Management’s Discussion and Analysis

Executive Overview

Directors Investment Group, Inc. (DIG), a Nevada corporation, is the parent company for a diverse group of companies with a focus on two strategic industries – life insurance and financial services. The combined financial statements of Directors Investment Group, Inc. include all accounts of DIG and its subsidiaries (the Company) accounted for on a Generally Accepted Accounting Principles basis with the exception of the insurance subsidiaries that are accounted for on a Statutory Accounting Principles basis.

As of December 31, 2021, the subsidiaries of DIG include Directors Capital Ventures, Inc. (DCVI), Directors Holding Corporation (DHC), Parkway Advisors Group, Inc. (PAGI), Parkway Advisors Holdings, Inc. (PAHI), and Funeral Agency, Inc. (FAI). Additionally, the limited partnerships owned by the subsidiaries are included in the combined statement. The limited partnerships are Parkway Advisors LP (PALP) and Directors Agency LP (DALP). Two affiliates – Directors Air Corporation (DAC) and Directors Real Estate Management, LP (DREMLP) – were dissolved at the end of 2021. Effective January 1, 2020, Passare, Inc. was merged into DIG, and as a legal entity, ceased to exist. Passare operations continue to be reported separately but as a division of DIG. The insurance company subsidiaries include Funeral Directors Life Insurance Company (FDLIC), Kentucky Funeral Directors Life Insurance Company (KFDLIC), and Funeral Directors Life of Louisiana (FDLA). The value of the insurance company subsidiaries is recorded on the books of the Company at book value in accordance with the methods set forth by the National Association of Insurance Commissioners (NAIC).

The sections that follow provide information about the important aspects of our operations and investments, both at the combined and subsidiary levels, and includes discussion of our results of operations. The accounting periods for all of the entities end on December 31.

Earnings Per Share

Basic earnings per share (EPS) is calculated by dividing net income by the average number of common shares issued and outstanding for the current and previous years. Diluted earnings per share is calculated by dividing net income by the average number of common shares issued and outstanding plus stock options issued and outstanding for the current and previous years. For the purpose of these calculations, shares issued and outstanding do not include treasury shares purchased by the Company.

For 2021, the average number of common shares issued and outstanding, basic and diluted, was 2,549,253 and 2,814,901, respectively. For 2020, the average number of common shares issued and outstanding, basic and diluted, was 2,532,212 and 2,742,984, respectively. The exercise of 19,412 common stock options by employees and directors and the net purchase of 1,514 treasury shares by the Company are reflected in the change in average common shares outstanding.

Basic EPS was $7.57 and diluted EPS was $6.86 for 2021. For 2020, basic and diluted EPS was $3.50 and $3.23 respectively. Increased earnings in FDLIC were largely responsible for the year-over-year increase in earnings per share.

Computation of Share Value

DIG’s Share Value was $80.36 for 2021 and $72.85 for 2020, based on the modified book value calculation. This was an 10.31% increase over 2020.

For 2021 and 2020, Share Value is calculated using the modified book value approach that was approved by the shareholders at the April 1996 annual shareholders’ meeting. The calculation is the 1996 book value method plus an additional amount added for the value of FDLIC’s insurance business and interest maintenance reserve (IMR). For 2021, the equity component was $177,404,169 and the value of FDLIC’s business and IMR was $28,171,013. Total actual shares issued and outstanding at the end of 2021 were 2,558,202. For 2020, the equity component was $161,180,854, and the value of FDLIC’s business and IMR was $23,883,567. Total actual shares issued and outstanding at the end of 2020 were 2,540,304.

Income Taxes

Directors Investment Group, Inc. and its non-insurance subsidiaries file a consolidated U.S. income tax return. All taxes are booked and paid at the DIG level. In 2020, the Company paid no federal income tax as all available loss carryforwards were utilized to offset taxable income. For 2021, DIG recorded $778.1 thousand in federal income tax. Additional net operating loss carryforwards of $4.4 million can be used once Passare’s net income exceeds the operating expenses of DIG. These remaining carryforwards expire in 2034.

The insurance subsidiaries – FDLIC, KFDLIC, and FDLA – file a separate consolidated U.S. income tax return. The method of allocation between the companies is based upon separate return calculations with current credit for net losses. Intercompany tax balances are settled annually after the federal income tax return is completed and filed.

DALP and FDLIC are also subject to filing state income tax returns for various states in which they are licensed to conduct business.

The corporate federal income tax rate for DIG and the insurance subsidiaries was 21%.

Liquidity and Cash Flows

Management has set forth strategic objectives to help ensure that we keep a focus toward growing our core business and increasing shareholder value and that we are in a position to take advantage of opportunities when they arise. Those objectives include internal investment in our business (e.g., capital expenditures), share repurchases, shareholder dividends, debt reduction and management, and acquisition of businesses that will complement our core operations. The Company believes that cash generated from operations, together with the Company’s existing financial resources, will adequately finance the Company’s planned 2022 cash requirements.

SUMMARY OF CASH ACTIVITIES Principal sources of cash were commissions earned at DALP and FAI, investment advisory and consulting fees earned at PALP, subscription and activations fees earned at Passare, principal and interest payments received on business loans, and proceeds for issuance of common stock options. Our primary uses of cash were for operational expenses, reduction of debt, repurchase of stock, and payment of shareholder dividends. Net increase in cash for 2021 was $781.0 thousand.

INVESTING ACTIVITIES Business loans outstanding at year-end 2021 were $2.3 million compared to $2.8 million at the end of 2020. DIG received principal payments of $469.9 thousand. Remaining loans to funeral home customers earned interest at an average rate of 8.08%. No substantial new loans were extended in 2021. DIG collected interest payments of $200.3 thousand.

In 2016, DIG initiated a short-term investment strategy with Parkway Advisors as a means to earn investment income on excess cash accumulated from net operating earnings, repayment of business loans, or proceeds from the sale of treasury stock. Previously, investments were short term in nature and laddered to throw off approximately $500.0 thousand in cash at the end of each month. In mid-2021, in order to achieve a higher return, DIG revised its investment plan to invest approximately 40% in short-laddered bonds and the remainder invested with a growth and income focus. Total interest collected on investments was $69.6 thousand. At year-end 2021, total invested funds were $9.5 million. FINANCING ACTIVITIES DIG’s combined debt was comprised of borrowings from FDLIC. These loans originated in 2007 and were used to facilitate the funding of the funeral home financing program mentioned in “Investing Activities.” The loans pay interest at the rate of 9.25% and mature in April 2022. DIG paid FDLIC $486.5 thousand in principal and $351.3 thousand in interest in 2021. At year-end 2021, outstanding borrowings on the loans from FDLIC were $3.5 million. In April 2020, several of the DIG non-insurance companies applied for and received Paycheck Protection Program loans for a total of $1.2 million. A portion of the loans were forgiven in November and December of 2020, leaving a balance of $862.7 thousand that was forgiven in the first half of 2021.

During 2021, the Company offered options on 258,550 shares of common stock at a price range of $52.54 to $80.14. Options on 19,412 shares were exercised at a price range of $52.54 to $72.85, providing $1.1 million in cash resources. 23,334 shares at a price of $52.54 were not exercised and forfeited, leaving 215,804 shares exercisable in 2022, 2023, 2024, 2025, and 2026 at a price range of $57.05 to $80.14. During the year, DIG also repurchased 23,325 shares of common stock for $1.8 million. In July 2010, the Board of Directors approved the annual sale of a limited number of treasury shares. In 2020, DIG sold 25,010 shares of treasury stock for $1.8 million, and in 2021, DIG sold 21,811 shares for $1.7 million.

The Board of Directors approved the payment of quarterly dividends averaging $0.205 per share during 2021 for a total of $2.1 million. DIG paid $1.75 million in dividends in 2020.

SHAREHOLDER LIST & BENEFICIAL OWNERSHIP The table beginning on page 40 sets forth certain information as of March 1, 2022, with respect to each person who owns the Company’s common stock, each director of the Company, and all directors and officers of the Company as a group. Except as otherwise indicated, the persons named in the table have sole voting and investment power with respect to the shares of common stock shown. Each common share is entitled to one vote per share. The Company does have authorized preferred stock; however, none of the preferred stock was issued or outstanding as of December 31, 2021.