Management’s Discussion & 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.

The subsidiaries include Directors Capital Ventures, Inc. (DCVI), Directors Holding Corporation (DHC), Directors Air Corporation (DAC), Parkway Advisors Group, Inc. (PAGI), and 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 Directors Real Estate Management LP (DREMLP), Parkway Advisors LP (PALP), and Directors Agency LP (DALP). In April of 2015, DIG acquired 87% majority ownership in Passare, Inc. (Passare) in exchange for outstanding debt. During the second half of 2019, DIG acquired the remaining shares of Passare in exchange for cash or equivalent value in treasury shares. Effective January 1, 2020, Passare was merged into DIG and as a legal entity ceased to exist. Going forward, Passare operations will 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). FDLA was created in June of 2019 in response to the requests of Louisiana funeral home clients in order to address insurance licensing issues in the state. 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 2020, the average number of common shares issued and outstanding, basic and diluted, was 2,532,212 and 2,742,984, respectively. For 2019, the average number of common shares issued and outstanding, basic and diluted, was 2,523,455 and 2,733,116, respectively. The exercise of 21,779 common stock options by employees and directors and the net purchase of 5,595 treasury shares by the Company are reflected in the change in average common shares outstanding.

Basic EPS was $3.50 and diluted EPS was $3.23 for 2020. For 2019, basic and diluted EPS was $4.62 and $4.27 respectively. Decreased earnings for FDLIC was largely responsible for the year-over-year decrease in earnings per share.

Computation of Share Value

DIG’s Share Value was $72.85 for 2020 and $68.14 for 2019, based on the modified book value calculation. This was a 6.91% increase over 2019.

For 2020 and 2019, 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 2020, the equity component was $161,180,862 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. For 2019, the equity component was $153,231,480 and the value of FDLIC’s business and IMR was $18,763,859. Total actual shares issued and outstanding at the end of 2019 were 2,524,120.

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. There was no federal income tax expense for the combined group for 2020 as tax loss carryforwards entirely offset taxable income for the year. Remaining loss carryforwards of approximately $5.5 million will be used to offset future earnings. The Company can offset up to 80% of taxable income going forward.

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.

Due to the Tax Cuts and Jobs Act passed in 2017, 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 acquisitions 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 2021 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 activation fees earned at Passare, principal and interest payments received on business loans, proceeds from Paycheck Protection loans, sale of certain long-term investments, 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 2020 was $1.8 million.

Investing Activities

In January of 2020, DIG sold its investment in Community Bank of Snyder stock. Proceeds of $1.0 million were disbursed

as a dividend of $231.5 thousand and a purchase of $771.75 thousand, resulting in a gain on the sale of $83.5 thousand.

Since January 1, 1996, DAC provided a standby corporate aircraft for use in marketing and corporate air travel for DIG and its subsidiaries. When FDLIC directly purchased a newer aircraft in November of 2019, the Cessna Citation Bravo owned by DAC was hangered with the intent of selling the aircraft in 2020. In late December, the aircraft was sold for $1.3 million, resulting in a capital gain of $558.7 thousand.

Business loans outstanding at year-end 2020 were $2.8 million compared to $25.1 million at the end of 2019. The decrease was due largely to the merger of Passare into DIG at the beginning of 2020. Negative investment in Passare of $14.0 million was offset against $19.0 million in loans and interest payable to DIG, resulting in goodwill of $5.5 million. In the first quarter, DIG also received an early payoff on a $2.4 million loan. Remaining loans to funeral home customers earned interest at an average rate of 7.92%. No substantial new loans were extended in 2020. DIG collected principal payments in the amount of $3.2 million and interest payments of $421.4 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 the transfer of business loans to FDLIC, commission income at DALP and/or FAI level, or proceeds from the sale of treasury stocks. Investments are laddered to throw off approximately $500,000 in cash at the end of each month. Throughout 2020, DIG invested excess cash in short-term investments. Total interest collected on short-term investments was $45.2 thousand. At year-end 2020, DIG held $7.9 million in short-term investments.

Financing Activities

DIG’s combined debt was comprised largely of borrowings from FDLIC. These loans originated in 2007 and were used to facilitate the funding of the funeral home financing program mentioned above in investing activities. These loans were renegotiated and extended in April of 2017. The loans pay interest at the rate of 9.25% and mature in April 2022. DIG paid FDLIC $443.7 thousand in principal and $392.0 thousand in interest in 2020. At year-end 2020, outstanding borrowings on the loans from FDLIC were $4.0 million. In April, several of the DIG non-insurance companies applied for and received Paycheck Protection for a total of $1.223 million. A portion of the loans were forgiven in November and December, leaving a balance of $862.7 thousand as of December 31, 2020.

During 2020, the Company offered options on 256,755 shares of common stock at a price range of $48.04 to $74.95. Options on 21,779 shares were exercised at a price range of $48.04 to $63.83, providing $1.2 million in cash resources. 24,438 shares at a price of $48.04 were not exercised and forfeited, leaving 210,538 shares exercisable in 2021, 2022, 2023, 2024, and 2025 at a price range of $52.54 to $74.95. During the year, DIG also repurchased 30,605 shares of common stock for $2.1 million. In July of 2010, the Board of Directors approved the annual sale of a limited number of treasury shares. In 2019, DIG sold 17,645 shares of treasury stock for $1.2 million, and in 2020, DIG sold 25,010 shares for $1.7 million.

The Board of Directors approved the payment of quarterly dividends averaging $0.17 per share during 2020 for a total of $1.75 million. DIG paid $1.71 million in dividends in 2019.

Shareholder List & Beneficial Ownership

The table on page 39 sets forth certain information as of March 1, 2021, 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, 2020.