GLOBAL TRUST SERVICES Annual Report. (For the period beginning January 1, 2012 through fund termination on July 31, 2012) Stable Value Fund

Transcription

1 GLOBAL TRUST SERVICES 2012 Annual Report (For the period beginning January 1, 2012 through fund termination on July 31, 2012)

2 To Our Fund Participants: Union Bank, N.A. (the Bank ) is pleased to present the 2012 Annual Report of the (the Fund ). The Fund is a collective investment fund sponsored by the Bank. This report reflects the Fund s performance for the period January 1, 2012 through July 31, 2012 and its financial position as of July 31, As of January 30, 2012, the Bank as Sponsor and Trustee (the Trustee ) re-executed the Union Bank, N.A. Plan of Pooled Funds, to segregate the into a stand-alone Plan document. On March 9, 2012, the Trustee announced it would terminate and liquidate the Fund. On July 31, 2012, the Fund was fully terminated when all units were liquidated and proceeds distributed to all unit holders. For more information please see the notes to financials and visit the website at: The Bank has retained HighMark Capital Management, Inc., ( HighMark ) an SEC-registered investment adviser and a wholly owned subsidiary of the Bank, to provide investment advice with respect to the Fund. HighMark and its predecessors have been providing investment management services since 1919 and, as of December 31, 2011, had over $16.4 billion in assets under management. HighMark has a disciplined approach to investment management and is dedicated to providing competitive performance while helping clients meet their long-term investment objectives. If you have any questions regarding the Fund, please contact your Trust Officer. Sincerely, Greg Kirland Senior Vice President Union Bank, N.A.

3 Table of Contents July 31, 2012 (Termination Date) Page(s) Independent Auditors Report...1 Financial Statements Statement of Assets and Liabilities...2 Statement of Operations...2 Statement of Changes in Net Assets...3 Financial Highlights Notes to Financial Statements Supplementary Information Summary Schedule of Investments Purchased...12 Summary Schedule of Investments Matured or Sold...12

4 INDEPENDENT AUDITORS REPORT To the Trustee and Unit Holders of the of Union Bank, N.A.: We have audited the accompanying statement of assets and liabilities of the of Union Bank, N.A. (the Fund ) as of July 31, 2012 (termination date), and the related statements of operations, changes in net assets, and financial highlights for the period from January 1, 2012 to July 31, 2012 (termination date). These financial statements and financial highlights are the responsibility of the Fund s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the of Union Bank, N.A. as of July 31, 2012 (termination date), the results of its operations, changes in its net assets, and financial highlights for the period from January 1, 2012 to July 31, 2012 (termination date) in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplemental summary schedules of investments purchased and investments matured or sold for the period from July 1, 2012 to July 31, 2012 (termination date) are presented for the purpose of additional analysis and are not a required part of the financial statements, but are supplementary information required by Regulation 9 of the Comptroller of the Currency. These schedules are the responsibility of the Fund s management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. Such schedules have been subjected to the auditing procedures applied in our audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, such schedules are fairly stated in all material respects in relation to the financial statements a whole. As discussed in Note 1 to the financial statements, the Fund was terminated on July 31, August 28, 2012

5 Statement of Assets and Liabilities July 31, 2012 (Termination Date) Total assets $ Total liabilities Net assets $ Net asset value per unit Class A (based upon net assets of $0 and 0 units outstanding) $ 0.00 Class B (based upon net assets of $0 and 0 units outstanding) $ 0.00 Class C (based upon net assets of $0 and 0 units outstanding) $ 0.00 Statement of Operations Investment income Dividends $ 11,455 Interest 18,939,099 Total investment income 18,950,554 Expenses Management fees - Class A 222,629 Management fees - Class B 175,733 Management fees - Class C 402,808 Sub-advisory fees 166,975 Custodian fees 71,249 Audit fees 28,500 Consulting fees 3,730 Professional fees 582 Total expenses 1,072,206 Net investment income $ 17,878,348 Realized and unrealized income on collective investment trust (Note 2) Realized income on collective investment trust $ 2,387,406 Change in unrealized income on collective investment trust (2,123,039) Net realized and change in unrealized income on collective investment trust 264,367 Net increase in net assets from operations $ 18,142,715 The accompanying notes are an integral part of these financial statements. 2

6 Statement of Changes in Net Assets Operations Net investment income $ 17,878,348 Realized income on collective investment trust 2,387,406 Change in unrealized income on collective investment trust (2,123,039) Net increase in net assets from operations 18,142,715 Distributions to participants from Net investment income - Class A (2,568,211) Net investment income - Class B (2,430,922) Net investment income - Class C (12,879,215) Total distributions from net investment income (17,878,348) Realized income from collective investment trust - Class A (Note 2) (46,563) Realized income from collective investment trust - Class B (Note 2) (36,015) Realized income from collective investment trust - Class C (Note 2) (181,789) Total distributions from Realized income from collective investment trust (264,367) Net decrease in net assets from distributions to participants (18,142,715) Unit transactions Proceeds from sale of units 45,368,444 Dividends reinvested 15,921,067 Cost of units redeemed (637,620,849) Net decrease in net assets from unit transactions (576,331,338) Total decrease in net assets (576,331,338) Net assets Beginning of period 576,331,338 End of period $ Number of fund units Issued 45,368,444 Reinvested 15,921,067 Redeemed (637,620,849) Net decrease in units outstanding (576,331,338) Units outstanding Beginning of period 576,331,338 End of period The accompanying notes are an integral part of these financial statements. 3

7 Financial Highlights Class A Per unit data (for a unit outstanding throughout the period) Operations Net investment income $ 0.04 Realized income from collective investment trust* Distributions to participants from Net investment income (0.04) Realized income from collective investment trust* Net asset value Beginning of period 1.00 End of period** $ 1.00 Total return*** 3.35% Ratio of expenses to average net assets*** 0.34% Net investment income as a percentage of average net assets*** 3.34% Class B Per unit data (for a unit outstanding throughout the period) Operations Net investment income $ 0.04 Realized income from collective investment trust* Distributions to participants from Net investment income (0.04) Realized income from collective investment trust* Net asset value Beginning of period 1.00 End of period** $ 1.00 Total return*** 3.38% Ratio of expenses to average net assets*** 0.32% Net investment income as a percentage of average net assets*** 3.60% The accompanying notes are an integral part of these financial statements. 4

8 Financial Highlights Class C Per unit data (for a unit outstanding throughout the period) Operations Net investment income $ 0.04 Realized income from collective investment trust* Distributions to participants from Net investment income (0.04) Realized income from collective investment trust* Net asset value Beginning of period 1.00 End of period** $ 1.00 Total return*** 3.53% Ratio of expenses to average net assets*** 0.17% Net investment income as a percentage of average net assets*** 3.71% * Amount rounds to less than $0.01 per share. ** Represents last net asset value transacted on July 31, 2012 (Termination Date). *** Performance and ratios are based upon actual days in the period and are not annualized. Annualized expense ratios for the period for the Class A, Class B and Class C shares were 0.60%, 0.54% and 0.30%, respectively. The accompanying notes are an integral part of these financial statements. 5

9 Notes to Financial Statements 1. Fund Organization and Investment Objective The Union Bank, N.A. (the Fund ) was established June 11, 1986, and is governed by the Plan of the Pooled Investment Funds of Union Bank, N.A. (as amended and restated effective July 21, 2010) and as re-executed January 30, 2012 as amended from time to time (the Plan ). Union Bank, N.A. (the Trustee ) was the sponsor, Trustee, and Investment Manager of the Fund. Union Bank, N.A. is a national banking association that provides fiduciary services, including trustee and investment management agency services for funds and custodial services for institutional trust clients. HighMark Capital Management, Inc. (the Investment Adviser ), a wholly owned subsidiary of Union Bank, N.A., acts as Investment Adviser to the Trustee which maintains the Fund. Morley Capital Management, Inc. (the Sub-Adviser or Morley ) an unaffiliated investment adviser, also provided investment advisory services to the Trustee. On March 9, 2012, (the Record Date ) the Trustee announced the termination date of the Fund (the Termination Date ) would be the earlier of July 31, 2012 or the date when all units in the Fund had been redeemed and that the investment objective was changed to preservation of capital. In order to comply with the investment objective, to promote liquidity, and limit volatility following the Record Date, the Fund s fixed income securities and collective investment fund, the Union Bond and Trust Company were sold. The proceeds from the liquidation of assets were reinvested into registered U.S. Government money market funds. A portion of the money market funds were wrapped by a single benefit responsive wrap contract issued by Principal Life Insurance Company with the intention of preserving the ability to transact fund units at contract value and amortize the realized gain. The Fund was terminated on July 31, 2012, all money market funds and Fund units were liquidated, and the unit holders were credited Fund income and proceeds from unit liquidation. No assets or liabilities existed as of July 31, For more information about the events preceding the Termination Date please review the Fund Termination Notice and Updates published by the Trustee on the Fund s website at the following web address The Trustee negotiated a benefit responsive wrap contract (also referred to within this report as alternative investment contracts) with Principal Life Insurance Company, an affiliate of Principal Financial Group. For that benefit-responsive wrap contracts provided through Principal Life Insurance Company, the Trustee retained Morley Capital Management, Inc. to manage the assets held in the Fund s segregated account wrapped by the Principal contract, and such manager received compensation from the Fund for such advisory services as disclosed on Schedule A of the Fund s Disclosure Statement. The Trustee invested in the Union Bond and Trust Company (the UBT SVF ), a collective investment fund which is managed by Morley. As the Fund s sub-advisor, Morley waived its advisory fee from the Fund with respect to any Fund assets invested in the UBT SVF, and was compensated for such services solely from the UBT SVF. Investments in collective investment vehicles, including without limitation collective investment funds, mutual funds and insurance company bundled products may include investment in vehicles advised by the Investment Adviser or Sub-Adviser, or for which the Trustee or the Investment Adviser, Sub- Adviser, or affiliates thereof provide other services for a fee. Prior to implementation of the termination procedures starting March 9, 2012 noted above, the primary investment objective of the 6

10 Notes to Financial Statements Fund was to provide dependable current income and safety of principal by making direct investments in stable value instruments, and in certain other fixed income or money market obligations or in a variety of collective investment vehicles which invest in such obligations. A stable value instrument is a fixed income obligation, the rate of return of which is guaranteed by the issuing insurance company, bank, savings and loan or other financial institution; or a debt instrument or portfolio of debt instruments owned by the Fund combined with a 100% benefit responsive contract (wrapper) issued by an insurance company, bank, savings and loan or other financial institution. 2. Summary of Significant Accounting Policies The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The policies are in conformity with accounting principles generally accepted in the United States of America ( GAAP ), and provisions of the Plan. Investment Valuation Prior to its Termination Date on July 31, 2012, the Fund invested in a short-term investment vehicle. The investment in units of the short-term investment vehicle were valued at the net asset value as reported daily. FASB Accounting Standards Codification ( FASB ASC ) 820, (formerly FASB Statement No. 157, Fair Value Measurements) establishes a single authoritative definition of fair value, sets a framework for measuring fair value and requires additional disclosures about fair value measurements. FASB ASC 820 applies to fair value measurements already required or permitted by existing standards. As defined in FASB ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Fund maximizes the use of observable market inputs and minimizes the use of unobservable inputs. Observable inputs reflect market-derived or market based information obtained from independent sources, while unobservable inputs reflect the Fund s estimate about market data. Based on the observability of the inputs used, the Fund classifies its fair value measurements in accordance with the three-level hierarchy as defined by GAAP. This hierarchy is based on the quality, observability and reliability of the information used to determine fair value. Various inputs are used in determining the value of the Fund s investments. These inputs are summarized in the three broad levels listed below: Level 1 Quoted prices in active markets for identical securities. Valuations are based on quoted prices in active markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market, they do not entail a significant degree of judgment. Level 2 Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data. Financial assets classified as Level 2 included fixed income securities, repurchase agreements and money market funds. Level 3 Significant unobservable inputs (including the Fund s own assumptions in determining the fair value of investments). Valuations are based on at least one significant unobservable input 7

11 Notes to Financial Statements that is supported by little or no market activity and is significant to the fair value measurement. Values are determined using pricing models and discounted cash flow models that include management, judgment and estimation, which may be significant. Financial assets classified as Level 3 included the wrap contracts. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. There were no significant transfers between Level 1 and Level 2 for the period ended July 31, Level 3 Reconciliation Disclosure Following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value: Balance as of December 31, 2011 $ 80,638 Accrued discounts/(premiums) Realized gain/(loss) Change in unrealized appreciation/(depreciation) Net purchases/(sales) (80,638) Transfers in and/or (out) of Level 3 Balance as of July 31, 2012 $ Since the Fund did not hold wrapped assets or wrap contracts as of July 31, 2012, the following FASB ASC 820 informational disclosures were not applicable or provided in these financial statements: average yield, sensitivity analysis, the table of investments at fair value and investments at contract value, the fair value to contract value ratio, and events that may limit the Fund to transact at contract value. Collective Investment Trust Fund The Fund invested in the UBT SVF managed by Morley. The objective of the UBT SVF is to provide a low-risk, moderate yield investment. The UBT SVF is managed to earn a consistent level of return, while providing for, preservation of capital, high credit quality and liquidity. The UBT SVF consists of a diversified portfolio of high quality stable value alternative investment contracts issued by life insurance companies, banks and other financial institutions. Unlike mutual funds, the UBT SVF does not declare or payout dividends; income earned on the assets is accrued daily and reinvested into the UBT SVF. This accrual of income and payment of expenses incurred are reflected in the UBT SVF NAV, also known as the unit price, which is priced daily and is not held constant. The Fund values its investment in the UBT SVF using the daily UBT SVF NAV or unit price. The unrealized appreciation on this investment was distributed to unit holders of the Fund on a daily basis. Upon the liquidation of this investment, the unrealized appreciation was recognized as realized income as reflected on both the Statements of Operations and Changes in Net Assets. The UBT SVF is fully benefit responsive in the event the Fund requires a redemption to meet participant withdrawals for qualified purposes as defined in the Union Bank N.A. Disclosure Statement. In the event the Fund initiates a Non-Qualified Withdrawal from the UBT SVF (for non-benefit reasons such as a transfer to competing investment options or termination of the UBT SVF as an investment option of the Fund) these withdrawals are made one year after notification is received from the Fund s Trustee. The Union Bond & Trust Company as trustee of the UBT SVF, 8

12 Notes to Financial Statements reserves the right to grant a withdrawal earlier than that mentioned above if there are sufficient cash assets to satisfy the withdrawal and it is not detrimental to the best interest of the UBT SVF. Money Market Investments Prior to the Record Date the Fund was permitted to invest excess cash in both prime obligation (non-governmental) Money Market Funds and U.S. Government Money Market Funds that seek a high level of current income consistent with the preservation of capital and maintenance of liquidity. Following the Record Date the Fund invested cash solely in U.S. Government money market funds that invested in debt securities issued or guaranteed by the U.S. government, or by U.S. government agencies or instrumentalities, and repurchase agreements fully collateralized by U.S. Treasury and U.S. government securities. Investment Transactions Investment transactions were accounted for on the trade date (date the order to buy or sell is executed). The cost of investments sold was determined by the first-in, first-out ( FIFO ) method. Investment Income Interest income was recorded as earned. The income crediting rate on synthetic investment contracts was the yield to maturity of the underlying assets, adjusted to amortize the difference between the market value of the assets and the book value of the contract over the duration of the underlying assets, less contract wrap fees, but not less than zero. The investments underlying synthetic investment contracts were generally fixed rate securities. However, the crediting rate on the contracts may be adjusted so that, over time, contract value approximates market value of the underlying investments. Units Issued, Redemptions and Distributions The NAV of the Fund was determined each business day. Units were issued and redeemed based upon the NAV. In accordance with the Plan, net investment income was distributed monthly. The Fund offered three classes of units, Class A, Class B and Class C units. All three classes represent interest in the same portfolio of investments and are substantially the same in all respects except that the classes are subject to different fee and expense obligations. Based upon review of unit holders eligibility for Classes A, B or C of the Fund, during the period from January 1, 2012 through July 31, 2012, no unit holders were eligible to be exchanged. 9

13 Notes to Financial Statements Below is the unit transaction table. Units Dollars Class A Issued 8,574,147 $ 8,574,147 Reinvested 2,450,535 2,450,535 Redeemed (114,321,646) (114,321,646) Class B Issued 5,523,148 5,523,148 Reinvested 2,312,118 2,312,118 Redeemed (86,502,536) (86,502,536) Class C Issued 31,271,149 31,271,149 Reinvested 11,158,414 11,158,414 Redeemed (436,796,667) (436,796,667) Expenses Investment management services fees were accrued daily and paid monthly to the Trustee based upon contractual terms at an annual rate of 0.50% of assets under management for Class A units, at an annual rate of 0.45% of assets under management for Class B units and at an annual rate of 0.20% of assets under management for Class C units. The Investment Adviser was paid directly by the Trustee for investment adviser services from these fees. Class A, Class B and Class C units are all charged a Sub-Adviser fee which is accrued daily and paid monthly to Morley based upon contractual terms at an annual rate of 0.07% on the first $300 million of Fund assets under management, 0.05% on the next $300 million of Fund assets under management, 0.03% on the next $400 million of Fund assets under management and 0.02% on all amounts in excess of $1 billion of Fund assets under management. In accordance with the Plan and applicable regulations, the Fund was charged for expenses incurred for the annual audit. In addition, the Fund periodically reimbursed the Trustee for administrative costs and expenses such as fund accounting fees and administrative costs and expenses incurred on behalf of the Fund. These costs are presented on a cumulative basis as a separate line item on the Fund s Statement of Operations, and were charged to the Fund at an annual rate of 0.025% of the net assets, calculated and accrued daily. Some participants may pay additional administrative fees directly to the Trustee. Any Fund balance representing units of the UBT SVF, managed by Morley as the Fund s Sub-Adviser, shall be excluded from the Fund balance against which the above-noted fees are calculated. Morley did not receive any compensation under this arrangement for such Fund investments, as Morley receives fund level compensation for its services to the UBT SVF. Federal and State Income Taxes The Fund was exempt from federal and state income taxes under the applicable provisions of the Internal Revenue Code and the related state codes. Accordingly, no provision for income taxes is included in these financial statements. The Fund applied the authoritative guidance on accounting for and disclosure of uncertainty in tax positions under FASB ASC 740, Income Taxes, which requires management to determine whether a tax position of the Fund is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not 10

14 Notes to Financial Statements threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. The Trustee determined that as of July 31, 2012, no uncertain tax positions existed. Subsequent Events There were no subsequent events or transactions through the date the financial statements were issued that would have materially impacted the financial statements as presented. 11

15 Supplementary Information Period January 1, 2012 through July 31, 2012 (Termination Date) Summary Schedule of Investments Purchased Shares/ Principal Amount Cost Alternative investment contracts 18,935,995 $ 18,935,995 Money market funds 587,505, ,505,196 $ 606,441,191 Summary Schedule of Investments Matured or Sold Shares/ Principal Amount Proceeds Alternative investment contracts* 456,524,793 $ 530,408,035 Money market funds 653,532, ,532,912 $1,183,940,947 * Includes activity for the UBT SVF 12