Merrill LYNCH Preferred Funding Iii 10-Q 2012 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NO.: 1-7182-06

MERRILL LYNCH PREFERRED CAPITAL TRUST III

(Exact name of Registrant as specified in its certificate of trust)

Delaware (State or other jurisdiction of incorporation or organization) 13-7139561 (I.R.S. Employer Identification No.)

4 World Financial Center New York, New York (Address of principal executive offices) 10080 (Zip Code)

Registrant’s telephone number, including area code: (212) 449-1000

COMMISSION FILE NO.: 1-7182-05

MERRILL LYNCH PREFERRED FUNDING III, L.P.

(Exact name of Registrant as specified in its certificate of limited partnership)

Delaware (State or other jurisdiction of incorporation or organization) 13-3982448 (I.R.S. Employer Identification No.)

4 World Financial Center New York, New York (Address of principal executive offices) 10080
(Zip Code)

Registrant’s telephone number, including area code: (212) 449-1000

Indicate by check mark whether the Registrants: (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the Registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files). Yes þ No o

Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o	Non-accelerated filer þ	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The Registrants meet the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and are therefore filing this Quarterly Report on Form 10-Q (the "Report") with a reduced disclosure format.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)	3
CONDENSED BALANCE SHEETS (Unaudited)	3
CONDENSED STATEMENTS OF EARNINGS (Unaudited)	4
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)	5
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)	6
NOTE TO CONDENSED FINANCIAL STATEMENTS (Unaudited)	7
CONDENSED BALANCE SHEETS (Unaudited)	8
CONDENSED STATEMENTS OF EARNINGS (Unaudited)	9
CONDENSED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (Unaudited)	10
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)	11
NOTE TO CONDENSED FINANCIAL STATEMENTS (Unaudited)	12
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	13
ITEM 4. CONTROLS AND PROCEDURES	13
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS	14
ITEM 6. EXHIBITS	14
SIGNATURES	15
INDEX TO EXHIBITS	16
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 101

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

MERRILL LYNCH PREFERRED CAPITAL TRUST III

CONDENSED BALANCE SHEETS (Unaudited)

(dollars in thousands, except per security amounts)

	September 30, 2012		December 31, 2011
ASSETS
Investment in affiliate partnership preferred securities	$	773,196	$	773,196
Interest receivable from affiliate	13,531		—
Total Assets	$	786,727	$	773,196
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Distributions payable	$	13,531	$	—
STOCKHOLDERS’ EQUITY
Preferred securities (7% Trust Originated Preferred Securities; 30,000,000 authorized, issued, and outstanding; $25 liquidation amount per security)	750,000		750,000
Common securities (7% Trust Common Securities; 927,840 authorized, issued, and outstanding; $25 liquidation amount per security)	23,196		23,196
Total Stockholders’ Equity	773,196		773,196
Total Liabilities and Stockholders' Equity	$	786,727	$	773,196

See Note to Condensed Financial Statements

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MERRILL LYNCH PREFERRED CAPITAL TRUST III

CONDENSED STATEMENTS OF EARNINGS (Unaudited)

(dollars in thousands)

	FOR THE THREE MONTHS ENDED
	September 30, 2012		September 30, 2011
EARNINGS
Interest on affiliate partnership preferred securities	$	13,531	$	13,531
	FOR THE NINE MONTHS ENDED
	September 30, 2012		September 30, 2011
EARNINGS
Interest on affiliate partnership preferred securities	$	40,593	$	40,593

See Note to Condensed Financial Statements

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MERRILL LYNCH PREFERRED CAPITAL TRUST III

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(dollars in thousands)

	FOR THE NINE MONTHS ENDED
	September 30, 2012			September 30, 2011
PREFERRED SECURITIES
Balance, beginning and end of period	$	750,000		$	750,000
COMMON SECURITIES
Balance, beginning and end of period	23,196			23,196
UNDISTRIBUTED EARNINGS
Balance, beginning of period	—			—
Earnings	40,593			40,593
Distributions	(27,062		)	(40,593		)
Distributions payable	(13,531		)	—
Balance, end of period	—			—
Total Stockholders’ Equity	$	773,196		$	773,196

See Note to Condensed Financial Statements

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MERRILL LYNCH PREFERRED CAPITAL TRUST III

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands)

	FOR THE NINE MONTHS ENDED
	September 30, 2012			September 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings	$	40,593		$	40,593
Change in interest receivable from affiliate	(13,531		)	—
Cash provided by operating activities	27,062			40,593
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions	(27,062		)	(40,593		)
Cash used for financing activities	(27,062		)	(40,593		)
NET CHANGE IN CASH	—			—
CASH, BEGINNING OF PERIOD	—			—
CASH, END OF PERIOD	$	—		$	—

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:

Distributions accrued but not paid at September 30, 2012 and September 30, 2011 were $13,531 and $0, respectively.

See Note to Condensed Financial Statements

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MERRILL LYNCH PREFERRED CAPITAL TRUST III

NOTE TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

September 30, 2012

Merrill Lynch Preferred Capital Trust III (the “Trust”) is a statutory business trust formed under the Delaware Business Trust Act, as amended. Merrill Lynch & Co., Inc. (the “Company”) is the sole owner of the Trust common securities.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For a complete discussion of significant accounting policies, refer to the audited financial statements included in the Trust's Annual Report on Form 10-K for the year ended December 31, 2011.

BASIS OF PRESENTATION

These unaudited condensed financial statements should be read in conjunction with the audited financial statements included in the Annual Report on Form 10-K of the Trust for the year ended December 31, 2011. The interim condensed financial statements for the three- and nine- month periods are unaudited; however, all adjustments necessary for a fair presentation of the condensed financial statements have been included.

INVESTMENTS

The Trust's investment in Merrill Lynch Preferred Funding III, L.P. (the "Partnership") Preferred Securities represents a limited partnership interest in the Partnership and is recorded at cost. Income on the Partnership Preferred Securities is accrued when earned.

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MERRILL LYNCH PREFERRED FUNDING III, L.P.

CONDENSED BALANCE SHEETS (Unaudited)

(dollars in thousands)

	September 30, 2012		December 31, 2011
ASSETS
Investments:
Affiliate debentures	$	900,547	$	900,547
U.S. Government and agencies	9,096		9,098
Total investments	909,643		909,645
Interest receivable from affiliates	15,760		—
Total Assets	$	925,403	$	909,645
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Distributions payable	$	15,760	$	—
PARTNERS’ CAPITAL
Limited partnership interest	773,196		773,196
General partnership interest	136,447		136,449
Total Partners' Capital	909,643		909,645
Total Liabilities and Partners' Capital	$	925,403	$	909,645

See Note to Condensed Financial Statements

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MERRILL LYNCH PREFERRED FUNDING III, L.P.

CONDENSED STATEMENTS OF EARNINGS (Unaudited)

(dollars in thousands)

	FOR THE THREE MONTHS ENDED
	September 30, 2012		September 30, 2011
EARNINGS
Interest income:
Affiliate debentures	$	15,760	$	15,760
U.S. Government and agencies	2		6
Earnings	$	15,762	$	15,766
	FOR THE NINE MONTHS ENDED
	September 30, 2012		September 30, 2011
EARNINGS
Interest income:
Affiliate debentures	$	47,279	$	47,279
U.S. Government and agencies	6		17
Earnings	$	47,285	$	47,296

See Note to Condensed Financial Statements

9

MERRILL LYNCH PREFERRED FUNDING III, L.P.

CONDENSED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL (Unaudited)

(dollars in thousands)

	FOR THE NINE MONTHS ENDED
	September 30, 2012			September 30, 2011
LIMITED PARTNER’S CAPITAL
Balance, beginning of period	$	773,196		$	773,196
Earnings allocated to limited partner	40,593			40,593
Distributions	(27,062		)	(40,593		)
Distributions payable	(13,531		)	—
Balance, end of period	773,196			773,196
GENERAL PARTNER’S CAPITAL
Balance, beginning of period	136,449			136,452
Earnings allocated to general partner	6,692			6,703
Distributions	(4,465		)	(6,708		)
Distributions payable	(2,229		)	—
Balance, end of period	136,447			136,447
TOTAL PARTNERS’ CAPITAL	$	909,643		$	909,643

See Note to Condensed Financial Statements

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MERRILL LYNCH PREFERRED FUNDING III, L.P.

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands)

	FOR THE NINE MONTHS ENDED
	September 30, 2012			September 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings	$	47,285		$	47,296
Accretion of interest on securities issued by U.S. Government and agencies	(6		)	(17		)
Change in interest receivable from affiliates	(15,760		)	—
Cash provided by operating activities	31,519			47,279
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities	(9,096		)	(9,096		)
Maturities of investment securities	9,104			9,118
Cash provided by investing activities	8			22
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to limited partner	(27,062		)	(40,593		)
Distributions to general partner	(4,465		)	(6,708		)
Cash used for financing activities	(31,527		)	(47,301		)
NET CHANGE IN CASH	—			—
CASH, BEGINNING OF PERIOD	—			—
CASH, END OF PERIOD	$	—		$	—

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:

Distributions accrued but not paid at September 30, 2012 and September 30, 2011 were $15,760 and $0, respectively.

See Note to Condensed Financial Statements

11

MERRILL LYNCH PREFERRED FUNDING III, L.P.

NOTE TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

September 30, 2012

Merrill Lynch Preferred Funding III, L.P. (the “Partnership”) is a limited partnership formed under the Delaware Revised Uniform Limited Partnership Act, as amended. Merrill Lynch & Co. Inc. (the “Company”) is the sole general partner of the Partnership.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For a complete discussion of significant accounting policies, refer to the audited financial statements included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2011.

BASIS OF PRESENTATION

These unaudited condensed financial statements should be read in conjunction with the audited financial statements included in the Annual Report on Form 10-K of the Partnership for the year ended December 31, 2011. The interim condensed financial statements for the three- and nine-month periods are unaudited; however, all adjustments necessary for a fair presentation of the condensed financial statements have been included.

INVESTMENTS

The Partnership’s investment in affiliate debentures is recorded at cost. Its investment in U.S. Government and agency securities is recorded at accreted cost and matures within one year. At September 30, 2012, the estimated fair value of the investment in affiliate debentures was approximately $1.0 billion, which is classified as Level 2 in the fair value hierarchy per Accounting Standards Codification 820, Fair Value Measurement and Disclosures ("Fair Value Accounting"). This fair value was estimated based on current market interest rates and credit spreads for the Company's debt with similar terms and maturities. At September 30, 2012, the fair value of the investment in U.S. Government and agency securities, which is classified as Level 1 in the fair value hierarchy under Fair Value Accounting, approximated its carrying value.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

No disclosure is required for this Item pursuant to General Instruction H of Form 10-Q. There were no material changes in the amount of revenue and expense items between the most recent calendar year-to-date period presented and the corresponding period in the preceding year.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No disclosure is required for this Item pursuant to General Instruction H of Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

The Trust

The person who functions as the equivalent of the Chief Executive Officer and the Chief Financial Officer of the Trust has evaluated the effectiveness of the Trust's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this Form 10-Q. Based on that evaluation, the person who functions as the equivalent of the Chief Executive Officer and the Chief Financial Officer of the Trust has concluded that the Trust's disclosure controls and procedures are effective as of the end of the period covered by this report, in recording, processing, summarizing and reporting information required to be disclosed by the Trust in reports that it files or submits under the Exchange Act, within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms.

In addition, no change in the Trust's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the three months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Trust's internal control over financial reporting.

The Partnership

The person who functions as the equivalent of the Chief Executive Officer and the Chief Financial Officer of the Partnership has evaluated the effectiveness of the Partnership's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based on that evaluation, the person who functions as the equivalent of the Chief Executive Officer and the Chief Financial Officer of the Partnership has concluded that the Partnership's disclosure controls and procedures are effective as of the end of the period covered by this report, in recording, processing, summarizing and reporting information required to be disclosed by the Partnership in reports that it files or submits under the Exchange Act, within the time periods specified in the SEC's rules and forms.

In addition, no change in the Partnership's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the three months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Partnership's internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Trust's and the Partnership's Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 6. EXHIBITS

An exhibit index has been filed as part of this Report and is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this Report to be signed on their behalf by the undersigned, thereunto duly authorized.

MERRILL LYNCH PREFERRED CAPITAL TRUST III*
By:	/s/ ANGELA C. JONES
	Name:	Angela C. Jones
	Title:	Regular Trustee

MERRILL LYNCH PREFERRED FUNDING III, L.P.
By: MERRILL LYNCH & CO., INC., as General Partner
By:	/s/ ANTHONY BINIARIS
	Name:	Anthony Biniaris
	Title:	Chief Accounting Officer and Controller
		Merrill Lynch & Co., Inc.

Date: November 14, 2012

* There is no principal executive officer(s), principal financial officer, controller, principal accounting officer or board of directors of the Registrant. The Trustees of the Trust (which include the Regular Trustees, the Property Trustee and the Delaware Trustee) together exercise all powers and perform all functions with respect to the Trust.

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INDEX TO EXHIBITS

EXHIBITS
12	Statement re: Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Securities Distributions (Unaudited).(1)
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
101	The following materials from Merrill Lynch Preferred Capital Trust III and Merrill Lynch Preferred Funding III, L.P. Quarterly Reports on Form 10-Q for the three- and nine-month periods ended September 30, 2012 and September 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Balance Sheets, (ii) the Condensed Statements of Earnings, (iii) the Condensed Statements of Changes in Stockholders' Equity / Partners' Capital, (iv) the Condensed Statements of Cash Flows, and (v) the Note to Condensed Financial Statements.(1)(2)

(1) Filed herewith.

(2) These interactive data files shall not be deemed filed for purposes of Section 11or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Act 1934, as amended, or otherwise subject to liability under those sections.

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