large Cap Concentrated | 50 |  |  | 24 |  |  | 108 | %
All Cap Select | 404 |  |  | 365 |  |  | 11 | %
Long-Short | 2,062 |  |  | 1,960 |  |  | 5 | %
Global/International | 45 |  |  | 28 |  |  | 61 | %
Micro Cap | 14 |  |  | — |  |  | NM
Total Equity | 26,938 |  |  | 18,705 |  |  | 44 | %
Short Duration Securitized Bond | 1,494 |  |  | 1,023 |  |  | 46 | %
Core Fixed Income | 764 |  |  | 434 |  |  | 76 | %
Long Duration Treasury | 50 |  |  | 70 |  |  | (29) | %
Corporate Credit(a) | — |  |  | 1,571 |  |  | NM
High Yield(a) | — |  |  | 546 |  |  | NM
Total Fixed Income | 2,308 |  |  | 3,644 |  |  | (37) | %
Total Equity and Fixed Income | 29,246 |  |  | 22,349 |  |  | 31 | %
(Less: Investments in affiliated funds)(b) | (60) |  |  | (66) |  |  | (9) | %
Total AUM | $ | 29,186 |  |  | $ | 22,283 |  |  | 31 | %

(a) The Diamond Hill Corporate Credit and High Yield investment advisory contracts were sold to Brandywine Global effective July 30, 2021.
(b) Certain of the Funds own shares of the Diamond Hill Short Duration Securitized Bond Fund. The Company reduces the total AUM by these investments held in this affiliated fund.
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| Change in Assets Under Management |
| For the Three Months Ended September 30, |
(in millions) | 2021 |  | 2020 |
AUM at beginning of the period | $ | 32,360 |  |  | $ | 20,645 |  |
Net cash inflows (outflows) |  |  |  |
proprietary funds | 155 |  |  | 56 |  |
sub-advised funds | — |  |  | 71 |  |
separately managed accounts | 65 |  |  | (29) |  |
| 220 |  |  | 98 |  |
Sale of high yield-focused advisory contracts | (3,456) |  |  | — |  |
Net market appreciation and income | 62 |  |  | 1,540 |  |
Increase (decrease) during the period | (3,174) |  |  | 1,638 |  |
AUM at end of the period | $ | 29,186 |  |  | $ | 22,283 |  |
Average AUM during the period | $ | 30,659 |  |  | $ | 22,038 |  |

| Change in Assets Under Management |
| For the Nine Months Ended September 30, |
(in millions) | 2021 |  | 2020 |
AUM at beginning of the period | $ | 26,411 |  |  | $ | 23,399 |  |
Net cash inflows (outflows) |  |  |  |
proprietary funds | 2,142 |  |  | 9 |  |
sub-advised funds | (57) |  |  | 762 |  |
separately managed accounts | 279 |  |  | (191) |  |
| 2,364 |  |  | 580 |  |
Sale of high yield-focused advisory contracts | (3,456) |  |  | — |  |
Net market appreciation (depreciation) and income | 3,867 |  |  | (1,696) |  |
Increase (decrease) during the period | 2,775 |  |  | (1,116) |  |
AUM at end of the period | $ | 29,186 |  |  | $ | 22,283 |  |
Average AUM during the period | $ | 30,305 |  |  | $ | 21,056 |  |

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| Net Cash Inflows (Outflows) Further Breakdown For the Three Months Ended September 30,
(in millions) | 2021 |  | 2020
Net cash inflows (outflows) |  |  |
Equity | $ | (18) |  |  | $ | (348) |
Fixed Income | 238 |  |  | 446 |
| $ | 220 |  |  | $ | 98 |
| Net Cash Inflows (Outflows) Further Breakdown For the Nine Months Ended September 30,
(in millions) | 2021 |  | 2020
Net cash inflows (outflows) |  |  |
Equity | $ | 1,182 |  |  | $ | (540) |
Fixed Income | 1,182 |  |  | 1,120 |
| $ | 2,364 |  |  | $ | 580 |

AUM decreased $3.2 billion during the three months ended September 30, 2021, due primarily to the sale of the High Yield-Focused Advisory Contracts (see note 11 in the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q), partially offset by appreciation and net inflows of our strategies during the period. Flows into our strategies during the three months ended September 30, 2021, totaled $0.2 billion.
AUM increased $2.8 billion during the nine months ended September 30, 2021, due primarily to appreciation in the financial markets and net inflows into our strategies during the period. The increase was partially offset by the sale of the High Yield-Focused Advisory Contracts. Both our equity and fixed income strategies experienced net inflows during the nine months ended September 30, 2021. Flows in our equity strategies were largely driven by our Large Cap strategy, which experienced net inflows of $2.2 billion. These net inflows were partially offset by net outflows from our other equity strategies totaling approximately $1.0 billion. The Company's fixed income strategies had net positive flows of $1.2 billion during the nine months ended September 30, 2021, with each individual fixed income strategy other than Long Duration Treasury having net positive flows.
Effective March 31, 2021, the Company closed its Large Cap strategy to most new investors. In February 2021, the Company began offering its Large Cap Concentrated strategy as a new open-end mutual fund in the Funds lineup. On June 1, 2021, DHMF commenced operations.
Model Delivery Programs
DHCM provides strategy-specific model portfolios to sponsors of model delivery programs. DHCM does not have discretionary investment authority over individual client accounts in model delivery programs, and therefore, these assets are not included in the Company's AUM. DHCM provides updated model portfolios to the program sponsors on a periodic basis. DHCM is paid for its services by the program sponsor at a pre-determined rate based on assets in the program. Model delivery program assets were $1.9 billion as of September 30, 2021, and $1.1 billion as of December 31, 2020.
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Consolidated Results of Operations
The following is a table and discussion of the Company's consolidated results of operations.

| Three Months Ended September 30, |  |  |  |  | Nine Months Ended September 30,
(in thousands, except per share amounts and percentages) | 2021 |  | 2020 |  | % Change |  |  |  |  | 2021 |  | 2020 |  | % Change
Total revenue | $ | 55,055 |  |  | $ | 31,176 |  |  | 77% |  |  |  |  | $ | 139,139 |  |  | $ | 91,350 |  |  | 52%
Net operating income | $ | 28,321 |  |  | $ | 9,970 |  |  | 184% |  |  |  |  | 59,620 |  |  | 37,462 |  |  | 59%
Net operating income, as adjusted(a) | $ | 28,324 |  |  | $ | 11,931 |  |  | 137% |  |  |  |  | 64,238 |  |  | 35,093 |  |  | 83%
Investment income (loss), net | (2,630) |  |  | 5,053 |  |  | NM |  |  |  |  | 8,911 |  |  | (5,783) |  |  | NM
Gain on sale of high yield-focused advisory contracts | 9,000 |  |  | — |  |  | NM |  |  |  |  | 9,000 |  |  | — |  |  | NM
Income tax expense | 9,816 |  |  | 3,882 |  |  | 153% |  |  |  |  | 20,766 |  |  | 9,429 |  |  | 120%
Net income attributable to common shareholders | 25,628 |  |  | 10,566 |  |  | 143% |  |  |  |  | 56,201 |  |  | 24,296 |  |  | 131%
Earnings per share attributable to common shareholders (diluted) | $ | 8.03 |  |  | $ | 3.30 |  |  | 143% |  |  |  |  | $ | 17.66 |  |  | $ | 7.52 |  |  | 135%
Operating profit margin | 51 | % |  | 32 | % |  |  |  |  |  |  | 43 | % |  | 41 | % |  |
Operating profit margin, as adjusted(a) | 51 | % |  | 38 | % |  |  |  |  |  |  | 46 | % |  | 38 | % |  |

(a) Net operating income, as adjusted, and operating profit margin, as adjusted, are non-GAAP performance measurements. See the "Use of Supplemental Data as Non-GAAP Performance Measure" section within this Quarterly Report on Form 10-Q.
Summary Discussion of Consolidated Results of Operations - Three Months Ended September 30, 2021, compared with Three Months Ended September 30, 2020
Revenue for the three months ended September 30, 2021, increased $23.9 million compared to the three months ended September 30, 2020, primarily due to a 39% increase in average AUM, as well as $11.9 million in performance-based fees earned in 2021. These increases were partially offset by a decrease in the average advisory fee rate (excluding performance-based fees) from 0.53% to 0.52% quarter-over-quarter. We recognized no performance-based fees during the three months ended September 30, 2020.
Operating profit margin was 51% for the three months ended September 30, 2021, and 32% for the three months ended September 30, 2020. Operating profit margin, as adjusted, was 51% for the three months ended September 30, 2021, and 38% for the same period in 2020. Operating profit margin, as adjusted, excludes deferred compensation expense (benefit) from operating income because it is offset by an equal amount in investment income below net operating income on the income statement and thus has no effect on net income attributable to the Company. The Company believes this non-GAAP measure helps the reader to understand its core operating results and increases comparability period-to-period. See "Use of Supplemental Data as Non-GAAP Performance Measure" section within this Quarterly Report on Form 10-Q.
The Company expects that its 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 the development of investment strategies, products, or channels.
The Company had $2.6 million in investment losses due to market depreciation for the three months ended September 30, 2021, compared with investment income of $5.1 million for the three months ended September 30, 2020.
The Company recorded a gain of $9.0 million related to the sale of our High Yield-Focused Advisory Contracts during the third quarter 2021. 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 Advisory Contracts on the one-year anniversary of the Closing Date, but there can be no assurance these additional payments will be earned.
Income tax expense increased $5.9 million for the three months ended September 30, 2021, compared to the same period in 2020. The increase in income tax expense was primarily due to an increase in DHCM's income before taxes, and an increase in the Company's effective tax rate from 25.8% to 28.3% period-over-period, primarily due to the additional state and local taxes incurred based on the performance-fees recorded during the period.
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The Company generated net income attributable to common shareholders of $25.6 million ($8.03 per diluted share) for the three months ended September 30, 2021, compared with net income attributable to common shareholders of $10.6 million ($3.30 per diluted share) for the three months ended September 30, 2020, primarily due to increased revenues and the gain on the sale of the High Yield-Focused Advisory Contracts.
Revenue

| Three Months Ended September 30, |  |
(in thousands, except percentages) | 2021 |  | 2020 |  | % Change
Investment advisory | $ | 51,848 |  |  | $ | 29,363 |  |  | 77 | %
Mutual fund administration, net | 3,207 |  |  | 1,813 |  |  | 77 | %
Total | $ | 55,055 |  |  | $ | 31,176 |  |  | 77 | %

Investment Advisory Fees. Investment advisory fees increased $22.5 million, or 77%, from the three months ended September 30, 2020, to the three months ended September 30, 2021. 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 due to an increase of 39% in average AUM, and $11.9 million of performance-based fees recognized during three months ended September 30, 2021 as a significant performance-based agreement reached its first five-year measurement term on September 30, 2021. We recognized no performance-based fees during the three months ended September 30, 2020. The average advisory fee rate excluding performance-based fees for the three months ended September 30, 2021 and the three months ended September 30, 2020 were 0.52% and 0.53%, respectively.
Mutual Fund Administration Fees. Mutual fund administration fees increased $1.4 million, or 77%, from the three months ended September 30, 2020 to the three months ended September 30, 2021. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of the Funds' average AUM. This increase was primarily due to a 38% increase in the Funds' average AUM from the three months ended September 30, 2020, to the three months ended September 30, 2021, and a reduction in administration fees paid on behalf of the Funds as a percentage of average Fund AUM.
Expenses

| Three Months Ended September 30, |  |
(in thousands, except percentages) | 2021 |  | 2020 |  | % Change
Compensation and related costs, excluding deferred compensation expense | $ | 20,433 |  |  | $ | 13,704 |  |  | 49 | %
Deferred compensation expense | 3 |  |  | 1,961 |  |  | (100) | %
General and administrative | 3,637 |  |  | 3,096 |  |  | 17 | %
Sales and marketing | 1,767 |  |  | 1,581 |  |  | 12 | %
Mutual fund administration | 894 |  |  | 864 |  |  | 3 | %
Total | $ | 26,734 |  |  | $ | 21,206 |  |  | 26 | %

Compensation and Related Costs, Excluding Deferred Compensation Expense. Employee compensation and benefits increased by $6.7 million, or 49%, from the three months ended September 30, 2020, compared to the three months ended September 30, 2021. This increase was due to increases in accrued incentive compensation of $5.2 million, in salary and related benefits of $0.9 million, and in restricted stock expense of $0.6 million. Incentive compensation expense can fluctuate significantly period-over-period as the Company evaluates investment performance, individual performance, Company performance and other factors.
Deferred Compensation Expense. Deferred compensation expense was not significant for the three months ended September 30, 2021. For the three months ended September 30, 2020 the Company recorded expense of $2.0 million due to market appreciation on our deferred compensation plan investments.
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The gain on deferred compensation plan investments increases deferred compensation expense and is 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.
General and Administrative. General and administrative expenses increased by $0.5 million, or 17%, from the three months ended September 30, 2020, to the three months ended September 30, 2021. This increase was due primarily due to increases of approximately $0.3 million in consulting fees, $0.1 million in depreciation expense related to distribution technology software, and $0.1 million in other general administrative expenses.
Sales and Marketing. Sales and marketing expenses increased by $0.2 million from the three months ended September 30, 2020, to the three months ended September 30, 2021. The increase was due to $0.2 million in increased spending related to marketing technology.
Mutual Fund Administration. Mutual fund administration expense increased 3%, from the three months ended September 30, 2020, compared to the three months ended September 30, 2021. Mutual fund administration expenses consist of both variable and fixed expenses. The small increase was due to an increase in variable expenses as a result of the increase in the average Fund AUM period-over-period.
Summary Discussion of Consolidated Results of Operations - Nine Months Ended September 30, 2021, compared with Nine Months Ended September 30, 2020
Revenue for the nine months ended September 30, 2021, increased $47.8 million, compared to revenue for the same period in 2020, primarily due to an increase in average AUM of 44% period-over-period, and $11.9 million in performance-based fees earned in 2021. We recognized no performance-based fees during the nine months ended September 30, 2020. The increase was partially offset by a decrease in the average advisory fee rate (excluding performance-based fees) from 0.55% to 0.52%.
Operating profit margin was 43% for the nine months ended September 30, 2021, and 41% for the nine months ended September 30, 2020. Operating profit margin, as adjusted, was 46% for the nine months ended September 30, 2021, and 38% for the nine months ended September 30, 2020. Operating profit margin, as adjusted, excludes deferred compensation expense (benefit) from operating income because it is offset by an equal amount in investment income below net operating income on the income statement and thus has no effect on net income attributable to the Company. The Company believes this non-GAAP measure helps the reader to understand its core operating results and increases comparability period-to-period. See "Use of Supplemental Data as Non-GAAP Performance Measure" section within this report.
The Company expects that its 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 the development of investment strategies, products, or channels.
The Company recognized $8.9 million in investment income for the nine months ended September 30, 2021, compared with investment losses of $5.8 million for the nine months ended September 30, 2020. The change year-over-year was primarily due to the negative impact that COVID-19 had on the financial markets in March 2020, and the subsequent market rebound.
The Company recorded a gain of $9.0 million related to the sale of our High Yield-Focused Advisory Contracts during the third quarter 2021. 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 Advisory Contracts on the one-year anniversary of the Closing Date, but there can be no assurance these additional payments will be earned.
Income tax expense increased $11.3 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The increase in income tax expense was primarily due to the increase in the Company's income before taxes, which was partially offset by a decrease in the Company's effective tax rate from 29.8% to 26.8%, primarily due to the impact of redeemable noncontrolling interest period-over-period. The provision for income taxes includes the effect of the operations of th e Consolidated Funds that are not subject to federal income taxes. Accordingly, a portion of the Company's earnings are not subject to corporate tax.
The Company generated net income attributable to common shareholders of $56.2 million ($17.66 per diluted share) for the nine months ended September 30, 2021, compared with net income attributable to common shareholders of $24.3 million ($7.52 per diluted share) for the same period in 2020. The increase in net income and earnings per diluted share was primarily driven by the increase in revenue, the gain on sale of the High Yield-Focused Advisory Contracts, and an increase in investment income during the nine months ended September 30, 2021.
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Revenue

| Nine Months Ended September 30, |  |
(in thousands, except percentages) | 2021 |  | 2020 |  | % Change
Investment advisory | $ | 130,134 |  |  | $ | 86,219 |  |  | 51 | %
Mutual fund administration, net | 9,005 |  |  | 5,131 |  |  | 76 | %
Total | $ | 139,139 |  |  | $ | 91,350 |  |  | 52 | %

Investment Advisory Fees. Investment advisory fees for the nine months ended September 30, 2021, increased $43.9 million, or 51%, compared to the nine months ended September 30, 2020. 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 primarily due to an increase in average AUM of 44% and $11.9 million of performance-based fees earned during the period as a significant performance-based agreement reached its first five-year measurement term on September 30, 2021. The Company recognized no performance-based fees during the nine months ended September 30, 2020. The increase was partially offset by a decrease in the average advisory fee rate (excluding performance-based fees) from 0.55% to 0.52% period-over-period. 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, 2021, compared to the same period in 2020.
Mutual Fund Administration Fees. Mutual fund administration fees for the nine months ended September 30, 2021, increased $3.9 million, or 76%, compared to the nine months ended September 30, 2020. Mutual fund administration fees include administration fees received from the Funds, which are calculated as a percentage of the Funds' average AUM. The increase was primarily due to the 43% increase in the Funds' average AUM for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, and a reduction in administration fees paid on behalf of the Funds as a percentage of average Fund AUM.
Expenses

| Nine Months Ended September 30, |  |
(in thousands, except percentages) | 2021 |  | 2020 |  | % Change
Compensation and related costs, excluding deferred compensation expense (benefit) | $ | 56,188 |  |  | $ | 41,679 |  |  | 35 | %
Deferred compensation expense (benefit) | 4,618 |  |  | (2,369) |  |  | NM
General and administrative | 10,324 |  |  | 7,925 |  |  | 30 | %
Sales and marketing | 5,672 |  |  | 4,186 |  |  | 35 | %
Mutual fund administration | 2,717 |  |  | 2,467 |  |  | 10 | %
Total | $ | 79,519 |  |  | $ | 53,888 |  |  | 48 | %

Compensation and Related Costs, Excluding Deferred Compensation Expense (Benefit). Employee compensation and benefits for the nine months ended September 30, 2021, increased by $14.5 million compared to the nine months ended September 30, 2020. This increase was due to increases in accrued incentive compensation of $10.2 million, in salary and related benefits of $3.1 million, and in restricted stock expense of $1.2 million. Incentive compensation expense can fluctuate significantly period-over-period as the Company evaluates investment performance, individual performance, Company performance and other factors.
Deferred Compensation Expense (Benefit). Deferred compensation expense was $4.6 million for the nine months ended September 30, 2021, compared to a benefit of $2.4 million for the nine months ended September 30, 2020. The expense in the current period was primarily due to market appreciation on deferred compensation plan investments, while the benefit in the prior period was primarily due to the negative impact COVID-19 had on the financial markets in March 2020.
The gain (loss) on deferred compensation plan investments increases (decreases) deferred compensation expense (benefit) and is included in operating income. Deferred compensation expense (benefit) 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.
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General and Administrative. General and administrative expense for the nine months ended September 30, 2021, increased by $2.4 million, or 30%, compared to the nine months ended September 30, 2020. This increase was primarily due to a non-recurring $1.1 million refund related to Ohio commercial activity tax, which was received in the first quarter of 2020 and reduced general and administrative expense. The Ohio commercial activity tax is a gross receipts tax, and therefore, is not included in income taxes. Other increases in 2021 include $0.5 million of proxy solicitation fees related to the sale of the High Yield-Focused Advisory Contracts (see note 11 in the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q), $0.3 million in consulting expense, $0.3 million in IT staffing, hardware and software expense and $0.2 million in depreciation expense.
Sales and Marketing. Sales and marketing expense for the nine months ended September 30, 2021 increased by $1.5 million, or 35%, compared to the nine months ended September 30, 2020. The increase was primarily due to increases of $0.8 million related to the Company's distribution technology platform, and the related external data costs, and additional payments of $0.7 million made to third-party intermediaries related to the sale of our mutual funds on their platforms.
Mutual Fund Administration. Mutual fund administration expenses for the nine months ended September 30, 2021, increased by $0.3 million, or 10%, compared to the nine months ended September 30, 2020. Mutual fund administration expenses consist of both variable and fixed expenses. The increase was primarily due to an increase in variable expenses as a result of the increase in the average Fund AUM period-over-period.
Liquidity and Capital Resources
Sources of Liquidity
The Company's current financial condition is liquid, with a significant amount of its assets comprised of cash and cash equivalents, investments, accounts receivable, and other current assets. The Company's 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 other current assets represented $251.8 million and $205.1 million of total assets as of September 30, 2021 and December 31, 2020, respectively. The Company believes that these sources of liquidity, as well as its continuing cash flows from operating activities, will be sufficient to meet its current and future operating needs for the next 12 months.
Uses of Liquidity
In line with the Company's primary objective to fulfill its fiduciary duty to clients and its secondary objective to achieve an adequate long-term return for shareholders, it anticipates that its main uses of cash will be for operating expenses and seed capital to fund new and existing investment strategies. The Company's board of directors and management regularly review various factors to determine whether it has capital in excess of that required for its business, and the appropriate uses of any such excess capital.
On February 27, 2020, the Company's board of directors approved a stock repurchase program (the "2020 Repurchase Program") authorizing management to repurchase up to $50.0 million of the Company's common stock. Under the 2020 Repurchase Program, the Company repurchased $7.5 million of its common shares during the nine months ended September 30, 2021. As of September 30, 2021, $27.8 million remains available for repurchase under the 2020 Repurchase Program. The authority to repurchase shares: (1) may be exercised from time to time as market conditions warrant, (2) is subject to regulatory constraints, and (3) will expire two years from the date of board approval or upon the earlier repurchase in full of the authorized amount of shares. The timing, amount, and other terms and conditions of any repurchases will be determined by Company management in its discretion based on a variety of factors, including the market price of such shares, corporate considerations, general market and economic conditions, and applicable legal requirements.
The Company's board of directors has approved the institution of a regular quarterly dividend, which it began paying in the first quarter of 2021. A summary of cash dividends paid during the nine months ended September 30, 2021 is presented below:
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Dividend | Declaration Date |  | Date Paid |  | Dividend Amount (in millions)
First quarter - $1.00 per share | February 25, 2021 |  | March 19, 2021 |  | $ | 3.1 |
Second quarter - $1.00 per share | April 26, 2021 |  | June 18, 2021 |  | 3.2 |
Third quarter - $1.00 per share | July 28, 2021 |  | September 24, 2021 |  | 3.2 |
Total |  |  |  |  | $ | 9.5 |

On October 26, 2021, the Board approved a regular quarterly dividend for the fourth quarter of 2021 of $1.00 per share. The Board also approved a special cash dividend of $19.00 per share. Both the fourth quarter regular dividend and the special dividend will be paid on December 10, 2021, to shareholders of record as of November 29, 2021. These dividends are expected to reduce shareholders' equity by approximately $63.4 million.
The Board also approved an increase in the regular quarterly dividend beginning in the first quarter of 2022. Subject to the Board's approval each quarter and compliance with applicable legal requirements, the Company expects to increase the Company's regular quarterly dividend from $1.00 per share to $1.50 per share in the first quarter of 2022.
In addition to the regular quarterly dividends, the Board will decide whether to approve and pay an additional special dividend in the fourth quarter of each fiscal year. Although the Company currently expects to pay regular quarterly dividends, depending on the circumstances and the board of directors’ judgment, the Company may not pay such dividends as described.
Working Capital
As of September 30, 2021, the Company had working capital of approximately $213.5 million, compared to $168.9 million as of December 31, 2020. Working capital includes cash and cash equivalents, accounts receivable, investments, and other current assets of DHCM, net of accounts payable and accrued expenses, accrued incentive compensation, deferred compensation and other current liabilities of DHCM.
Below is a summary of securities owned by the Company as of September 30, 2021 and December 31, 2020.

| As of
| September 30, 2021 |  | December 31, 2020
Corporate Investments: |  |  |
Diamond Hill Core Bond Fund | $ | 46,759,964 |  |  | $ | 47,204,636 |
Diamond Hill Long-Short Fund | 19,067,822 |  |  | 16,945,863 |
Diamond Hill Large Cap Concentrated Fund | 10,829,980 |  |  | — |
Diamond Hill Global Fund | 11,854,260 |  |  | 11,269,719 |
Diamond Hill Micro Cap Fund, LP | 9,603,387 |  |  | — |
Diamond Hill International Fund | 20,591,978 |  |  | 10,156,320 |
Total Corporate Investments | 118,707,391 |  |  | 85,576,538 |
Deferred Compensation Plan Investments in the Funds and DHMF | 34,883,646 |  |  | 33,241,952 |
Total investments held by DHCM | 153,591,037 |  |  | 118,818,490 |
Investments in Consolidated Funds held by noncontrolling interests | 14,101,934 |  |  | 9,582,646 |
Total Investment Portfolio | $ | 167,692,971 |  |  | $ | 128,401,136 |

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. The Company expects that cash flows provided by operating activities will continue to serve as its primary source of working capital in the near future.
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For the nine months ended September 30, 2021, net cash provided by operating activities totaled $15.3 million. Cash inflows from operating activities were primarily driven by net income of $56.8 million, the add back of share-based compensation of $5.4 million, depreciation of $0.9 million, and a $1.0 million increase in the incentive compensation accrual. These inflows were partially offset by the adjustment to net income of $9.0 million for the gain on sale of the High Yield-Focused Advisory Contracts, securities purchased by the Consolidated Funds of $23.5 million, and the cash impact of timing differences in the settlement of other assets and liabilities of $16.3 million. Absent the cash used in operations by the Consolidated Funds, cash flows provided by operations were $38.3 million.
For the nine months ended September 30, 2020, net cash provided by operating activities totaled $38.2 million. Cash inflows provided by operating activities were primarily driven by net income of $22.3 million, the add back of share-based compensation of $5.7 million, depreciation of $0.8 million, and the cash impact of timing differences in the settlement of assets and liabilities of $13.4 million. These increases were partially offset by a decrease in accrued incentive compensation of $4.0 million due to the payment of incentive compensation in the first quarter of 2020. Absent the cash used by the Consolidated Funds to purchase securities into their investment portfolios, cash flows provided by operations were $35.9 million.
Cash Flows from Investing Activities
The Company’s cash flows from investing activities consist primarily of capital expenditures and purchases and redemptions in our investment portfolio.
Cash flows used in investing activities totaled $0.5 million for the nine months ended September 30, 2021. Cash flows used in investing activities were primarily driven by corporate investment purchases of $17.0 million and property and equipment purchases of $1.0 million. These outflows were partially offset by proceeds from the redemption of investments totaling $8.5 million and $9.0 million of proceeds received from the sale of the High Yield-Focused Advisory Contracts.
Cash flows provided by investing activities totaled $10.7 million for the nine months ended September 30, 2020. Cash flows provided by investing activities were primarily driven by proceeds from the redemption of investments totaling $24.8 million, partially offset by investment purchases of $12.4 million, and property and equipment (capitalized software) purchases of $1.7 million.
Cash Flows from Financing Activities
The Company’s cash flows from financing activities consist primarily of the repurchase of its common stock, shares withheld related to employee tax withholding, dividends paid on its common stock, and distributions to, or contributions from, redeemable noncontrolling interest holders.
For the nine months ended September 30, 2021, net cash used in financing activities totaled $14.7 million, consisting of the payment of quarterly dividends totaling $9.5 million, repurchases of the Company’s common stock of $7.5 million, and the value of shares withheld related to employee tax withholding of $1.5 million. These cash outflows were partially offset by net subscriptions received in the Consolidated Funds from redeemable noncontrolling interest holders of $3.4 million and proceeds received under the ESPP of $0.5 million.
For the nine months ended September 30, 2020, net cash used in financing activities totaled $24.3 million, consisting of repurchases of the Company’s common stock of $18.6 million, net redemptions in the Consolidated Funds from redeemable noncontrolling interest holders of $4.1 million, and the value of shares withheld related to employee tax withholding of $1.6 million.
Supplemental Consolidated Cash Flow Statement
The Company's consolidated balance sheets reflect the investments and other assets and liabilities of the Consolidated Funds, as well as redeemable noncontrolling interest for the portion of the Consolidated Funds that are held by third-party investors. Although the Company can redeem its net interest in the Consolidated Funds at any time, the Company 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, 2021, that are attributable to the Company and to the Consolidated Funds, and the related eliminations required in preparing the consolidated statements.

| Nine Months Ended September 30, 2021
| 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 (loss) | $ | 56,200,986 |  |  | $ | 2,563,711 |  |  | $ | (1,999,751) |  |  | $ | 56,764,946 |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |  |  |  |  |  |
Depreciation | 930,990 |  |  | — |  |  | — |  |  | 930,990 |
Share-based compensation | 5,351,120 |  |  | — |  |  | — |  |  | 5,351,120 |
Gain on sale of high yield-focused advisory contracts | (9,000,000) |  |  | — |  |  | — |  |  | (9,000,000) |
Net (gains)/losses on investments | (7,048,214) |  |  | (2,563,711) |  |  | 1,999,751 |  |  | (7,612,174) |
Net change in securities held by Consolidated Funds | — |  |  | (23,532,392) |  |  | — |  |  | (23,532,392) |
Other changes in assets and liabilities | (8,106,644) |  |  | 524,147 |  |  | — |  |  | (7,582,497) |
Net cash provided by (used in) operating activities | 38,328,238 |  |  | (23,008,245) |  |  | — |  |  | 15,319,993 |
Net cash (used in) provided by investing activities | (20,120,438) |  |  | — |  |  | 19,577,064 |  |  | (543,374) |
Net cash (used in) provided by financing activities | (18,105,755) |  |  | 23,008,245 |  |  | (19,577,064) |  |  | (14,674,574) |
Net change during the period | 102,045 |  |  | — |  |  | — |  |  | 102,045 |
Cash and cash equivalents at beginning of period | 98,478,202 |  |  | — |  |  | — |  |  | 98,478,202 |
Cash and cash equivalents at end of period | $ | 98,580,247 |  |  | $ | — |  |  | $ | — |  |  | $ | 98,580,247 |

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Use of Supplemental Data as Non-GAAP Performance Measure
As supplemental information, the Company is providing performance measures that are based on methodologies other than GAAP (“non-GAAP”). The Company believes that the non-GAAP measures below are useful measures of its core business activities, are important metrics in estimating the value of an asset management business, and may enable more appropriate comparisons to its peers. These non-GAAP measures should not be used as 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, 2021 and 2020, respectively.

| Three Months Ended September 30, |  | Nine Months Ended September 30,
(in thousands, except percentages and per share data) | 2021 |  | 2020 |  | 2021 |  | 2020
Total revenue | $ | 55,055 |  |  | $ | 31,176 |  |  | $ | 139,139 |  |  | $ | 91,350 |
Net operating income, GAAP basis | $ | 28,321 |  |  | $ | 9,970 |  |  | $ | 59,620 |  |  | $ | 37,462 |
Non-GAAP adjustment: |  |  |  |  |  |  |
Gains (losses) on deferred compensation plan investments, net(1) | 3 |  |  | 1,961 |  |  | 4,618 |  |  | (2,369) |
Net operating income, as adjusted, non-GAAP basis(2) | 28,324 |  |  | 11,931 |  |  | 64,238 |  |  | 35,093 |
Non-GAAP adjustment: |  |  |  |  |  |  |
Tax provision on net operating income, as adjusted, non-GAAP basis(3) | (7,844) |  |  | (3,206) |  |  | (17,332) |  |  | (9,811) |
Net operating income, as adjusted, after tax, non-GAAP basis(4) | $ | 20,480 |  |  | $ | 8,725 |  |  | $ | 46,906 |  |  | $ | 25,282 |
Net operating income, as adjusted after tax per diluted share, non-GAAP basis(5) | $ | 6.41 |  |  | $ | 2.73 |  |  | $ | 14.74 |  |  | $ | 7.82 |
Diluted weighted average shares outstanding, GAAP basis | 3,193 |  |  | 3,201 |  |  | 3,182 |  |  | 3,231 |
Operating profit margin, GAAP basis | 51 | % |  | 32 | % |  | 43 | % |  | 41 | %
Operating profit margin, as adjusted, non-GAAP basis(6) | 51 | % |  | 38 | % |  | 46 | % |  | 38 | %

(1) Gains (losses) on deferred compensation plan investments, net: The gain (loss) on deferred compensation plan investments, which increases (decreases) deferred compensation expense included in operating income, is removed from operating income in the calculation because it is offset by an equal amount in investment income (loss) below net operating income on the income statement, and thus, has no impact on net income attributable to the Company.
(2) Net operating income, as adjusted: This non-GAAP measure 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 the gain on sale of high yield-focused advisory contracts, and is calculated by applying the unconsolidated effective tax rate to net operating income, as adjusted.
(4) Net operating income, as adjusted, after tax: This non-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. The Company does not have any obligation under a guarantee contract, a retained or contingent interest in assets, or any similar arrangement that serves as credit, liquidity, or market risk support for such assets, or any other obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument or arising out of a variable interest.
Critical Accounting Policies and Estimates
For a summary of the critical accounting policies important to understanding the condensed consolidated financial statements, please see Note 2, Significant Accounting Policies, in the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, and Critical Accounting Policies and Estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as Note 2, Significant Accounting Policies, in the 2020 Form 10-K.

ITEM 3: | Quantitative and Qualitative Disclosures About Market Risk

For information regarding the Company’s exposure to certain market risks, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the 2020 Form 10-K. Except as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations, there have been no significant changes in the Company’s market risk exposures since our December 31, 2020 year end.

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 were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. The Company continues to monitor and assess the impact, if any, that the COVID-19 pandemic and the related economic impacts could have on the design and operating effectiveness of our internal controls.

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 have been no material changes to the Company's risk factors from the information disclosed in Item 1A of the 2020 Form 10-K.

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

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During the quarter ended September 30, 2021, the Company did not sell any shares of its common stock that were not registered under the Securities Act. The following table sets forth information regarding the Company’s repurchases of its common stock during the quarter ended September 30, 2021:

Period | Total Number of Shares Purchased for Employee Tax Withholdings(a) |  | Total Number of Shares Purchased as part of Publicly Announced Programs(b) |  | Average Price Paid Per Share Purchased Under the Programs |  | Aggregate Purchase Price of Shares Purchased Under the Programs |  | Approximate Dollar Value of the Shares That May Yet Be Purchased Under the Program(b)
July 1, 2021 through July 31, 2021 | 4,967 |  |  | — |  |  | — |  |  | — |  |  | $ | 33,447,025 |
August 1, 2021 through August 31, 2021 | — |  |  | 17,096 |  |  | $ | 177.99 |  |  | $ | 3,042,863 |  |  | $ | 30,404,162 |
September 1, 2021 through September 30, 2021 | — |  |  | 14,372 |  |  | $ | 178.99 |  |  | $ | 2,572,387 |  |  | $ | 27,831,775 |
Total | 4,967 |  |  | 31,468 |  |  | $ | 178.44 |  |  | $ | 5,615,250 |  |  |

(a)The Company regularly withholds shares for tax payments due upon the vesting of employee restricted stock. During the quarter ended September 30, 2021, the Company purchased 4,967 shares of common stock for employee tax withholding at an average price paid per share of $167.31.
(b)On February 27, 2020, the Company announced the 2020 Repurchase Program, pursuant to which our board of directors authorized management to repurchase up to $50.0 million of the Company’s common stock in the open market and in private transactions in accordance with applicable securities laws. The 2020 Repurchase Program will expire in February 2022, or upon the earlier completion of all authorized purchases under such program.
The Company has entered into a Rule 10b5-1 repurchase plan. This plan is intended to qualify for the safe harbor under Rule 10b5-1 of the Exchange Act. A Rule 10b5-1 plan allows a company to purchase its stock at times when it would not ordinarily be in the market because of its trading policies or the possession of material nonpublic information. Because repurchases under the 10b5-1 plan 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. 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.
Through September 30, 2021, the Company has repurchased 173,616 shares of the Company's common stock under the 2020 Repurchase Program at a total cost of $22.2 million.

ITEM 3: | Defaults Upon Senior Securities

None.

ITEM 4: | Mine Safety Disclosures

Not applicable.

ITEM 5: | Other Information

On October 26, 2021 (the “Effective Date”), the Company entered into an Employment Agreement with Heather E. Brilliant, the Company’s Chief Executive Officer and President (the “Agreement”). The Agreement, among other changes, modifies the terms of Ms. Brilliant’s compensation to be consistent with the Company’s current compensation practices. The Agreement will expire on December 31, 2026, but will automatically renew for one-year periods unless the Company or Ms. Brilliant provides advance notice that it will not be renewed. The Agreement supersedes and replaces the employment agreement entered into between the Company and Ms. Brilliant dated July 5, 2019.
Ms. Brilliant will receive an annual base salary of $400,000 and will be eligible to receive both annual cash and equity bonuses. She will also receive reimbursement for certain travel and other expenses and will receive insurance and fringe benefits at the levels available to all the Company’s employees. As long as she remains employed with the Company, Ms. Brilliant will be eligible to receive (i) an annual incentive award with a target fair market value equal to $1,750,000, with a minimum annual
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incentive award of at least $600,000 (“Incentive Award”), and (ii) an annual equity bonus with a target fair market value equal to $600,000 for the period from the Effective Date through October 1, 2024 (“Initial Equity Award”), and $1,200,000 thereafter (“LTI Award”). The Incentive Awards and LTI Awards will be determined based upon Ms. Brilliant’s satisfaction of certain performance criteria established by the Board and eligibility requirements under the Company’s Equity and Cash Incentive Plan. The Incentive Awards will also be subject to the Company’s performance during the relevant calendar year. Any such Incentive Award may be paid in cash or Company stock, or a combination thereof, provided that at least 40% of any Incentive Award must be paid in cash.
In the event of Ms. Brilliant’s death, subject to certain restrictions, she or her estate will be eligible to receive (i) her accrued but unpaid base salary, reimbursement of expenses, other benefits to which she would be entitled through the termination date and any Incentive Award for a completed year that has not yet been paid (“Accrued Obligations”), and (ii) any Initial Equity Award and any LTI Award for a completed year that has been granted, but is unvested, will vest in accordance with the terms of the applicable plan and award agreement. In the event of Ms. Brilliant’s permanent disability (as defined in the Agreement), she will be entitled to receive the Accrued Obligations.
If Ms. Brilliant’s employment is terminated without cause (as defined in the Agreement) or if she resigns with good reason (as defined in the Agreement), she will be eligible to receive (i) the Accrued Obligations, (ii) a single lump sum payment of her annual base salary, (iii) a pro-rated single lump sum payment based upon the amount of the Incentive Award made to Ms. Brilliant for the calendar year preceding termination of employment; and (iv) a single lump sum payment equal to the fair market value of the portion of any LTI Award that would have vested for the calendar year in which the termination occurs. If Ms. Brilliant is terminated for cause or resigns without good reason, she will be eligible to receive only her accrued but unpaid base salary, reimbursement of expenses and other benefits to which she would be entitled through the termination date.
In addition, in the event that a change in control (as defined in the Agreement) occurs and, within six months prior or 24 months following such change in control Ms. Brilliant's employment is terminated by the Company or its successor without cause or Ms. Brilliant resigns with good reason, then Ms. Brilliant will receive (i) the Accrued Obligations, (ii) a single lump sum payment of the greater of her then annual base salary or her base salary paid to her in the most recently completed calendar year, (iii) a single lump sum payment equal to the Incentive Award made to Ms. Brilliant for the calendar year preceding termination of employment, (iv) a pro-rated single lump sum payment equal to the target annual Incentive Award for the calendar year in which the termination of employment occurs, (v) full vesting of any previously granted LTI Award, to the extent not previously vested due to the change in control transaction, and (vi) full vesting of the Initial Equity Award to the extent not previously vested due to the change in control transaction.
The Agreement also contains customary non-competition, non-solicitation, confidentiality and non-disparagement covenants, both during, and for a period following termination of, Ms. Brilliant’s employment with the Company.
The foregoing description of the Agreement is qualified in its entirety by reference to the full text of the Agreement, a copy of which is filed herewith as Exhibit 10.1 and is incorporated herein by reference.
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ITEM 6: | Exhibits

3.1 |  | Amended and Restated Articles of Incorporation of the Company (Incorporated by reference from Exhibit 3(i) to the Current Report on Form 8-K 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 Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on April 28, 2017) (File No. 000-24498).
3.3 |  | Amended and Restated Code of Regulations of the Company (Incorporated by reference from Exhibit 3.2 to the Current Report on Form 8-K 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 October 26, 2021. (Filed herewith).
31.1 |  | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). (Filed herewith).
31.2 |  | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). (Filed herewith).
32.1 |  | Section 1350 Certifications. (Filed herewith)
101.INS |  | XBRL Instance 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.
104 |  | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).

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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 26, 2021 |  | Chief Executive Officer and President |  | /s/ Heather E. Brilliant
|  |  |  | Heather E. Brilliant
October 26, 2021 |  | Chief Financial Officer and Treasurer |  | /s/ Thomas E. Line
|  |  |  | Thomas E. Line

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