Navy-Marine Corps Relief Society Audited Financial Statements · 2020-05-13 · Navy-Marine Corps...

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Navy-Marine Corps Relief Society

Audited Financial Statements

Years ended December 31, 2019 and 2018with Report of Independent Auditors



Years ended December 31, 2019 and 2018

Contents

Report of Independent Auditors......................................................................................................................1


Statements of Financial Position ....................................................................................................................2Statements of Activities....................................................................................................................................3Statements of Functional Expenses............................................................................................................4 - 5Statements of Cash Flows................................................................................................................................6Notes to Financial Statements...................................................................................................................7 - 27

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Report of Independent Auditors

Board of DirectorsNavy-Marine Corps Relief SocietyArlington, Virginia

We have audited the accompanying financial statements of the Navy-Marine Corps Relief Society (the Society),which comprise the statements of financial position as of December 31, 2019 and 2018 and the relatedstatements of activities, functional expenses and cash flows for the years then ended and the related notes tothe financial statements.

Management's Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements inaccordance with accounting principles generally accepted in the United States of America; this includes thedesign, implementation, and maintenance of internal control relevant to the preparation and fair presentationof financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. We conductedour audits in accordance with auditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on the auditor's judgment, including the assessment ofthe risks of material misstatement of the financial statements, whether due to fraud or error. In making thoserisk assessments, the auditor considers internal control relevant to the entity's preparation and fairpresentation of the financial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internalcontrol over financial reporting. Accordingly, we express no such opinion. An audit also includes evaluating theappropriateness of accounting policies used and the reasonableness of significant accounting estimates madeby management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouraudit opinion.

OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the financialposition of the Society as of December 31, 2019 and 2018 and its changes in net assets and cash flows for theyears then ended in accordance with accounting principles generally accepted in the United States of America.

Vienna, VirginiaApril 21, 2020


Statements of Financial Position

December 31,2019 2018

AssetsCash and cash equivalents $ 1,056,176 $ 1,113,384Investments 99,711,563 84,286,341Prepaid expenses, inventory and other assets 997,742 992,388Contributions and pledges receivable 5,365,394 4,463,012Loans receivable, net 21,391,170 21,597,977Property and equipment, net 3,027,692 2,716,844

Total assets $ 131,549,737 $ 115,169,946

Liabilities and net assetsLiabilities:

Accounts payable and accrued expenses $ 1,089,180 $ 782,325Accrued salary and leave 1,085,755 1,297,694Lines of credit 1,886 6,018Pension liability 24,189,423 21,566,186Annuity payable 458,170 415,813

Total liabilities 26,824,414 24,068,036

Net assets:Without donor restrictions 93,250,499 80,195,907With donor restrictions 11,474,824 10,906,003

Total net assets 104,725,323 91,101,910

Total liabilities and net assets $ 131,549,737 $ 115,169,946

See accompanying notes to the financial statements.2


Statements of Activities

Years ended December 31,2019 2018

Without DonorRestrictions

With DonorRestrictions Total

Without DonorRestrictions

With DonorRestrictions Total

Revenues, gains and other supportContributions $ 19,814,556 $ 4,026,126 $ 23,840,682 $ 15,907,755 $ 4,386,096 $ 20,293,851Other revenues:

Thrift shop 1,151,255 - 1,151,255 1,128,650 - 1,128,650Miscellaneous 18,561 - 18,561 10,012 - 10,012

Investment income (loss), net 16,856,638 1,258,579 18,115,217 (6,218,771) (423,205) (6,641,976)37,841,010 5,284,705 43,125,715 10,827,646 3,962,891 14,790,537

Net assets released from restrictions:Satisfaction of program restrictions 956,250 (956,250) - 276,421 (276,421) -Expiration of time restrictions 3,816,096 (3,816,096) - 4,338,312 (4,338,312) -

Total net assets released from restrictions 4,772,346 (4,772,346) - 4,614,733 (4,614,733) -Total revenues, gains and other support 42,613,356 512,359 43,125,715 15,442,379 (651,842) 14,790,537

ExpensesProgram services 21,599,205 - 21,599,205 22,476,456 - 22,476,456Management and general 2,921,258 - 2,921,258 2,966,888 - 2,966,888Fundraising 1,606,833 - 1,606,833 1,419,220 - 1,419,220

Total expenses 26,127,296 - 26,127,296 26,862,564 - 26,862,564

Change in net assets from operations 16,486,060 512,359 16,998,419 (11,420,185) (651,842) (12,072,027)

Non-operating activitiesChange in beneficial interest in trust held by third parties - 56,462 56,462 - (67,354) (67,354)Pension related (costs) benefits other than net periodic pension cost (3,431,468) - (3,431,468) 3,593,416 - 3,593,416

Change in net assets 13,054,592 568,821 13,623,413 (7,826,769) (719,196) (8,545,965)

Net assets, beginning of year 80,195,907 10,906,003 91,101,910 88,022,676 11,625,199 99,647,875

Net assets, end of year $ 93,250,499 $ 11,474,824 $ 104,725,323 $ 80,195,907 $ 10,906,003 $ 91,101,910



Statement of Functional Expenses

Year ended December 31, 2019

ProgramServices Supporting Services

ClientServices

Managementand General Fundraising Total

2019Total

ExpensesSalaries and benefits $ 14,257,302 $ 1,729,000 $ 785,767 $ 2,514,767 $ 16,772,069Grant expense 2,306,736 - - - 2,306,736Loans written off (net of recoveries) 1,119,829 - - - 1,119,829Loans converted to grants 237,465 - - - 237,465Financial assistance fees 9,036 - - - 9,036Non-financial programs 390,181 - - - 390,181Volunteer expenses 507,455 - - - 507,455Human resources - 323,468 - 323,468 323,468Professional fees/bank charges - 517,839 610,527 1,128,366 1,128,366Office administration 1,254,778 152,168 69,155 221,323 1,476,101Travel expense 122,553 23,116 34,432 57,548 180,101Training and conferences 272,468 2,902 2,124 5,026 277,494Depreciation and equipment

expenses 1,121,402 135,994 61,804 197,798 1,319,200Miscellaneous administration - 36,771 43,024 79,795 79,795

Total expenses $ 21,599,205 $ 2,921,258 $ 1,606,833 $ 4,528,091 $ 26,127,296



Statement of Functional Expenses

Year ended December 31, 2018

ProgramServices Supporting Services

ClientServices

Managementand General Fundraising Total

2018Total

ExpensesSalaries and benefits $ 15,793,417 $ 1,831,867 $ 766,956 $ 2,598,823 $ 18,392,240Grant expense 2,200,028 - - - 2,200,028Loans written off (net of recoveries) 995,020 - - - 995,020Loans converted to grants 300,439 - - - 300,439Financial assistance fees 12,749 - - - 12,749Non-financial programs 312,847 - - - 312,847Volunteer expenses 441,508 - - - 441,508Human resources - 182,196 - 182,196 182,196Professional fees/bank charges - 614,486 479,203 1,093,689 1,093,689Office administration 1,373,660 159,330 66,707 226,037 1,599,697Travel expense 110,456 19,389 34,105 53,494 163,950Training and conferences 12,664 4,807 100 4,907 17,571Depreciation and equipment

expenses 923,668 107,136 44,854 151,990 1,075,658Miscellaneous administration - 47,677 27,295 74,972 74,972

Total expenses $ 22,476,456 $ 2,966,888 $ 1,419,220 $ 4,386,108 $ 26,862,564



Statements of Cash Flows

Years ended December 31,2019 2018

Cash flows from operating activitiesChange in net assets $ 13,623,413 $ (8,545,965)Adjustments to reconcile change in net assets to net cash

used in operating activities:Depreciation 249,847 328,877Realized and unrealized (gains) losses, net (16,591,421) 8,678,226Change in beneficial interest in trusts held by third parties (56,462) 67,354Change in provision for doubtful accounts 35,015 2,449Pension related costs (benefits) other than net periodic

costs 3,431,468 (3,593,416)Changes in operating assets and liabilities:

Prepaid expenses, inventory and other assets (5,354) (198,341)Contributions and pledges receivable (902,382) 202,359Loans receivable 171,792 292,090Accounts payable and accrued expenses 306,855 (152,432)Accrued salary and leave (211,939) (69,235)Pension liability (808,231) 748,869Annuity payable 42,357 66,244

Net cash used in operating activities (715,042) (2,172,921)

Cash flows from investing activitiesPurchase of property and equipment (560,695) (379,529)Net sale of investments 1,222,661 3,138,573

Net cash provided by investing activities 661,966 2,759,044

Cash flows from financing activitiesProceeds from line of credit 39,764,163 46,888,394Payments on line of credit (39,768,295) (46,882,376)

Net cash (used in) provided by financing activities (4,132) 6,018

Net change in cash and cash equivalents (57,208) 592,141Cash and cash equivalents, beginning of year 1,113,384 521,243Cash and cash equivalents, end of year $ 1,056,176 $ 1,113,384

Supplemental cash flow informationInterest paid $ 49,368 $ 67,513



Notes to Financial Statements

Years ended December 31, 2019 and 2018

Note A - Organization

The Navy-Marine Corps Relief Society (the Society) is a non-profit charitable corporation founded in1904. The Society consists of a headquarters located in Arlington, Virginia, and field offices located atU.S. Navy and Marine Corps installations throughout the world. The mission of the Society is toprovide, in partnership with the Navy and Marine Corps, financial, educational and other assistanceto members of the naval service of the United States, and their eligible family members andsurvivors, when in need, and to manage funds to administer these programs. Financial assistancemay be in the form of interest-free loans, direct relief grants, educational loans, educational grants,or any combination thereof. The accompanying financial statements include the accounts of theSociety's headquarters and its field sites.

Note B - Summary of Significant Accounting Policies

Basis of PresentationThe accompanying financial statements have been prepared on the accrual basis of accounting inaccordance with accounting principles generally accepted in the United States (U.S. GAAP).

Measure of OperationsThe statements of activities reports all changes in net assets, including changes in net assets fromoperating and nonoperating activities. Operating activities consist of those items attributable to theSociety's ongoing program and supporting services. Nonoperating activities are limited to thechange in beneficial interest in trust held by third parties and pension related benefit (costs) otherthan net periodic pension cost.

Use of EstimatesPreparation of financial statements in accordance with U.S. GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and disclosureof contingent assets and liabilities at the date of the financial statements and the reported amountsof revenues and expenses during the reporting period. Actual results could differ from thoseestimates.

Subsequent EventsThe Society has evaluated subsequent events for disclosure and recognition through April 21, 2020,the date on which these financial statements were available to be issued.

Net AssetsNet assets, revenues, gains, and losses are classified based on the existence or absence of donorimposed restrictions. Accordingly, net assets and changes therein are classified and reported asfollows:

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Notes to Financial Statements (Continued)

Note B - Summary of Significant Accounting Policies (Continued)

Net Assets (continued)Net Assets Without Donor Restrictions - Net assets available for use in general operations and notsubject to donor restrictions.

Net Assets With Donor Restrictions - Net assets subject to donor-imposed restrictions. Some donor-imposed restrictions are temporary in nature, such as those that will be met by the passage of timeor other events specified by the donor. Other donor-imposed restrictions are perpetual in nature,where the donor stipulates that resources be maintained in perpetuity. Donor-imposed restrictionsare released when a restriction expires, that is, when the stipulated time has elapsed, when thestipulated purpose has been fulfilled, or both.

Functional Allocation of ExpensesThe costs of program and supporting services activities have been summarized on a functional basisin the statements of activities. The statements of functional expenses present the naturalclassification detail of expenses by function. Certain categories of expenses are attributed to morethan one program or supporting function, and therefore, require allocation on a reasonable basisthat is consistently applied. Salaries and benefits, office administration expenses and depreciationand equipment expenses are allocated on the basis of estimates of time and effort, while all otherexpenses are allocated directly based on the nature of the activity.

Revenue RecognitionPledges and contributions result primarily from an annual fundraising drive sponsored by theSecretary of the Navy and held at Navy and Marine Corps commands throughout the world.Contributions are recognized when a promse to give is received. Conditional promises to give, thatis, those with a measurable performance or other barrier, and a right of return, are not recognizeduntil the conditions on which they depend on have been met. Contributions received are recordedat fair value as net assets without donor restriction, or net assets with donor restrictions, dependingon the existence and/or nature of any donor restrictions. A contribution is reported as withoutdonor restrictions if a restriction is fulfilled in the same time period in which the contribution isreceived. The Society estimates contributions and pledges receivable based on prior years'experience and management's analysis of specific promises made. All amounts are consideredcurrent.

Revenue from sales at thrift shops is measured based on the amount of consideration received atthe time of the sale. Generally the stand-alone selling price is based on the prices charged tocustomers. Revenue is recognized when control of the goods is transferred to the customer, whichis the point of sale and satisfaction of the performance obligation. As each item is individuallypriced, no allocation of the transaction price is necessary.

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Loans Receivable - Assistance and EducationThe Society's loans receivable are reported on the statements of financial position, net of anallowance for doubtful accounts. In accordance with U.S. GAAP, loans made and repayments ofloans affect the calculation of the loan balance and are not shown as income or expense. Due to theunique nature of the amounts due from loan recipients, it is not practical to estimate their fairmarket value.

Educational and direct relief loans are recorded at face value, bear no interest, and are generallydue in monthly installments over periods deemed appropriate by caseworkers. The loans havewidely varying maturities and are based upon need rather than credit worthiness of the borrower.Some loans are converted into grants and thereby expensed when it becomes apparent that theindividual is in financial need and is unable to repay the Society. Some loans are written off asuncollectible. The Society determines loans to be uncollectible when payments are not received asscheduled.

Delinquent loans are charged to the allowance for doubtful accounts when internal collection effortshave been exhausted and the account is deemed uncollectible. The Society evaluates the adequacyof the allowance on an annual basis based on historical loss experience. Loans written off asexpenses are shown net of recoveries in the financial statements.

Investments and Fair Value MeasurementsAll investments are carried at fair value, with gains and losses included in the statements ofactivities. Investment income (loss), net consists of interest and dividends earned from cash, cashequivalents and investments, gains and losses realized upon sales, and unrealized gains and lossesresulting from fluctuations in market values of investments, net of related investment managementexpenses. Gains and losses upon sales are calculated using the average cost method.

The Society’s estimates of fair value for financial assets and liabilities are based on the frameworkestablished in the fair value measurements and disclosures accounting guidance. The framework isbased on the inputs used in valuation and requires that observable inputs be used in the valuationswhen available. The disclosure of fair value estimates in the fair value accounting guidance includesa hierarchy based on whether significant valuation inputs are observable. In determining the level ofthe hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quotedprices in active markets and the lowest priority to unobservable inputs that reflect the Society’ssignificant market assumptions. The three levels of the hierarchy are as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identicalassets or liabilities traded in active markets that the Society has the ability to access.

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Investments and Fair Value Measurements (continued)Level 2 – Inputs to the valuation methodology include quoted prices for similar assets orliabilities in active markets, quoted prices for identical or similar assets or liabilities inmarkets that are not active, inputs other than quoted prices that are observable for theasset or liability and market-corroborated inputs.

Level 3 – Valuations based on models where significant inputs are not observable. Theunobservable inputs reflect the Society's own assumptions about the inputs that marketparticipants would use.

Fair values are based on quoted market prices when available (Level 1). When market prices are notavailable, fair value is generally estimated using current market inputs for similar financialinstruments with comparable terms and credit quality, commonly referred to as matrix pricing(Level 2). In instances where there is little or no market activity for the same or similar instruments,the Society estimates fair value using methods, models and assumptions that management believesare relevant to the particular asset or liability. This may include discounted cash flow analysis orother income based approaches (Level 3). These valuation techniques involve some level ofmanagement estimation and judgment. The Society recognizes transfers between levels in the fairvalue hierarchy at the end of the period for the event or change in circumstances that caused thetransfer.

Income TaxesThe Society is a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. Inaddition, income in the statements of activities has been properly classified as exempt. Accountingstandards require an entity to analyze the technical merits of its tax positions and determine thelikelihood that these positions will be sustained if examined by the taxing authorities. Managementhas evaluated its tax positions and concluded that the Society has properly maintained its exemptstatus. In addition, the Society has concluded that there are no uncertain tax positions as ofDecember 31, 2019.

InventoryDonated inventory located at the Society's thrift shops is valued at its estimated net realizable value.Management has determined that its thrift shop sales are generally exempt from sales tax. In 2009,California passed legislation that specifically exempted the thrift shops from sales tax until January2014; subsequently, the exemption has been extended until January 2024. While this legislation isnot retroactive, the Society has maintained it has tax exempt status as a part of the EmployeeRetirement Income Security Act of 1974 (ERISA).

During 2019 and 2018, branded items were purchased in bulk quantities resulting in inventory atyear end. This inventory is valued at cost.

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Gift CardsThe Society uses gift cards as a part of the operations for the Budget For Baby (B4B) program. As aresult, gift cards were on hand as of December 31, 2019 and 2018, and are recorded within prepaidexpenses, inventory and other assets on the statements of financial position.

Property and EquipmentProperty and equipment are capitalized at cost for purchases over $2,500. Property and equipmentare recorded at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of three to five years for the respective assets.

Cash and Cash EquivalentsThe Society considers cash and cash equivalents to include only demand deposits. Money marketaccounts and short-term, highly liquid investments purchased for its trading accounts and handledby investment managers are treated as investments rather than cash equivalents. The carryingamounts approximate fair value because of the short duration of these instruments.

Concentrations of Credit RiskFinancial instruments that potentially subject the Society to significant concentrations of credit riskconsist principally of cash, investments and loans receivable. Substantially all of the Society's cashand cash equivalents are maintained in a single bank. The Society has exposure to credit risk to theextent that its cash and cash equivalents exceed amounts covered by Federal Deposit InsuranceCorporation. The Society has not experienced any losses in such accounts and managementbelieves it is not exposed to any significant credit risk on cash and cash equivalents. With respect toinvestments, the Society limits its credit risk by diversifying its investments and working with manydifferent investment managers. At December 31, 2019 and 2018, the Society had uncollateralizedloans receivable totaling $22.5 million and $22.7 million, respectively, all to present or former servicemembers of the Navy or Marine Corps, their eligible family members and their survivors. The Societybelieves that its credit risk for these loans is not significant.

In the normal course of business, the Society is also subject to the credit risk associated with thenon-performance by counter-parties of their contractual obligations pursuant to securities andforeign currency transactions.

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Recent Accounting PronouncementsThe Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU)2014-09, Revenue from Contracts with Customers (Topic 606), which supercedes or replaces nearlyall GAAP revenue recognition guidance. This standard requires the recognition of revenue whenpromised goods or services are transferred to customers in an amount that reflects theconsideration to which an entity expects to be entitled in exchange for those goods and services.We have implemented ASU 2014-09 and its related amendments beginning in 2019. No cumulativeeffect adjustment in net assets was recorded because the adoption of ASU 2014-09 did not impactthe Society's reported historical revenue.

FASB has issued ASU 2018-08, Clarifying the Scope and the Accounting Guidance for ContibrutionsReceived and Made, to clarify and improve the scope and the accounting guidance for contributionsreceived and contributions made. This standard assists entities in evaluating whether transactionsshould be accounted for as contributions or exchange transactions and determining whether acontribution is conditional. We have implemented the provision of ASU 2018-08 applicable tocontributions received in the accompanying financial statements under a modified prospectivebasis. There is no effect on net assets in connection with our implementation of ASU 2018-08.

Note C - Liquidity and Availability of Resources

Financial assets available for general expenditure, that is, without donor or other restrictions limitingtheir use, within one year of the date of the statement of financial position, comprise the following:

December 31,2019 2018

Cash and cash equivalents $ 1,056,176 $ 1,113,384Investments 78,448,975 64,649,482Contributions and pledges receivable 5,365,394 4,463,012Loans receivable within one year 18,850,990 18,960,980Financial assets available to meet cash needs for general

expenditures within one year $ 103,721,535 $ 89,186,858

The Society has a policy to utilize lines of credit to meet daily obligations, as necessary. The Society isprimarily supported by loan repayments and contributions. The Society had assets available forgeneral expenditure within one year of $103,721,535 and $89,186,858 as of the years endedDecember 31, 2019 and 2018, respectively. None of the financial assets shown above are subject toany donor or other restrictions that make them unavailable for general expenditures.

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Note C - Liquidity and Availability of Resources (Continued)

Management has informally designated a portion of its investments as a reserve fund. Theseamounts are not deemed to be board designated net assets under U.S. GAAP. The Society maintainswithin this reserve fund an amount determined by the Board of Directors or management to beadequate to fund the maximum cash draw down of the fiscal or calendar year, and amounts may bedrawn upon with Board of Directors or management approval. These amounts can be madeavailable as necessary by either the Board of Directors or management, and can be used forongoing programs and operations. The Society's annual business plan, which is approved by theBoard of Directors, includes a planned reserve fund withdrawal, as necessary, to balance cashinflows and outflows.

The Society's endowment funds consist of donor-restricted endowments. Income from donor-restricted endowments is restricted for specific purposes, with the exception of the amountsavailable for general use. Donor-restricted endowment funds are not available for generalexpenditure.

Day to day operations of the Society are financed through the master operating account. Any dailynegative balances in the master operating account are covered by a $10,000,000 collateralized lineof credit with Truist (formerly SunTrust) and a $20,000,000 collateralized line of credit with UBS,which can be drawn upon to provide funds to meet the Society's short-term cash flow needs overthe course of its operating cycle. The Society maintains a $0 outstanding account balance and$1,886 in accrued interest under the Truist line of credit as of December 31, 2019, and expects todraw upon the Truist line of credit within one year of the date of the statement of financial position.As of December 31, 2018, the Society had an outstanding account balance of $0, and $6,018 inaccrued interest under the Truist line of credit. Therefore, the collateral associated with the Truistline of credit is considered unavailable for general expenditures. The Society maintains a $0outstanding account balance and $0 in accrued interest under the UBS line of credit as of December31, 2019 and 2018, respectively, and does not intend to draw upon the UBS line of credit within oneyear of the date of the statement of financial position. As the collateral associated with the UBS lineof credit does not contain any further restrictions, the collateral is considered available for generalexpenditures.

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Note D - Investments

The Society follows a policy of diversification of its investments in order to reduce volatility of pricefluctuations in its overall portfolio and balance risk/return levels to meets its financial goals.Investments are stated at fair value and consist of the following at December 31:

2019 2018 LevelCommon stocks $ 15,225 $ 11,515,067 Level 1Bond exchange traded funds 10,399 10,297 Level 1Equity exchange traded funds 51,312,141 34,638,548 Level 1Fixed income securities 191,747 143,378 Level 1Short-term investments 8,814,351 1,020,661 Level 1Equity mutual funds 17,593,052 16,829,098 Level 1Bond mutual funds 14,863,122 13,570,932 Level 1Beneficial interest in perpetual trust 588,644 532,182 Level 2Hedge fund 6,322,882 6,026,178 N/ATotal $ 99,711,563 $ 84,286,341

The Society invests in a hedge fund, the O'Connor Global Multi-Strategy Limited (the Fund). The Fundis not publicly traded; the Society therefore values its investment in the Fund at the net asset value(NAV) as reported by the fund manager, multiplied by the number of units held. The net asset valueof the Fund is based on the fair value of the underlying securities held by the Fund. The investmentmanager reserves the right to adjust the reported NAV if it is deemed to be not reflective of fairvalue. Because of the inherent uncertainty in the valuations of these investments, their estimatedvalues may differ significantly from the values that would have been used had a ready market forthe investments existed, and the difference could be material. As permitted by U.S. GAAP, theSociety uses the NAV as a practical expedient to determine the fair value of this private investmentvehicle and it is therefore excluded from the fair value hierarchy.

The Fund is a feeder fund in a master-feeder structure whereby the Fund invests substantially all ofits assets (other than as may be necessary to pay any Fund level expenses and implement anycurrency hedges) in the O’Connor Global Multi-Strategy Alpha Master Limited (the Master Fund), acompany organized under the laws of the Cayman Islands. The investment objective of the MasterFund is to realize consistently high risk adjusted appreciation in the value of its assets. The MasterFund seeks to achieve its investment objective primarily through a combination of multiplestrategies, which may include but are not limited to fundamental market neutral long/short,long/short equity, convertible arbitrage, merger arbitrage, credit trading, opportunistic, macro andquantitative strategies.

The Fund has notice requirements for redemptions which requires notification no later than the lastbusiness day of the first month of the quarter in which the shareholder wishes to redeem. As ofDecember 31, 2019 and 2018, there were no unfunded commitments related to the Fund.

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Note E - Loans Receivable-Assistance and Education

The Society provides uncollateralized interest-free loans to eligible service members and eligiblefamily members for help with emergency needs and education, such as:

Emergency Transportation Funeral Expenses Medical/Dental Bills (patient's share) Food, Rent and Utilities Disaster Relief Assistance Child Care Expenses Essential Vehicle Repairs Unforeseen Family Emergencies Tuition Assistance

Credit quality indicators such as consumer credit risk scores, credit ratings, collateral, collectionexperience, etc. are not used for any criteria. The credit quality indicators used by the Society areinternal metrics. Those internal metrics/assessments include verification of need, preparation of abudget, and ability to repay the loan.

An analysis of loan activity, which includes all loans for education programs as well as direct relief, isas follows as of December 31:

2019 2018

Loans outstanding, beginning of year $ 22,692,097 $ 22,984,187

Loans made 40,133,848 41,369,224Collections on loans (38,975,962) (40,337,177)Loans considered uncollectible (1,092,213) (1,023,699)Loans converted to grants (237,465) (300,438)

Loans outstanding 22,520,305 22,692,097Allowance for doubtful accounts (1,129,135) (1,094,120)

Loans receivable, end of year $ 21,391,170 $ 21,597,977

The following chart represents the aging of loans receivable by class of loan as of December 31,2019:

31 to 60 DaysPast Due


Greater than90 Days Past

DueTotal

Past Due Current TotalTotal FinancialAssistance $ 63,815 $ 39,988 $ 403,809 $ 507,612 $ 22,012,693 $ 22,520,305

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Note E - Loans Receivable-Assistance and Education (Continued)

The following chart represents the aging of loans receivable by class of loan as of December 31,2018:



Greater than90 Days Past

DueTotal

Past Due Current TotalTotal FinancialAssistance $ 40,835 $ 49,105 $ 460,278 $ 550,218 $ 22,141,879 $ 22,692,097

Impairment of loans receivable is evaluated collectively on the aggregate balance, not on theindividual loan basis. The calculation is an estimate based upon the average of the prior three yearshistory of loans write-offs, conversions and total loan assistance. The allowance is then adjusted ascalculations require.

The following chart provides information for loans receivable as of December 31:

2019 2018Number of loans outstanding 38,240 40,874Average face amount of loans $ 973 $ 929Average carrying amount of loans $ 589 $ 530

The difference between the average face and average carrying amount of loans is due to paymentsof principal by loanees. Total impairment losses, which are recorded in program services expensesin the statements of activities, are $1,119,829 and $995,020 for the years ending December 31, 2019and 2018, respectively.

The activity in the allowance for doubtful accounts - loans receivable is as follows for the year endedDecember 31:

2019 2018Allowance, beginning balance $ 1,094,120 $ 1,091,671

Current period impairment losses 1,119,829 995,020Current year reductions (1,084,814) (992,571)

Allowance, ending balance $ 1,129,135 $ 1,094,120

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Note F - Property and Equipment

The following summarizes the property and equipment accounts as of December 31:

2019 2018Office furniture and equipment $ 64,864 $ 72,950Automobiles 15,802 15,802Computer equipment 2,172,169 2,339,012Software (including work-in-progress) 3,375,404 2,876,119

5,628,239 5,303,883Less: accumulated depreciation (2,600,547) (2,587,039)Total property and equipment, net $ 3,027,692 $ 2,716,844

Note G - Lines of Credit

The Society maintains a $10,000,000 line of credit with Truist and a $20,000,000 line of credit withUBS to provide funds to meet its short-term cash flow needs over the course of its operating cycle.The Truist line of credit expires on August 31, 2021 and carries an interest rate of the LIBOR 30-dayindex plus 1.20% per annum. The Fixed Income Collateral account is pledged as collateral againstthe line of credit. The agreement allows for borrowing up to 75% of the market value ($13.8 millionas of December 31, 2019) of this investment account. The outstanding account balance with Truist atDecember 31, 2019 and 2018 was $0 in principal for both years and $1,886 and $6,018 in accruedinterest, respectively.

The UBS line of credit carries an interest rate equal to the LIBOR 30-day index plus 1.20% perannum. One of the Society's investment accounts with UBS (current market value of $74 million) ispledged as collateral. The outstanding account balance with UBS at December 31, 2019 and 2018was $0 in principal for both years and $0 in accrued interest for both years, respectively. Thecarrying value of both liabilities approximates fair value.

Note H - Retirement Plans

The Society sponsors a defined benefit retirement plan (the Plan), a 403(b) salary reductionarrangement, and a 401(k) Plan. The Society does not contribute to the 403(b) Plan.

Under the terms of the Plan, a participant may retire at the later of attainment of age 65 orcompletion of five years of participation. Vesting in employer contributions is 0% for the first fiveyears of service and full vesting occurs after five years. The Society's funding policy is to make theminimum annual contribution required by applicable regulations. Contributions are intended toprovide not only for benefits attributed to service to date, but for those expected to be earned in thefuture. There are no Plan participant contributions. Effective January 1, 2011, any employee hiredafter that date will not be eligible to enter the Plan. The Society sponsors a 401(k) Plan for only thoseemployees hired after January 1, 2011. Contributions to the 401(k) Plan were $299,926 and $301,910for 2019 and 2018, respectively.

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Note H - Retirement Plans (Continued)

The Plan has established a trust to hold and administer the assets of the Plan and to pay benefitsand expenses from the fund upon direction of the Plan administrators or the Society. Contributionsare also made as needed to an insurance company and funded in accordance with an actuarialestimate of amounts required to meet the benefits payable to pre-1986 retirees who are stillcovered under the terms of the Society's previous coverage.

U.S. GAAP requires that the unfunded status of the Plan be recognized as a liability in thestatements of financial position and as a reduction of net assets without donor restriction in thestatements of activities.

The following table sets forth the Plan's funded status and amounts recognized in the Society'sfinancial statements as of and for the years ended December 31:

2019 2018Accumulated benefit obligation $ 64,086,127 $ 55,820,517

Projected benefit obligation $ (70,033,656) $ (60,439,003)Plan assets at fair value 45,844,233 38,872,817

Funded status $ (24,189,423) $ (21,566,186)

The amounts of contributions, benefits paid from the Plan, and net periodic benefit costs are asfollows for the years ended December 31:

2019 2018Employer contribution $ 2,600,000 $ 1,600,000Benefits paid $ 3,020,460 $ 2,643,171

Components of net periodic benefit costs:Service costs $ 1,344,500 $ 1,943,910Interest costs 2,502,867 2,470,456Amortization of actuarial loss 826,449 1,100,477Expected return on plan assets (2,882,047) (3,165,975)

Net periodic benefit costs $ 1,791,769 $ 2,348,868

The cumulative amounts that have been recognized as a reduction in net assets without donorrestriction not yet recognized as a component of net periodic benefit cost reported for the yearsended December 31:

2019 2018Net loss $ (17,563,580) $ (14,132,112)

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The amounts that have been recognized for the period as an increase (reduction) in net assetswithout donor restriction arising from the Plan but not yet reclassified as components of netperiodic benefit cost for the years ended December 31:

2019 2018Net (loss) benefit $ (3,431,468) $ 3,593,416

There are no accumulated prior service costs that will be amortized into net periodic benefit costsduring 2020. The net loss that will be amortized into net periodic benefit costs during 2020 is$826,449.

In determining the expected rate of return on plan assets, the Society considers the relativeweighting of plan assets, the historical performance of total plan assets and individual asset classesand economic and other indicators of future performance. In addition, the Society may consult withand consider the input of financial and other professionals in developing appropriate returnbenchmarks.

Assumptions used in accounting for the Plan were as follows at December 31:

2019 2018Weighted-average assumptions to determine benefit obligations:

Discount rate %3.25 %4.25Rate of compensation increase %3.50 %3.00

Weighted-average assumptions to determine net periodic pension cost:Discount rate %4.25 %3.75Expected long-term rate of return on plan assets %7.50 %7.50Rate of compensation increase %3.00 %5.00

During 2019, the MP-2019 Improvement Generational Scale was adopted as a mortality assumptionfor the Plan. The projected benefit obligation decreased by $274,601 due to changing theimprovement scale. During 2018, the MP-2018 Improvement Generational Scale was adopted as amortality assumption for the Plan. The projected benefit obligations decreased by $138,157 due tothe changing of the improvement scale.

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Based on actuarial estimates, in 2020 the Society expects to contribute approximately $2.4 million toplan year 2020. The estimated future benefits payments are as follows for the fiscal years endingDecember 31, 2019 through 2030:

2020 $ 3,261,3032021 3,238,0272022 3,330,8862023 3,534,2692024 3,638,0492025 - 2030 20,452,356

$ 37,454,890

Plan assets invested in mutual funds and money market accounts are carried at their fair marketvalue based on market quotes as determined by the custodian.

These valuation methods may produce a fair value calculation that may not be indicative of netrealizable value or reflective of future fair values. Furthermore, while the Society believes itsvaluation method is appropriate and consistent with other market participants, the use of differentmethodologies or assumptions to determine the fair value of certain financial instruments couldresult in a different estimate of fair value at the reporting date.

The following table sets forth by level, within the U.S. GAAP fair value hierarchy, the Plan assets atfair value as of December 31, 2019 and 2018:

2019 2018 LevelBond mutual funds $ 11,379,350 $ 9,807,135 1Equity mutual funds 29,723,360 25,986,418 1Balanced mutual funds 2,612,881 2,793,776 1Money market funds 2,128,642 285,488 1

$ 45,844,233 $ 38,872,817

There were no transfers between levels during the years ended December 31, 2019 or 2018.

The investment policy and target investment allocations for the plan assets for the fiscal year endingDecember 31, 2019 are designed to target 20% to 60% invested in fixed income securities, 40% to80% invested in equity securities, and 0% to 40% invested in cash and cash equivalents.

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The following table summarizes the plan assets by major category as of December 31:

2019 2018Equity securities %70 %74Fixed income securities %25 %25Other %5 %1Total %100 %100

Note I - Net Assets With Donor Restrictions

Net assets with donor restrictions are restricted for the following purposes or periods:

2019 2018

Subject to expenditure for specified purpose: McAlinden Fund $ 128,618 $ 128,618 Gordon B. Davis Fund 1,819,671 1,476,047 Military Services Support 79,634 64,596 Clegg Fund 826,840 670,701 Neuman Fund 627,083 508,666 Alvin Cerny Fund 119,924 97,278 USAA - 570,000

3,601,770 3,515,906Subject to the passage of time: Pledges receivable 4,026,127 3,816,096

Restricted in perpetuity: SCAMP Fund 250,000 250,000 Selfridge Fund 1,000,000 1,000,000 The Ilgenfritz Fund 1,428,283 1,428,283 Lowell Reade 580,000 580,000 Beneficial interest in Behannon Perpetual Trust 588,644 532,182

3,846,927 3,790,465Not subject to spending policy or appropriation: Underwater endowments - (216,464)

Total net assets with donor restrictions $ 11,474,824 $ 10,906,003

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Note I - Net Assets With Donor Restrictions (Continued)

Net assets were released from donor restrictions by incurring expenses satisfying the restrictedpurpose or by the passage of time as follows for the year ended December 31:

2019 2018Satisfaction of purpose restrictions:

SCAMP Fund $ 35,196 $ -Selfridge Fund 140,670 -Clegg Fund - 20,421Gordon B Davis Fund - 75,000Neuman Fund - 65,000Ilgenfritz Fund 128,795 -Alvin Cerny Fund - 6,000Lowell Reade 81,589 -USAA Grant 570,000 110,000

956,250 276,421Expiration of time 3,816,096 4,338,312

Total net assets released from donor restrictions $ 4,772,346 $ 4,614,733

Net assets with donor restrictions are available for the following purposes:

Joseph A. McAlinden Working Divers Scholarship Fund - To fund research of ocean agriculture byNavy working divers.

Gordon B. Davis Scholarship Fund - To provide education scholarships to eligible Marine Corpspersonnel.

The Ilgenfritz Fund - The Society received a partial distribution from the Ilgenfritz estate in 2013directing the funds be used to provide educational assistance to children of active duty anddeceased members of the Naval Services (Navy and Marine Corps). During 2016, based on theagreement with the estate, the entire balance of this fund was restricted to the donated corpus($1,428,283 corpus).

Alvin Cerny Fund - To provide educational assistance to eligible Sailors, Marines and their families.

Military Services Support - To provide financial assistance for Society-wide programs, restricted tointerest income only for a period of 10 years.

RADM Courtney G. Clegg (MC) and Mrs. Margaret H. Clegg Scholarship Fund - To provide educationscholarships to eligible dependents of the Navy and Marine Corps.

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Note I - Net Assets With Donor Restrictions (Continued)

Major Joel L. Neuman USMC Scholarship Fund - To provide educational assistance to eligible Sailors,Marines and their families.

USAA - To provide support for the Budget for Baby Workshop, Emergency Financial Assistance,Disaster Assistance, and Combat Casualty Assistance – Visiting Nurse program (as of December 31,2019) and the Combat Casualty Assistance – Visiting Nurse program (as of December 31, 2018).

Scholarships for Children of American Military Personnel (SCAMP) - To provide scholarships throughthe Travers Scholarship Program ($250,000 corpus).

Selfridge Fund - To assist widows and minor children of deceased officers and enlisted men of theU.S. Navy and Marine Corps ($1,000,000 corpus).

Lowell Reade - To be used at the discretion of the Society ($580,000 corpus).

Behannon Perpetual Trust - The Society holds a beneficial interest in the Mozelle BehannonCharitable Trust, a perpetual trust which is valued at the fair value of the Society's one-third share ofthe assets in the trust. The Society receives an annual income payment which is used to fulfill theSociety's mission.

Note J - Commitments

USS Cole Memorial Fund - Provides financial assistance to surviving family members of thepersonnel killed as a result of the terrorist attack on USS Cole on October 12, 2000. During 2013, theUSS Cole Memorial Fund exhausted all monies in the fund. All future payments to support eligiblebeneficiaries will be paid out of the Society’s operating funds. As of December 31, 2019, the Societyanticipates making disbursements to 3 additional children for a total amount of $375,000 as eachchild reached his or her 21st birthday. The Society has agreed to be the guarantor of sufficient fundsfor tuition, books and fees for each of these 3 children to obtain a four-year, post-secondaryuniversity degree or equivalent technical/vocational training. Since the Society is not the first payerof educational benefits, and since it is unknown how many of the children will pursue futureeducation opportunities, or what the future costs of tuition will be for those who do requesteducation assistance, it is not possible to estimate any reasonable future disbursement amount forthis purpose. The Society paid $0 during the years ending December 31, 2019 and 2018,respectively.

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Note J - Commitments (Continued)

Pentagon Assistance Fund - To provide financial assistance to surviving spouses and children of thenaval personnel killed as a result of the terrorist attack on the Pentagon on September 11, 2001, andthose killed in the theater of combat operations during Operation Enduring Freedom. The fundprovides for the Society to act as a guarantor of sufficient funds for tuition, books and fees for eachof the surviving spouses and children to obtain a four-year, post-secondary university degree orequivalent technical/vocational training. Additionally, each surviving spouse received a distributionof $50,000 and each surviving child will be eligible to receive $125,000 upon reaching his or her 21stbirthday. The Pentagon Assistance Fund was closed to new beneficiaries on June 1, 2007, coincidentwith the increase of the Service member's Group Life Insurance (SGLI) benefit to $400,000 andCongressional approval of the transferability of education benefits to the spouses and dependentchildren of service personnel. As of December 31, 2019, there are no net assets with donorrestrictions remaining relating to this purpose. However, the Society will continue to honor itscommitment through the use of net assets without donor restrictions. Due to the nature of thiscommitment, it is not possible to reasonably estimate the future disbursements for these purposes.

No liability has been recorded in the statements of financial position as of December 31, 2019 and2018 for the commitments described above. Expense for the commitment for the $125,000 fixedsum is recognized in the year an eligible individual reaches age twenty-one, and for the educationalexpenses, in the year the qualified expenses are incurred. The Society expects that 29 children willreceive this benefit through the year ended December 31, 2027.

Note K - Endowment

The Society's endowments consist of four individual donor-restricted endowment funds establishedfor the purposes of providing income to support general operations and specific activities, asdetailed in Note I. As required by U.S. GAAP, net assets of the endowment fund are classified andreported based on the existence or absence of donor-imposed restrictions.

Interpretation of Relevant LawManagement and the Board of Directors of the Society have interpreted the District of ColumbiaUniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring the preservation ofthe fair value of the original gifts as of the date of the donor restricted endowment funds, unlessthere are explicit donor stipulations to the contrary. At December 31, 2019 and 2018, there were nosuch donor stipulations. As a result of this interpretation, the Society retains in perpetuity (a) theoriginal value of the initial and subsequent gift amounts (including promises to give net of discountand allowance for uncollectible amounts) donated to the endowment fund and (b) anyaccumulations to the endowment made in accordance with the direction of the applicable donor giftinstrument at the time the accumulation is added. Donor restricted amounts not retained inperpetuity are subject to appropriation for expenditure by us in a manner consistent with thestandard of prudence prescribed by UPMIFA.

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Note K - Endowment Funds (Continued)

Interpretation of Relevant Law (continued)From time to time, certain donor-restricted endowment funds may have fair values less than theamount required to be maintained by donors or by law (underwater endowments). The Society hasinterpreted UPMIFA to permit spending from underwater endowments in accordance with purdentmeasures required under law. At December 31, 2019, funds with original gift values of $3,258,283,fair values of $3,258,283 and no deficiencies were reported in net assets with donor restrictions. AtDecember 31, 2018, funds with original gift values of $3,258,283, fair values of $3,041,819 anddeficiencies of $216,464 were reported in net assets with donor restrictions.

As of December 31, the Society had the following endowment net asset composition by type of fund:

Year ended December 31, 2019With DonorRestrictions

Original gift amount $ 3,258,283Accumulated investment losses -

$ 3,258,283

Year ended December 31, 2018Original gift amount $ 3,258,283Accumulated investment losses (216,464)

$ 3,041,819

Investment and Spending PoliciesEndowment funds are invested to provide long term growth of capital to meet the future obligationsof the funds in accordance with the respective donor covenants establishing them. Anotherconsideration and objective of the fund is to prudently manage risk by diversifying investments in amanner that lowers overall volatility of the funds' corpus. An asset allocation of 50% to 70% inequities, 20% to 50% in fixed income, and 5% to 10% in other asset classes is maintained.

The Society considers the following factors in making a determination to appropriate or accumulatedonor restricted endowment funds:

The duration and preservation of the endowment fund The purpose of the Society and the donor restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of the Society The investment policies of the Society The changing financial needs of the Society's clients, i.e., demands for services and programs

of the Society

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Note K - Endowment Funds (Continued)

The earnings on endowment funds in excess of corpus are classified as net assets with donorrestrictions until those amounts are appropriated for expenditure by the Society. Net assets arereleased from donor restrictions by incurring expenses satisfying the restricted purpose or byoccurrence of other events specified by the donors. Donor restricted funds for which the restrictedpurpose is satisfied in the year they are received are classified as net assets without donorrestrictions on the statements of activities.

Changes in endowment net assets for the years ended December 31 are as follows:

With DonorRestrictions

Endowment net assets January 1, 2019 $ 3,041,819Contributions -Investment return, net 602,714Amounts appropriated for expenditure (386,250)Endowment net assets December 31, 2019 $ 3,258,283

Endowment net assets January 1, 2018 $ 3,258,283Contributions -Investment return, net (216,464)Amounts appropriated for expenditure -Endowment net assets December 31, 2018 $ 3,041,819

Note L - Contributed Services/Facilities/Equipment

Donated services are recognized as contributions if the services create or enhance non-financialassets or require specialized skills, are performed by people with those skills, and would otherwisebe purchased. No contributions of services were recorded in the financial statements for the yearsended December 31, 2019 and 2018.

The Society receives substantial benefit from services provided by active and retired members ofthe Navy and Marine Corps and their spouses. These volunteer services totaled an estimated275,000 hours and 288,000 hours in 2019 and 2018, respectively. The value of these volunteerservices is not included in the financial statements.

In addition, the Navy and Marine Corps donate the use of office space and other services at variousmilitary installations around the world. The value of these donated facilities has not been reflectedin the accompanying financial statements and is not presently determinable. Space occupied by theSociety's Headquarters in Arlington, Virginia during 2019 and 2018 was valued at $613,584 and$617,718, respectively, which is recorded in the financial statements as contributions and officeadministration expense (which is allocated to program and supporting services as benefited).

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Note L - Contributed Services/Facilities/Equipment (Continued)

The Society, from time to time, is provided the use of government furniture and equipment inaccordance with Title 10 of the U.S. Code and agreements reached between the Society and theNavy and Marine Corps. The equipment is being depreciated over a five-year useful life inaccordance with Title 10 and the Society recognized $145,153 and $159,066 in depreciation andequipment expenses for 2019 and 2018, respectively.

Note M - Related Party Transactions

The Society is related to the Navy-Marine Corps Ball Committee (the Committee), a nonprofitorganization, through shared directors. During the years ended December 31, 2019 and 2018, theCommittee donated $428,500 and $459,265, respectively, to the Society, which is recognized incontributions in the statements of activities.

Note N - Subsequent Events

In December 2019, a novel strain of coronavirus (COVID-19) surfaced. The spread of COVID-19around the world in the first quarter of 2020 has caused significant volatility in U.S. and internationalmarkets. There is significant uncertainty around the breadth and duration of business disruptionsrelated to COVID-19, as well as its impact on the U.S. and international economies. Due to theevolving impacts of COVID-19, the Society notes there could be closures of thrift shops andassistance sites around the world. However, at this point in time, the financial impact isindeterminable.

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