MORRIS, DAVIS & CHAN LLP Certified Public Accountants
PORTUGUESE FRATERNAL SOCIETY OF AMERICA FINANCIAL STATEMENTS TOGETHER WITH INDEPENDENT AUDITORS' REPORTS DECEMBER 31, 2011 (WITH 2010 COMPARATIVE TOTALS)
MORRIS, DAVIS & CHAN LLP Certified Public Accountants
PORTUGUESE FRATERNAL SOCIETY OF AMERICA TABLE OF CONTENTS
PAGE INDEPENDENT AUDITORS' REPORT
1
STATEMENT OF ADMITTED ASSETS, LIABILITIES, RESERVES AND UNASSIGNED FUNDS AS OF DECEMBER 31, 2011 - STATUTORY BASIS
2-3
STATEMENT OF CHANGES IN UNASSIGNED FUNDS FOR THE YEAR ENDED DECEMBER 31, 2011 - STATUTORY BASIS
4
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2011– STATUTORY BASIS
5
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2011– STATUTORY BASIS
6-7
NOTES TO FINANCIAL STATEMENTS
8-19
i
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF ADMITTED ASSETS, LIABILITIES, RESERVES, AND UNASSIGNED FUNDS – STATUTORY BASIS DECEMBER 31, 2011 (WITH 2010 TOTALS FOR COMPARATIVE PURPOSES)
General Fund
20-30 Fund
Disability Fund
Youth Fund
Library Fund
2011 Total
2010 Total
ASSETS Investments Cash and cash equivalents Bonds, at amortized cost Preferred stocks (at cost, approximate market value at $7,303,719 for 2011 and $5,592,176 for 2010) Mutual funds, at market Common stocks, at market Certificate policy loans, at cost Mortgage loans on real estate Real estate: Occupied by PFSA (at cost, net of accumulated depreciation of $637,506 for 2011 and $616,112 for 2010) Held for production of income (at cost, net of accumulated depreciation of $107,474 for 2011 and $363,344 for 2010) Held for sale (at cost, net of accumulated depreciation of $10,329 for 2011) Other investments
$
Total investments Other assets Accrued investment income receivable Deferred and uncollected premiums Total other assets Total assets
$
5,814,446 65,448,318
$ 461,868 -
$
10,721 -
$
27,670 -
$
75,672 -
$
6,390,377 65,448,318
$
4,182,967 67,079,085
7,775,629 2,722,543 478,493 324,182 12,524,528
-
-
-
-
7,775,629 2,722,543 478,493 324,182 12,524,528
5,911,345 2,343,029 260,981 278,568 15,744,279
210,216
-
-
-
-
210,216
217,170
2,731,729
-
-
-
-
2,731,729
2,110,612
842,702 125,887
-
-
-
-
842,702 125,887
185,985
98,998,673
461,868
10,721
27,670
75,672
99,574,604
98,314,021
1,176,021 6,405
-
-
-
-
1,176,021 6,405
1,007,115 7,175
1,182,426
-
-
-
-
1,182,426
1,014,290
100,181,099
$
461,868
$
10,721
$
27,670
$
75,672
The accompanying notes are an integral part of these financial statements. 2
$
100,757,030
$
99,328,311
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF ADMITTED ASSETS, LIABILITIES, RESERVES, AND UNASSIGNED FUNDS – STATUTORY BASIS DECEMBER 31, 2011 (WITH 2010 TOTALS FOR COMPARATIVE PURPOSES)
General Fund
20-30 Fund
Disability Fund
Youth Fund
Library Fund
2011 Total
2010 Total
LIABILITIES, RESERVES, AND UNASSIGNED FUNDS Liabilities Supplemental contracts Certificate and contract claims Premiums received in advance Custodial funds Unearned interest Other liabilities Total liabilities
$
1,870,769 271,286 171,121 37,026 7,654 240,603
$
-
$
-
$
-
$
-
$
1,870,769 271,286 171,121 37,026 7,654 240,603
$
1,860,366 189,099 178,140 36,466 6,718 217,415
2,598,459
-
-
-
-
2,598,459
2,488,204
88,908,811 1,998,254 1,701,040
238,631 -
-
-
-
89,147,442 1,998,254 1,701,040
86,931,354 1,263,763 2,097,525
Total reserves
92,608,105
238,631
-
-
-
92,846,736
90,292,642
Total liabilities and reserves
95,206,564
238,631
-
-
-
95,445,195
92,780,846
4,974,535
223,237
10,721
27,670
75,672
5,311,835
6,547,465
Reserves Life insurance and other insurance contracts Interest maintenance reserve Asset valuation reserve
Unassigned funds Total liabilities, reserves and unassigned funds
$ 100,181,099
$
461,868
$
10,721
$
27,670
$
75,672
The accompanying notes are an integral part of these financial statements. 3
$
100,757,030
$
99,328,311
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF CHANGES IN UNASSIGNED FUNDS - STATUTORY BASIS FOR THE YEAR ENDED DECEMBER 31, 2011 (WITH 2010 TOTALS FOR COMPARATIVE PURPOSES)
Disability Fund
General Fund
20-30 Fund
Youth Fund
Library Fund
2011 Total
2010 Total
Unassigned funds, beginning of year Net (loss) income Change in non-admitted assets Change in unrealized gain (loss) on investments Decrease (increase) in asset valuation reserve
$
6,268,896 (1,303,272) 105,282 (492,856) 396,485
$
167,836 55,401 -
$
8,467 2,254 -
$
26,725 945 -
$
75,541 131 -
$
6,547,465 (1,244,541) 105,282 (492,856) 396,485
$
6,082,430 182,311 444,785 (239,089) 77,028
Unassigned funds, end of year
$
4,974,535
$
223,237
$
10,721
$
27,670
$
75,672
$
5,311,835
$
6,547,465
The accompanying notes are an integral part of these financial statements. 4
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF OPERATIONS - STATUTORY BASIS FOR THE YEAR ENDED DECEMBER 31, 2011 (WITH 2010 TOTALS FOR COMPARATIVE PURPOSES)
General Fund Revenues Investment income Less: Investment expenses Net investment income Insurance premiums and fees Other income
$
Total revenues
$
9,033,223
Operating expenses Death and disability benefits Matured endowments Surrender benefits Increase (decrease) in policy and contract reserves General and administrative expenses Interest expense Total operating expenses Net operating income
$
2,494
Youth Fund
$
1,864
2,494
1,864
Library Fund
$
131
2011 Total
$
131
5,993,175 (898,200) 5,094,975 3,937,073 6,029
2010 Total
$
5,733,087 (707,919) 5,025,168 5,332,578 48,566
9,038,077
10,406,312
3,545,404 140,051 632,219 2,272,774 2,053,918 282,166
1,650 (56,686) -
240 -
919 -
-
3,547,054 140,051 632,219 2,216,088 2,055,077 282,166
3,682,376 53,835 865,991 1,547,348 3,139,639 291,481
8,926,532
(55,036)
240
919
-
8,872,655
9,580,670
2,254
945
165,422
825,642
55,401
(1,409,963) $
365 365
106,691
Realized loss on investments Net income (loss)
5,993,175 (898,200) 5,094,975 3,936,708 1,540
20-30 Fund
Disability Fund
(1,303,272)
$
-
55,401
$
2,254
131
$
945
$
The accompanying notes are an integral part of these financial statements. 5
131
(1,409,963) $
(1,244,541)
(643,331) $
182,311
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF CASH FLOWS - STATUTORY BASIS FOR THE YEAR ENDED DECEMBER 31, 2011
Cash flows from operating activities: Insurance premiums and fees received Investment income received Other income received Death and disability benefits paid Matured endowments paid Surrender benefits paid General and administrative expenses paid Investment expenses paid Interest paid
$
Net cash provided by operating activities
3,930,823 5,731,667 6,030 (3,548,819) (56,098) (632,219) (2,031,889) (692,781) (282,166) 2,424,548
Cash flows from investing activities: Proceeds from sales and maturities of bonds Proceeds from sales of stock Proceeds from sales of mutual funds Proceeds from repayment of mortgage loans on real estate Proceeds from sales of real estate Purchase of bonds Purchase of preferred stock Purchase of mutual funds Mortgage loans made Cost of additions to real estate Other
28,012,740 1,094,274 386,477 272,720 352,000 (25,761,018) (3,435,161) (921,936) (100,000) (31,216) (86,018)
Net cash used in investing activities
(217,138)
Net increase in cash and cash equivalents
2,207,410
Cash and cash equivalents, beginning of year
4,182,967
Cash and cash equivalents, end of year
$
6,390,377
The accompanying notes are an integral part of these financial statements. 6
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF CASH FLOWS - STATUTORY BASIS FOR THE YEAR ENDED DECEMBER 31, 2011
Reconciliaion of Net Income to Net Cash Provided by Operating Activities Net loss
$
Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation Amortization of bond discount Amortization of interest maintenance reserve Increase in policy and contract reserves Realized loss on sale of investments
(1,244,541)
94,307 111,112 (106,973) 2,216,088 1,409,963
Change in operating assets and liabilities: Deferred and uncollected premiums Accrued investment income receivable Supplemental contracts Certificate and contract claims Premiums received in advance Custodial funds Unearned interest Other liabilities Other
770 (168,906) 10,403 82,188 (7,019) 561 936 23,188 2,471
Net cash provided by operating activities
$
2,424,548
The accompanying notes are an integral part of these financial statements. 7
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Organization Portuguese Fraternal Society of America (PFSA), is a fraternal benefit society with the charter of providing life and disability insurance and annuity contracts to its members. PFSA also periodically makes charitable, scholarship, and cultural donations as approved by its Board of Directors. On January 1, 2010, Conselho Supremo da Irmandade do Divino Espirito Santo do Estado da California (IDES), Conselho Supremo da Sociedade do Espirito Santo do Estado da California (SES), and Conselho Supremo da Uniao Portuguesa Protectora do Estado da California (UPPEC) merged with and into UPEC. Following the merger, UPEC changed its name to PFSA. The names, logos and service marks of IDES, SES, UPPEC, and UPEC were retained for use by PFSA. The transaction was accounted for as a statutory merger B. Basis of Accounting The financial statements of PFSA have been prepared on the basis of accounting practices prescribed or permitted by the Insurance Department of the State of California for Fraternal Benefit Societies, a statutory basis of accounting. This basis of accounting differs from accounting principles generally accepted in the United States of America (GAAP) in certain areas as noted. The California Insurance Department recognizes only statutory accounting practices prescribed or permitted by the State of California for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under the California Insurance Law. The National Association of Insurance Commissioners’ (the NAIC) Accounting Practices and Procedures Manual version effective January 1, 2001, as amended through March 2011 (NAIC SAP) has been adopted as a component of prescribed or permitted practices by the State of California. The State has adopted certain prescribed accounting practices that differ from those found in NAIC SAP. Any departures from NAIC SAP and its effect on the financial statements (if material) have been disclosed. C. Accounting Policies Cash and Cash Equivalents: PFSA considers cash and cash equivalents to be the operating checking account, money market funds and demand deposits.
8
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) C. Accounting Policies (Continued) Valuation of Investments: Carrying values of investments and the amounts of the Asset Valuation Reserve have been determined in accordance with methods adopted by the NAIC. Bonds are stated principally at amortized costs, preferred stocks are stated at cost, and common stocks and mutual funds are stated at market which is a departure from GAAP. Certificate policy loans are stated at the unpaid principal amounts and are secured by liens upon the cash value of the underlying policy. Real estate is stated at cost less accumulated depreciation. The Asset Valuation Reserve which is a departure from GAAP, is prescribed by the NAIC, and is a contingency fund classified as an obligation and is maintained for protection against possible future capital losses on bonds and stocks. Mortgage loans on real estate are stated at the aggregate unpaid principal balance. Fire insurance at least equal to the excess of the loan over the maximum loan which would be permitted by law on the land without the buildings is required on all properties covered by mortgage loans. Revenue Recognition: Life premiums are recognized as income over the premium paying period of the related policies. Annuity considerations are recognized when received. Deposits on deposit-type contracts are entered directly as a liability when received. Accident and Health premiums are earned ratably over the terms of the related insurance contracts or policies. Interest income is recognized as earned. Property and Improvements: Admitted property and improvements are stated at cost. Ordinary maintenance and repair items and non-admitted assets are expensed. Depreciation is computed using the straight-line method, based on the estimated lives of the admitted assets. For financial reporting purposes, office equipment, electronic data processing equipment with an original cost of less than $250,000, and electronic data processing software and the related depreciation are charged directly to unassigned fund balance as non-admitted assets per Insurance Department of the State of California regulations which is a departure from GAAP. Under NAIC SAP, electronic data processing equipment and operating software are considered admitted assets, and are to be depreciated over a period not to exceed 3 years. For the year ended December 31, 2011 there is no difference in admitted assets and unassigned funds between NAIC SAP
9
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) C. Accounting Policies (Continued) and the Insurance Department of the State of California regulations because the electronic data processing equipment and operating software were fully depreciated. Non-Admitted Assets: The Insurance Department of the State of California prescribes that certain assets be eliminated for financial reporting purposes which is a departure from GAAP. The net change in such non-admitted assets is charged directly to the unassigned fund balance. The change in non-admitted assets is represented by the change in electronic data processing equipment. Capital Gains and Losses: Realized capital gains and losses arising from investment transactions are reflected in the accompanying statements of operations, as prescribed by the Insurance Department of the State of California. However, the Insurance Department of the State of California and NAIC SAP prescribe that realized gains and losses arising from certain investment transactions are to be deferred and recognized as an "Interest Maintenance Reserve" which is a departure from GAAP. This Interest Maintenance Reserve is amortized into investment income over the approximate remaining life of the investment sold. Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect certain reported amounts and disclosures. PFSA bases reserves for life insurance and annuities on actuarial assumptions which include life expectancy and estimated rate of return on reserve investments. Accordingly, actual results could differ from those estimates. Subsequent Events: PFSA’s financial statements have been evaluated for subsequent events or transactions for potential recognition through May 24, 2012, the date the financial statements were available to be issued. The Society determined that there are no subsequent events or transactions that require disclosure to or adjustment in the financial statements.
10
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
2.
INVESTMENTS A. Bonds The amortized cost and estimated market value of debt securities at December 31, 2011 are as follows: Amortized Cost U.S. Government bonds Industrial and miscellaneous bonds Non-U.S. bonds
$
1,750,211 51,807,410 11,890,697
$ 65,448,318
Unrealized Gain (Loss)
Estimated Fair Value
$ 134,312 2,746,241 (16,105)
$ 1,884,523 54,553,651 11,874,592
$ 2,864,448
$ 68,312,766
The amortized cost of debt securities at December 31, 2011 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 10 years Due after 10 years
$ 1,784,174 9,757,164 28,670,130 25,236,850 $ 65,448,318
During 2011, marketable debt securities which were classified as held to maturity at an amortized cost of $27,160,787 matured or were called by the issuers. Realized gain on the called bonds totaling $851,954 for 2011 was transferred to the interest maintenance reserve. B. Mortgage Loans The maximum and minimum lending rates for mortgage loans were 8.75% and 4.50% for 2011. The maximum percentage of any loan to the value of security at the time of the loans, exclusive of insured or guaranteed mortgages was 75% for 2011.
11
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
2.
INVESTMENTS (Continued) B. Bonds (Continued) There was one mortgage with interest 180 days past due at December 31, 2011. The carrying amount of this mortgage was $438,746. PFSA began foreclosure proceedings on this property on November 30, 2011 and no interest due was recorded at December 31, 2011. This mortgage is not considered impaired since the estimated market value of the property exceeded the carrying amount of the mortgage at December 31, 2011.
3.
FAIR VALUE MEASUREMENTS Statement of Statutory Accounting Principles No. 100, Fair Value Measurements (SSAP 100), establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SSAP 100 are described below: Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that PFSA has the ability to access. Level 2: Inputs to the valuation methodology include: • Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in inactive markets; • Inputs other than quoted prices that are observable for the asset or liability; and • Inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
12
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
3.
FAIR VALUE MEASUREMENTS (Continued) The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. U.S. government debt obligations are valued on the basis of prices provided by an independent pricing service. These investments are classified within level 1 of the valuation hierarchy. Investments in other government and corporate debt obligations for which prices are not available on the basis of actual trades in securities markets are valued by an independent pricing service based upon a matrix system and/or appraisals provided by the pricing service which accounts for such factors as yields, prices, maturities, sell features, type of issue, coupon rate, ratings on comparable securities and other factors. These securities are generally classified within level 2 of the valuation hierarchy. Preferred stocks listed or regularly traded on a securities exchange are valued at the last quoted sales price end of year and are classified within level 1 of the valuation hierarchy. Listed securities not priced on a particular day use other independent pricing sources or broker quotes and other valuation techniques similar to those listed above for corporate debt obligations and classified within level 2 of the valuation hierarchy. Mutual funds are valued at the net asset value of shares held by PFSA at year end and are generally classified within level 1 of the fair value hierarchy. Common stocks are valued at closing price reported on the active market on which the individual securities are traded and classified within level 1 of the valuation hierarchy. Certificate policy loans and mortgage loans on real estate are carried at their net realizable value, which approximates fair value and are classified as level 3 of the fair value hierarchy. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while PFSA believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
13
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
3.
FAIR VALUE MEASUREMENTS (Continued) The following table sets forth by level, within the fair value hierarchy, PFSA’s investments at fair value at December 31, 2011. Level 1 Bonds U.S. Government Industrial and Miscellaneous Non-U.S. Corporate Bonds
$
Preferred Stocks Industrial and Miscellaneous U.S. Government Equity Non-U.S. Preferred Stock Total
Level 2
269,308 269,308
$ 13,979,954 42,037,494 11,841,948 67,859,396
4,464,995 44,800 4,509,795
2,793,924 2,793,924
Level 3
$
151,419 32,643 184,062
Total
$ 14,249,262 42,188,913 11,874,591 68,312,766
-
4,464,995 44,800 2,793,924 7,303,719
-
-
2,722,543 2,722,543
345,220 345,220
133,273 133,273
-
478,493 478,493
Certificate policy loans
-
-
324,182
324,182
Mortgage loans on real estate
-
-
12,524,528
12,524,528
$ 13,032,772
$ 91,666,231
Mutual Funds Equity
2,722,543 2,722,543
Common Stocks Industrial
Total
$
7,846,866
$ 70,786,593
For other assets and other liabilities, the carrying amounts approximate fair value. The following table sets forth a summary of changes in the fair value of PFSA’s level 3 investments for the year ended December 31, 2011. Industrial and Miscellaneous Bonds
Non-US Corporate Bonds
Certificate Policy Loans
Mortgage Loans on Real Estate
Balance, beginning of year Net realized gains and losses Purchases Sales Issuances Settlements Transfers into or out of Level 3
$
13,875 137,544
$
32,643
$
278,568 45,614 -
$ 15,744,279 100,000 (3,319,751) -
Balance, end of year
$
151,419
$
32,643
$
324,182
$ 12,524,528
14
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
4.
PROPERTY AND IMPROVEMENTS Following is a summary of property and improvements, accumulated depreciation and estimated useful lives at December 31, 2011 by category:
Cost Land Buildings Improvements
Accumulated Depreciation
Net Book Value
Useful Life N/A 50 years 3 - 10 years
$ 1,175,686 2,983,205 381,035
$
(737,497) (17,812)
$ 1,175,686 2,245,708 363,253
$ 4,539,926
$
(755,309)
$ 3,784,647
Depreciation of property and improvements, computed using the straight-line method, was $94,307 for the year ended December 31, 2011. 5.
OTHER LIABILITIES Other liabilities at December 31, 2011 consisted of the following:
6.
Accrued expenses Accrued vacation
$
209,295 31,308
Total
$
240,603
INVESTMENT INCOME Investment income is comprised of the following: Bond interest Interest on mortgage loans Dividends Rental income Interest on mutual funds Interest on bank accounts Interest on policy loans Amortization of interest maintenance reserve
$ 4,141,522 907,294 464,714 274,087 83,973 7,060 7,552 106,973 $ 5,993,175
15
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
7.
EMPLOYEES’ PENSION PLAN AND POST-RETIREMENT BENEFITS As a result of the statutory merger on January 1, 2010 as described in Note 1A, PFSA assumed the liability for 3 frozen defined benefit pension plans, the Retirement Plan of the Supreme Council of U.P.E.C. (UPEC Plan), the Retirement Plan of U.P.P.E.C. (UPPEC Plan), and the Retirement Plan of I.D.E.S. (IDES Plan). PFSA’s policy is to fund the minimum required contribution annually. For the UPEC Plan, employees were eligible to join the Plan the January 1st after their hire date and were fully vested after 5 years in the Plan. For the UPPEC Plan, employees were eligible to join the Plan on the date of hire and were fully vested after 6 years in the Plan. For the IDES Plan, employees were eligible to join the Plan after 500 hours of service within 6 months from the employment commencement date and were fully vested after 6 years in the Plan. For the year ended December 31, 2011, PFSA’s actuarially determined annual minimum contribution was: UPEC Plan UPPEC Plan IDES Plan
UPEC Plan UPPEC Plan IDES Plan
$
99,817 34,642 -
$
134,459
Actuarial Present Value of Accumulated Plan Benefits
Assumed Interest Rate
Market Value of Assets
$ 1,286,534 357,029 237,796
8% 7% 7%
$ 1,176,235 311,476 207,889
All participants in the Plans were fully vested at December 31, 2011. In addition to pension benefits, PFSA provides certain post-retirement benefits for retired employees. Employees are eligible for medical insurance benefits from retirement date through age 65.
16
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
7.
EMPLOYEES’ PENSION PLAN AND POST-RETIREMENT BENEFITS (Continued) In order to qualify for post-retirement benefits, an employee must have reached his or her 55th birthday and have completed 15 years of paid service with PFSA. PFSA will pay for the premium costs of medical, dental, vision, and life insurance in circumstances that meet one of the following conditions: If a retirement is granted as a result of an industrial accident or illness between ages 55 to 60, the employee will be paid 25% of the premium costs for those benefits; If early retirement is applied for between ages 60 and 62, the employee will be paid 50% of the premium costs for those benefits; or If early retirement is applied for between age 63 and 64, the employee will be paid 100% of the premium costs for those benefits. In all cases, payment for benefit coverage will terminate the month following the employee’s 65th birthday. Because of the minimal number of employees, management has determined that the requirement to establish a post-retirement benefits liability and to record an actuarially-determined annual expense would not have a significant impact on PFSA’s financial activity, and therefore, these items are not included in the accompanying financial statements. Effective January 1, 2005, PFSA adopted a 401(k) Plan for the benefit of its employees. The Plan was restated effective March 31, 2008. The assets of the 401(k) Plan are held by an outside custodian. All employees who are age 21 are eligible to participate on the first day of each quarter of the Plan year after completion of 3 months of service. Participants may contribute up to 100% of their eligible compensation as defined by the Plan document and subject to contribution limits set by the Internal Revenue Code. PFSA may make discretionary matching and non-elective contributions as determined by the Board of Directors. Participants must be employed on the last day of the Plan year to be eligible for the discretionary matching and non-elective contributions. Participants are 100% vested in their accounts at all times. PFSA made $35,681 nonelective contributions (equal to up to 3% of participants’ eligible compensation) for the benefit of participating employees in 2011.
17
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
8.
LIFE INSURANCE RESERVE AND INSURANCE CONTRACT RESERVES Consulting actuaries applied actuarial assumptions and methods in determining the life insurance reserve and annuity insurance contract reserves of $88,908,811 and accident and health contracts of $238,631, totaling $89,147,442 at December 31, 2011.
9.
TAX STATUS PFSA is exempt from income tax under Section 501(c)(8) of the Internal Revenue Code. PFSA believes that it has appropriate support for any tax positions taken, and as such, does not have any uncertain tax positions that are material to the financial statements. PFSA is generally no longer subject to examination by the Internal Revenue Service for years before 2008.
10. CONCENTRATION OF CREDIT RISK PFSA provides mortgage loans secured by real estate primarily in the San Francisco Bay Area of Northern California. The members' ability to repay the loans, and the value of the underlying collateral, depend in part on the Northern California economy and the local real estate market. PFSA maintains accounts with cash balances in excess of the Federal Deposit Insurance Corporation's insured limit of $250,000. These accounts are with financial institutions deemed by management to be financially sound based upon established rating systems. At December 31, 2011, PFSA had cash in excess of insured limits totaling $6,147,144. 11. LOAN COMMITMENTS PFSA had no outstanding unfunded loan commitments at December 31, 2011.
18
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
12. FUTURE MINIMUM LEASE PAYMENTS Future minimum lease payments to be received under non-cancelable operating leases as set forth in the lease agreements at December 31, 2011, are as follows: Year Ending December 31: 2012 2013 2014 2015
$
143,989 103,618 71,247 12,000
$
330,854
13. RECLASSIFICATION Certain amounts in the prior year comparative totals have been reclassified to conform to the current year presentation. 14. RECONCILIATION TO ANNUAL STATEMENT The following is a reconciliation between the accompanying financial statements and the Annual Statement submitted by PFSA to the California Department of Insurance as of and for the year ended December 31, 2011:
Total Net Loss Balance per Audited Financial Statements Adjustment for unrealized loss charged to operations which should have been charged to surplus
$
Balance per Annual Statement
$
19
(1,244,541) (76,963) (1,321,504)
MORRIS, DAVIS & CHAN LLP Certified Public Accountants
PORTUGUESE FRATERNAL SOCIETY OF AMERICA TABLE OF CONTENTS
PAGE INDEPENDENT AUDITORS' REPORT
1
STATEMENT OF ADMITTED ASSETS, LIABILITIES, RESERVES AND UNASSIGNED FUNDS AS OF DECEMBER 31, 2011 - STATUTORY BASIS
2-3
STATEMENT OF CHANGES IN UNASSIGNED FUNDS FOR THE YEAR ENDED DECEMBER 31, 2011 - STATUTORY BASIS
4
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2011– STATUTORY BASIS
5
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2011– STATUTORY BASIS
6-7
NOTES TO FINANCIAL STATEMENTS
8-19
i
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF ADMITTED ASSETS, LIABILITIES, RESERVES, AND UNASSIGNED FUNDS – STATUTORY BASIS DECEMBER 31, 2011 (WITH 2010 TOTALS FOR COMPARATIVE PURPOSES)
General Fund
20-30 Fund
Disability Fund
Youth Fund
Library Fund
2011 Total
2010 Total
ASSETS Investments Cash and cash equivalents Bonds, at amortized cost Preferred stocks (at cost, approximate market value at $7,303,719 for 2011 and $5,592,176 for 2010) Mutual funds, at market Common stocks, at market Certificate policy loans, at cost Mortgage loans on real estate Real estate: Occupied by PFSA (at cost, net of accumulated depreciation of $637,506 for 2011 and $616,112 for 2010) Held for production of income (at cost, net of accumulated depreciation of $107,474 for 2011 and $363,344 for 2010) Held for sale (at cost, net of accumulated depreciation of $10,329 for 2011) Other investments
$
Total investments Other assets Accrued investment income receivable Deferred and uncollected premiums Total other assets Total assets
$
5,814,446 65,448,318
$ 461,868 -
$
10,721 -
$
27,670 -
$
75,672 -
$
6,390,377 65,448,318
$
4,182,967 67,079,085
7,775,629 2,722,543 478,493 324,182 12,524,528
-
-
-
-
7,775,629 2,722,543 478,493 324,182 12,524,528
5,911,345 2,343,029 260,981 278,568 15,744,279
210,216
-
-
-
-
210,216
217,170
2,731,729
-
-
-
-
2,731,729
2,110,612
842,702 125,887
-
-
-
-
842,702 125,887
185,985
98,998,673
461,868
10,721
27,670
75,672
99,574,604
98,314,021
1,176,021 6,405
-
-
-
-
1,176,021 6,405
1,007,115 7,175
1,182,426
-
-
-
-
1,182,426
1,014,290
100,181,099
$
461,868
$
10,721
$
27,670
$
75,672
The accompanying notes are an integral part of these financial statements. 2
$
100,757,030
$
99,328,311
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF ADMITTED ASSETS, LIABILITIES, RESERVES, AND UNASSIGNED FUNDS – STATUTORY BASIS DECEMBER 31, 2011 (WITH 2010 TOTALS FOR COMPARATIVE PURPOSES)
General Fund
20-30 Fund
Disability Fund
Youth Fund
Library Fund
2011 Total
2010 Total
LIABILITIES, RESERVES, AND UNASSIGNED FUNDS Liabilities Supplemental contracts Certificate and contract claims Premiums received in advance Custodial funds Unearned interest Other liabilities Total liabilities
$
1,870,769 271,286 171,121 37,026 7,654 240,603
$
-
$
-
$
-
$
-
$
1,870,769 271,286 171,121 37,026 7,654 240,603
$
1,860,366 189,099 178,140 36,466 6,718 217,415
2,598,459
-
-
-
-
2,598,459
2,488,204
88,908,811 1,998,254 1,701,040
238,631 -
-
-
-
89,147,442 1,998,254 1,701,040
86,931,354 1,263,763 2,097,525
Total reserves
92,608,105
238,631
-
-
-
92,846,736
90,292,642
Total liabilities and reserves
95,206,564
238,631
-
-
-
95,445,195
92,780,846
4,974,535
223,237
10,721
27,670
75,672
5,311,835
6,547,465
Reserves Life insurance and other insurance contracts Interest maintenance reserve Asset valuation reserve
Unassigned funds Total liabilities, reserves and unassigned funds
$ 100,181,099
$
461,868
$
10,721
$
27,670
$
75,672
The accompanying notes are an integral part of these financial statements. 3
$
100,757,030
$
99,328,311
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF CHANGES IN UNASSIGNED FUNDS - STATUTORY BASIS FOR THE YEAR ENDED DECEMBER 31, 2011 (WITH 2010 TOTALS FOR COMPARATIVE PURPOSES)
Disability Fund
General Fund
20-30 Fund
Youth Fund
Library Fund
2011 Total
2010 Total
Unassigned funds, beginning of year Net (loss) income Change in non-admitted assets Change in unrealized gain (loss) on investments Decrease (increase) in asset valuation reserve
$
6,268,896 (1,303,272) 105,282 (492,856) 396,485
$
167,836 55,401 -
$
8,467 2,254 -
$
26,725 945 -
$
75,541 131 -
$
6,547,465 (1,244,541) 105,282 (492,856) 396,485
$
6,082,430 182,311 444,785 (239,089) 77,028
Unassigned funds, end of year
$
4,974,535
$
223,237
$
10,721
$
27,670
$
75,672
$
5,311,835
$
6,547,465
The accompanying notes are an integral part of these financial statements. 4
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF OPERATIONS - STATUTORY BASIS FOR THE YEAR ENDED DECEMBER 31, 2011 (WITH 2010 TOTALS FOR COMPARATIVE PURPOSES)
General Fund Revenues Investment income Less: Investment expenses Net investment income Insurance premiums and fees Other income
$
Total revenues
$
9,033,223
Operating expenses Death and disability benefits Matured endowments Surrender benefits Increase (decrease) in policy and contract reserves General and administrative expenses Interest expense Total operating expenses Net operating income
$
2,494
Youth Fund
$
1,864
2,494
1,864
Library Fund
$
131
2011 Total
$
131
5,993,175 (898,200) 5,094,975 3,937,073 6,029
2010 Total
$
5,733,087 (707,919) 5,025,168 5,332,578 48,566
9,038,077
10,406,312
3,545,404 140,051 632,219 2,272,774 2,053,918 282,166
1,650 (56,686) -
240 -
919 -
-
3,547,054 140,051 632,219 2,216,088 2,055,077 282,166
3,682,376 53,835 865,991 1,547,348 3,139,639 291,481
8,926,532
(55,036)
240
919
-
8,872,655
9,580,670
2,254
945
165,422
825,642
55,401
(1,409,963) $
365 365
106,691
Realized loss on investments Net income (loss)
5,993,175 (898,200) 5,094,975 3,936,708 1,540
20-30 Fund
Disability Fund
(1,303,272)
$
-
55,401
$
2,254
131
$
945
$
The accompanying notes are an integral part of these financial statements. 5
131
(1,409,963) $
(1,244,541)
(643,331) $
182,311
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF CASH FLOWS - STATUTORY BASIS FOR THE YEAR ENDED DECEMBER 31, 2011
Cash flows from operating activities: Insurance premiums and fees received Investment income received Other income received Death and disability benefits paid Matured endowments paid Surrender benefits paid General and administrative expenses paid Investment expenses paid Interest paid
$
Net cash provided by operating activities
3,930,823 5,731,667 6,030 (3,548,819) (56,098) (632,219) (2,031,889) (692,781) (282,166) 2,424,548
Cash flows from investing activities: Proceeds from sales and maturities of bonds Proceeds from sales of stock Proceeds from sales of mutual funds Proceeds from repayment of mortgage loans on real estate Proceeds from sales of real estate Purchase of bonds Purchase of preferred stock Purchase of mutual funds Mortgage loans made Cost of additions to real estate Other
28,012,740 1,094,274 386,477 272,720 352,000 (25,761,018) (3,435,161) (921,936) (100,000) (31,216) (86,018)
Net cash used in investing activities
(217,138)
Net increase in cash and cash equivalents
2,207,410
Cash and cash equivalents, beginning of year
4,182,967
Cash and cash equivalents, end of year
$
6,390,377
The accompanying notes are an integral part of these financial statements. 6
PORTUGUESE FRATERNAL SOCIETY OF AMERICA STATEMENT OF CASH FLOWS - STATUTORY BASIS FOR THE YEAR ENDED DECEMBER 31, 2011
Reconciliaion of Net Income to Net Cash Provided by Operating Activities Net loss
$
Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation Amortization of bond discount Amortization of interest maintenance reserve Increase in policy and contract reserves Realized loss on sale of investments
(1,244,541)
94,307 111,112 (106,973) 2,216,088 1,409,963
Change in operating assets and liabilities: Deferred and uncollected premiums Accrued investment income receivable Supplemental contracts Certificate and contract claims Premiums received in advance Custodial funds Unearned interest Other liabilities Other
770 (168,906) 10,403 82,188 (7,019) 561 936 23,188 2,471
Net cash provided by operating activities
$
2,424,548
The accompanying notes are an integral part of these financial statements. 7
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Organization Portuguese Fraternal Society of America (PFSA), is a fraternal benefit society with the charter of providing life and disability insurance and annuity contracts to its members. PFSA also periodically makes charitable, scholarship, and cultural donations as approved by its Board of Directors. On January 1, 2010, Conselho Supremo da Irmandade do Divino Espirito Santo do Estado da California (IDES), Conselho Supremo da Sociedade do Espirito Santo do Estado da California (SES), and Conselho Supremo da Uniao Portuguesa Protectora do Estado da California (UPPEC) merged with and into UPEC. Following the merger, UPEC changed its name to PFSA. The names, logos and service marks of IDES, SES, UPPEC, and UPEC were retained for use by PFSA. The transaction was accounted for as a statutory merger B. Basis of Accounting The financial statements of PFSA have been prepared on the basis of accounting practices prescribed or permitted by the Insurance Department of the State of California for Fraternal Benefit Societies, a statutory basis of accounting. This basis of accounting differs from accounting principles generally accepted in the United States of America (GAAP) in certain areas as noted. The California Insurance Department recognizes only statutory accounting practices prescribed or permitted by the State of California for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under the California Insurance Law. The National Association of Insurance Commissioners’ (the NAIC) Accounting Practices and Procedures Manual version effective January 1, 2001, as amended through March 2011 (NAIC SAP) has been adopted as a component of prescribed or permitted practices by the State of California. The State has adopted certain prescribed accounting practices that differ from those found in NAIC SAP. Any departures from NAIC SAP and its effect on the financial statements (if material) have been disclosed. C. Accounting Policies Cash and Cash Equivalents: PFSA considers cash and cash equivalents to be the operating checking account, money market funds and demand deposits.
8
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) C. Accounting Policies (Continued) Valuation of Investments: Carrying values of investments and the amounts of the Asset Valuation Reserve have been determined in accordance with methods adopted by the NAIC. Bonds are stated principally at amortized costs, preferred stocks are stated at cost, and common stocks and mutual funds are stated at market which is a departure from GAAP. Certificate policy loans are stated at the unpaid principal amounts and are secured by liens upon the cash value of the underlying policy. Real estate is stated at cost less accumulated depreciation. The Asset Valuation Reserve which is a departure from GAAP, is prescribed by the NAIC, and is a contingency fund classified as an obligation and is maintained for protection against possible future capital losses on bonds and stocks. Mortgage loans on real estate are stated at the aggregate unpaid principal balance. Fire insurance at least equal to the excess of the loan over the maximum loan which would be permitted by law on the land without the buildings is required on all properties covered by mortgage loans. Revenue Recognition: Life premiums are recognized as income over the premium paying period of the related policies. Annuity considerations are recognized when received. Deposits on deposit-type contracts are entered directly as a liability when received. Accident and Health premiums are earned ratably over the terms of the related insurance contracts or policies. Interest income is recognized as earned. Property and Improvements: Admitted property and improvements are stated at cost. Ordinary maintenance and repair items and non-admitted assets are expensed. Depreciation is computed using the straight-line method, based on the estimated lives of the admitted assets. For financial reporting purposes, office equipment, electronic data processing equipment with an original cost of less than $250,000, and electronic data processing software and the related depreciation are charged directly to unassigned fund balance as non-admitted assets per Insurance Department of the State of California regulations which is a departure from GAAP. Under NAIC SAP, electronic data processing equipment and operating software are considered admitted assets, and are to be depreciated over a period not to exceed 3 years. For the year ended December 31, 2011 there is no difference in admitted assets and unassigned funds between NAIC SAP
9
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) C. Accounting Policies (Continued) and the Insurance Department of the State of California regulations because the electronic data processing equipment and operating software were fully depreciated. Non-Admitted Assets: The Insurance Department of the State of California prescribes that certain assets be eliminated for financial reporting purposes which is a departure from GAAP. The net change in such non-admitted assets is charged directly to the unassigned fund balance. The change in non-admitted assets is represented by the change in electronic data processing equipment. Capital Gains and Losses: Realized capital gains and losses arising from investment transactions are reflected in the accompanying statements of operations, as prescribed by the Insurance Department of the State of California. However, the Insurance Department of the State of California and NAIC SAP prescribe that realized gains and losses arising from certain investment transactions are to be deferred and recognized as an "Interest Maintenance Reserve" which is a departure from GAAP. This Interest Maintenance Reserve is amortized into investment income over the approximate remaining life of the investment sold. Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect certain reported amounts and disclosures. PFSA bases reserves for life insurance and annuities on actuarial assumptions which include life expectancy and estimated rate of return on reserve investments. Accordingly, actual results could differ from those estimates. Subsequent Events: PFSA’s financial statements have been evaluated for subsequent events or transactions for potential recognition through May 24, 2012, the date the financial statements were available to be issued. The Society determined that there are no subsequent events or transactions that require disclosure to or adjustment in the financial statements.
10
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
2.
INVESTMENTS A. Bonds The amortized cost and estimated market value of debt securities at December 31, 2011 are as follows: Amortized Cost U.S. Government bonds Industrial and miscellaneous bonds Non-U.S. bonds
$
1,750,211 51,807,410 11,890,697
$ 65,448,318
Unrealized Gain (Loss)
Estimated Fair Value
$ 134,312 2,746,241 (16,105)
$ 1,884,523 54,553,651 11,874,592
$ 2,864,448
$ 68,312,766
The amortized cost of debt securities at December 31, 2011 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 10 years Due after 10 years
$ 1,784,174 9,757,164 28,670,130 25,236,850 $ 65,448,318
During 2011, marketable debt securities which were classified as held to maturity at an amortized cost of $27,160,787 matured or were called by the issuers. Realized gain on the called bonds totaling $851,954 for 2011 was transferred to the interest maintenance reserve. B. Mortgage Loans The maximum and minimum lending rates for mortgage loans were 8.75% and 4.50% for 2011. The maximum percentage of any loan to the value of security at the time of the loans, exclusive of insured or guaranteed mortgages was 75% for 2011.
11
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
2.
INVESTMENTS (Continued) B. Bonds (Continued) There was one mortgage with interest 180 days past due at December 31, 2011. The carrying amount of this mortgage was $438,746. PFSA began foreclosure proceedings on this property on November 30, 2011 and no interest due was recorded at December 31, 2011. This mortgage is not considered impaired since the estimated market value of the property exceeded the carrying amount of the mortgage at December 31, 2011.
3.
FAIR VALUE MEASUREMENTS Statement of Statutory Accounting Principles No. 100, Fair Value Measurements (SSAP 100), establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SSAP 100 are described below: Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that PFSA has the ability to access. Level 2: Inputs to the valuation methodology include: • Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in inactive markets; • Inputs other than quoted prices that are observable for the asset or liability; and • Inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
12
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
3.
FAIR VALUE MEASUREMENTS (Continued) The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. U.S. government debt obligations are valued on the basis of prices provided by an independent pricing service. These investments are classified within level 1 of the valuation hierarchy. Investments in other government and corporate debt obligations for which prices are not available on the basis of actual trades in securities markets are valued by an independent pricing service based upon a matrix system and/or appraisals provided by the pricing service which accounts for such factors as yields, prices, maturities, sell features, type of issue, coupon rate, ratings on comparable securities and other factors. These securities are generally classified within level 2 of the valuation hierarchy. Preferred stocks listed or regularly traded on a securities exchange are valued at the last quoted sales price end of year and are classified within level 1 of the valuation hierarchy. Listed securities not priced on a particular day use other independent pricing sources or broker quotes and other valuation techniques similar to those listed above for corporate debt obligations and classified within level 2 of the valuation hierarchy. Mutual funds are valued at the net asset value of shares held by PFSA at year end and are generally classified within level 1 of the fair value hierarchy. Common stocks are valued at closing price reported on the active market on which the individual securities are traded and classified within level 1 of the valuation hierarchy. Certificate policy loans and mortgage loans on real estate are carried at their net realizable value, which approximates fair value and are classified as level 3 of the fair value hierarchy. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while PFSA believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
13
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
3.
FAIR VALUE MEASUREMENTS (Continued) The following table sets forth by level, within the fair value hierarchy, PFSA’s investments at fair value at December 31, 2011. Level 1 Bonds U.S. Government Industrial and Miscellaneous Non-U.S. Corporate Bonds
$
Preferred Stocks Industrial and Miscellaneous U.S. Government Equity Non-U.S. Preferred Stock Total
Level 2
269,308 269,308
$ 13,979,954 42,037,494 11,841,948 67,859,396
4,464,995 44,800 4,509,795
2,793,924 2,793,924
Level 3
$
151,419 32,643 184,062
Total
$ 14,249,262 42,188,913 11,874,591 68,312,766
-
4,464,995 44,800 2,793,924 7,303,719
-
-
2,722,543 2,722,543
345,220 345,220
133,273 133,273
-
478,493 478,493
Certificate policy loans
-
-
324,182
324,182
Mortgage loans on real estate
-
-
12,524,528
12,524,528
$ 13,032,772
$ 91,666,231
Mutual Funds Equity
2,722,543 2,722,543
Common Stocks Industrial
Total
$
7,846,866
$ 70,786,593
For other assets and other liabilities, the carrying amounts approximate fair value. The following table sets forth a summary of changes in the fair value of PFSA’s level 3 investments for the year ended December 31, 2011. Industrial and Miscellaneous Bonds
Non-US Corporate Bonds
Certificate Policy Loans
Mortgage Loans on Real Estate
Balance, beginning of year Net realized gains and losses Purchases Sales Issuances Settlements Transfers into or out of Level 3
$
13,875 137,544
$
32,643
$
278,568 45,614 -
$ 15,744,279 100,000 (3,319,751) -
Balance, end of year
$
151,419
$
32,643
$
324,182
$ 12,524,528
14
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
4.
PROPERTY AND IMPROVEMENTS Following is a summary of property and improvements, accumulated depreciation and estimated useful lives at December 31, 2011 by category:
Cost Land Buildings Improvements
Accumulated Depreciation
Net Book Value
Useful Life N/A 50 years 3 - 10 years
$ 1,175,686 2,983,205 381,035
$
(737,497) (17,812)
$ 1,175,686 2,245,708 363,253
$ 4,539,926
$
(755,309)
$ 3,784,647
Depreciation of property and improvements, computed using the straight-line method, was $94,307 for the year ended December 31, 2011. 5.
OTHER LIABILITIES Other liabilities at December 31, 2011 consisted of the following:
6.
Accrued expenses Accrued vacation
$
209,295 31,308
Total
$
240,603
INVESTMENT INCOME Investment income is comprised of the following: Bond interest Interest on mortgage loans Dividends Rental income Interest on mutual funds Interest on bank accounts Interest on policy loans Amortization of interest maintenance reserve
$ 4,141,522 907,294 464,714 274,087 83,973 7,060 7,552 106,973 $ 5,993,175
15
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
7.
EMPLOYEES’ PENSION PLAN AND POST-RETIREMENT BENEFITS As a result of the statutory merger on January 1, 2010 as described in Note 1A, PFSA assumed the liability for 3 frozen defined benefit pension plans, the Retirement Plan of the Supreme Council of U.P.E.C. (UPEC Plan), the Retirement Plan of U.P.P.E.C. (UPPEC Plan), and the Retirement Plan of I.D.E.S. (IDES Plan). PFSA’s policy is to fund the minimum required contribution annually. For the UPEC Plan, employees were eligible to join the Plan the January 1st after their hire date and were fully vested after 5 years in the Plan. For the UPPEC Plan, employees were eligible to join the Plan on the date of hire and were fully vested after 6 years in the Plan. For the IDES Plan, employees were eligible to join the Plan after 500 hours of service within 6 months from the employment commencement date and were fully vested after 6 years in the Plan. For the year ended December 31, 2011, PFSA’s actuarially determined annual minimum contribution was: UPEC Plan UPPEC Plan IDES Plan
UPEC Plan UPPEC Plan IDES Plan
$
99,817 34,642 -
$
134,459
Actuarial Present Value of Accumulated Plan Benefits
Assumed Interest Rate
Market Value of Assets
$ 1,286,534 357,029 237,796
8% 7% 7%
$ 1,176,235 311,476 207,889
All participants in the Plans were fully vested at December 31, 2011. In addition to pension benefits, PFSA provides certain post-retirement benefits for retired employees. Employees are eligible for medical insurance benefits from retirement date through age 65.
16
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
7.
EMPLOYEES’ PENSION PLAN AND POST-RETIREMENT BENEFITS (Continued) In order to qualify for post-retirement benefits, an employee must have reached his or her 55th birthday and have completed 15 years of paid service with PFSA. PFSA will pay for the premium costs of medical, dental, vision, and life insurance in circumstances that meet one of the following conditions: If a retirement is granted as a result of an industrial accident or illness between ages 55 to 60, the employee will be paid 25% of the premium costs for those benefits; If early retirement is applied for between ages 60 and 62, the employee will be paid 50% of the premium costs for those benefits; or If early retirement is applied for between age 63 and 64, the employee will be paid 100% of the premium costs for those benefits. In all cases, payment for benefit coverage will terminate the month following the employee’s 65th birthday. Because of the minimal number of employees, management has determined that the requirement to establish a post-retirement benefits liability and to record an actuarially-determined annual expense would not have a significant impact on PFSA’s financial activity, and therefore, these items are not included in the accompanying financial statements. Effective January 1, 2005, PFSA adopted a 401(k) Plan for the benefit of its employees. The Plan was restated effective March 31, 2008. The assets of the 401(k) Plan are held by an outside custodian. All employees who are age 21 are eligible to participate on the first day of each quarter of the Plan year after completion of 3 months of service. Participants may contribute up to 100% of their eligible compensation as defined by the Plan document and subject to contribution limits set by the Internal Revenue Code. PFSA may make discretionary matching and non-elective contributions as determined by the Board of Directors. Participants must be employed on the last day of the Plan year to be eligible for the discretionary matching and non-elective contributions. Participants are 100% vested in their accounts at all times. PFSA made $35,681 nonelective contributions (equal to up to 3% of participants’ eligible compensation) for the benefit of participating employees in 2011.
17
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
8.
LIFE INSURANCE RESERVE AND INSURANCE CONTRACT RESERVES Consulting actuaries applied actuarial assumptions and methods in determining the life insurance reserve and annuity insurance contract reserves of $88,908,811 and accident and health contracts of $238,631, totaling $89,147,442 at December 31, 2011.
9.
TAX STATUS PFSA is exempt from income tax under Section 501(c)(8) of the Internal Revenue Code. PFSA believes that it has appropriate support for any tax positions taken, and as such, does not have any uncertain tax positions that are material to the financial statements. PFSA is generally no longer subject to examination by the Internal Revenue Service for years before 2008.
10. CONCENTRATION OF CREDIT RISK PFSA provides mortgage loans secured by real estate primarily in the San Francisco Bay Area of Northern California. The members' ability to repay the loans, and the value of the underlying collateral, depend in part on the Northern California economy and the local real estate market. PFSA maintains accounts with cash balances in excess of the Federal Deposit Insurance Corporation's insured limit of $250,000. These accounts are with financial institutions deemed by management to be financially sound based upon established rating systems. At December 31, 2011, PFSA had cash in excess of insured limits totaling $6,147,144. 11. LOAN COMMITMENTS PFSA had no outstanding unfunded loan commitments at December 31, 2011.
18
PORTUGUESE FRATERNAL SOCIETY OF AMERICA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011
12. FUTURE MINIMUM LEASE PAYMENTS Future minimum lease payments to be received under non-cancelable operating leases as set forth in the lease agreements at December 31, 2011, are as follows: Year Ending December 31: 2012 2013 2014 2015
$
143,989 103,618 71,247 12,000
$
330,854
13. RECLASSIFICATION Certain amounts in the prior year comparative totals have been reclassified to conform to the current year presentation. 14. RECONCILIATION TO ANNUAL STATEMENT The following is a reconciliation between the accompanying financial statements and the Annual Statement submitted by PFSA to the California Department of Insurance as of and for the year ended December 31, 2011:
Total Net Loss Balance per Audited Financial Statements Adjustment for unrealized loss charged to operations which should have been charged to surplus
$
Balance per Annual Statement
$
19
(1,244,541) (76,963) (1,321,504)
