10-Q 1 d10q.txt MAIN PLACE FUNDING SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 333-74817 MAIN PLACE FUNDING, LLC ----------------------- (Exact name of registrant as specified in its charter) Delaware 57-0236115 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 100 North Tryon Street, Charlotte, NC 28255 ------------------------------------------- (Address of principal executive offices) (Zip Code) (704) 388-7436 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has 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 registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ On November 14, 2002, there were no shares of common stock outstanding. As of November 14, 2002, all members' interests were held by Bank of America, N.A. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. MAIN PLACE FUNDING, LLC SEPTEMBER 30, 2002 FORM 10-Q

2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MAIN PLACE FUNDING, LLC STATEMENT OF INCOME (Dollars in Thousands)

See accompanying notes to financial statements. 3 MAIN PLACE FUNDING, LLC BALANCE SHEET (Dollars in Thousands)

See accompanying notes to financial statements. 4 MAIN PLACE FUNDING, LLC STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)

See accompanying notes to financial statements. 5 STATEMENT OF CHANGES IN MEMBERS' EQUITY (Dollars in Thousands)

(1) Changes in Accumulated Other Comprehensive Income (Loss) includes after-tax net unrealized gains (losses) on securities available-for-sale. See accompanying notes to financial statements. 6 MAIN PLACE FUNDING, LLC NOTES TO FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS Main Place Funding, LLC ("Main Place"), a Delaware limited liability company, is a subsidiary of Bank of America, N.A. (the "Parent"), which is a wholly owned indirect subsidiary of Bank of America Corporation (the "Corporation"). Main Place was established originally as a Maryland real estate investment trust to consolidate the acquisition, holding and management of certain closed-end residential mortgage loans owned by certain affiliates of the Corporation. Bank of America, N.A. holds a 100 percent membership interest in Main Place. Main Place is also considered a single-member LLC under current tax law. Main Place issues and sells mortgage-backed bonds and acquires, owns, holds and pledges the related mortgage notes and other assets serving as collateral in connection therewith. Beginning in the fourth quarter of 2002, Main Place also expects to issue certain financial warranty agreements in favor of third parties for a fee. On August 15, 2002, Main Place Trust, a Delware business trust was liquidated into Bank of America, N.A. NOTE 2 - ACCOUNTING POLICIES The information contained in the financial statements is unaudited. In the opinion of management, all normal recurring adjustments necessary for a fair statement of the interim period results have been made. Certain prior period amounts have been reclassified to conform to current period classifications. Accounting policies followed in the presentation of interim financial results are presented in Note 2 on pages 12 to 14 of the Annual Report on Form 10-K for the year ended December 31, 2001. NOTE 3 - LOANS The following table presents the composition of loans (dollars in thousands): SEPTEMBER 30 December 31 2002 2001 --------------------------------------------------------------------- Residential mortgage............................. $ 1,083,732 $ 5,149,783 Commercial real estate............................... 1,548 2,930 -------------------------- Total $ 1,085,280 $ 5,152,713 ========================== Transactions in the allowance for credit losses were as follows (dollars in thousands): Nine Months Ended September 30 -------------------------- 2002 2001 --------------------------------------------------------------------- Balance on January 1 ................... $ 7,729 $ 35,345 Loans charged off........................ (317) (169) Release of allowance for credit losses... (6,093) - -------------------------- Balance on September 30.................. $ 1,319 $ 35,176 -------------------------- Main Place had $19.0 million of nonperforming loans on September 30, 2002 compared to $23.5 million on December 31, 2001. Foreclosed properties on September 30, 2002 totaled $3.9 million compared to $5.3 million on 7 December 31, 2001. During the first nine months of 2002 and the fourth quarter of 2001 Main Place made an adjustment to the allowance for credit losses of $5.6 million and $21.8 million, respectively, due to the decline in the average balance of the loan portfolio throughout 2001. NOTE 4 - AFFILIATE TRANSACTIONS Main Place maintains its cash and cash equivalent accounts with the Parent in the form of time deposits. Interest income on time deposits for the three and nine months ended September 30, 2002 was $58.4 million and $160.4 million, respectively, compared to $73.2 million and $202.5 million for the same prior year periods. As of September 30, 2002 and December 31, 2001, Main Place had $14.6 billion and $11.2 billion, respectively, of time deposits placed with the Parent. At September 30, 2002, Main Place had no accounts receivable outstanding from affiliates of the Corporation compared to $2.9 million at December 31, 2001. These receivables are related to mortgage payments and securities principal and interest payments in process, which generally clear within 30 days. At September 30, 2002 and December 31, 2001, Main Place had $230.3 million and $885.5 million, respectively, of U.S. government securities sold under agreements to repurchase from the Parent and Banc of America Securities LLC, a wholly-owned subsidiary of the Corporation, which mature on demand. Interest expense on securities sold under agreements to repurchase for the three and nine months ended September 30, 2002 was $1.1 million and $4.3 million compared to $15.4 million and $65.1 million for the same prior year periods. Gross gains of approximately $10.4 million were realized on sales of available-for-sale securities during the nine months ended September 30, 2002, compared to $12.0 million for the same prior year period. Main Place has entered into agreements with the Parent for the servicing and administration of its mortgage portfolio. Servicing fees paid to the Parent approximated $.8 million and $7.8 million for the three and nine months ended September 30, 2002, respectively, compared to $5.6 million and $19.6 million for the same periods in 2001. Servicing fees are included in "Other operating expenses" on the accompanying statement of income and are based on actual collections on loans. From time to time, Main Place purchases certain mortgage loans originated by the Parent. Main Place purchased no loans from the Parent during the third quarter and first nine months ended September 30, 2002 and 2001. During the nine months ended September 30, 2002, Main Place sold $2.8 billion of mortage loans to the Parent compared to $1.5 billion for the nine months ended September 30, 2001. Purchases or sales of loans between Main Place and the Parent are at book value, excluding any related allowance for loan loss. No gains or losses were recorded on these transactions. Accrued expenses due to affiliates as of September 30, 2002 and December 31, 2001 were $429.1 million and $339.2 million respectively, composed primarily of income tax payable to the Parent of $392.3 million and $325.9 million, respectively. Beginning in the fourth quarter of 2002, in connection with certain financial warranty agreements made by Main Place in favor of third parties, Main Place may enter into corresponding financial warranty agreements with affiliates, including Bank of America, N.A. 8 NOTE 5 - LONG-TERM DEBT In April 1999, the Securities and Exchange Commission declared effective Main Place's shelf registration statement ("Registration Statement") providing an additional $5 billion of capacity for issuance of mortgage-backed bonds ("Bonds"). Bonds have been issued under this as well as previously effective registration statements. The Bonds, which were issued in series pursuant to separate indentures, are generally subject to the following terms. The Bonds, collateralized primarily by mortgage loans on 1-to-4 family dwellings, are obligations solely of Main Place. The Bonds are not prepayable at the option of Main Place, but are subject to redemption in whole or in part under certain circumstances. Under the terms of an indenture relating to each series of Bonds, Main Place must maintain a minimum amount of eligible collateral, which is determined on a discounted basis and may consist of mortgage loans, certain U.S. agency mortgage pass-through certificates, U.S. government securities and cash held by a trustee (the " Trustee"). The types, characteristics and permitted amounts of eligible collateral are subject to change from time to time without the consent of the bondholders if such changes would not adversely affect the ratings assigned to the Bonds. In the event such collateral requirements are not met with respect to any series, Main Place must provide additional mortgage loans or other acceptable collateral with respect to such series to meet the required amounts of eligible collateral and/or repurchase Bonds in an amount sufficient to meet collateral requirements. If sufficient eligible collateral is not supplied and/or sufficient Bonds are not repurchased, Main Place must redeem a portion of the outstanding Bonds of such series such that the existing amount of the eligible collateral meets the collateral requirements of the indenture relating to the Bonds of such series that remain outstanding after the redemption. In the event that Main Place should fail to comply and two thirds of bondholders do not waive the default event, the Trustee is provided the pledged collateral. As of September 30, 2002, Main Place had the authority to issue approximately $3.5 billion of securities under its existing shelf registration statement. Interest expense on the Series 1999-1 mortgage-backed bond for nine months ended September 30, 2002 was $16.1 million, compared to $64.4 million for the same period in 2001. On May 28, 2002, Main Place repaid its obligation of $1.5 billion on the Series 1999-1 mortgage-backed bond. There are no additional bonds outstanding. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Total net income for the third quarter and first nine months of 2002 was $60.1million and $211.8 million, respectively, representing decreases of $61.1 million and $177.4 million from the corresponding periods in 2001. The decrease primarily resulted from decreases in interest income, partially offset by decreases in interest expense on long- term debt and reduced funding costs associated with the repurchase agreements. Total income for the third quarter and first nine months of 2002 was $95.2 million and $359.0 million, respectively, representing decreases of $140.6 million and $413.5 million, respectively, from the corresponding periods in 2001. The decrease included a decline in interest and fees on loans of $88.3 million and $287.2 million respectively, due to the run off of the loan portfolio and a sale of $2.8 billion of loans back to the Parent. Interest income from the securities portfolio for the third quarter and first nine months of 2002 declined $26.0 million and $88.7 million, respectively, resulting primarily from a reduction of $1.8 billion in the average balance of the securities portfolio for the nine months ended September 30, 2002. The net change in total income also included a decrease in interest income on time deposits placed of $14.8 million and $42.1 million for the third quarter and first nine months of 2002, respectively, compared to the same periods in 2001. The changes in interest income on time deposits placed resulted from a decrease of 262 basis points in average yields, to 1.71 percent for the nine months ended September 30, 2002. Total income for the first nine months of 2002 also includes $10.4 million in gains on sales of available-for-sale securties. In addition, the net change in total income for the third quarter and first nine months of 2002 includes release of allowance of credit losses of $.5 million and $6.1 million, respectively. Total expenses (excluding income taxes) for the third quarter and first nine months of 2002 were $2.0 million and $28.7 million, respectively, representing a decrease of $39.8 million and $120.9 million compared to the same periods in 2001. The decrease includes a decline in interest expense on securities sold under agreements to repurchase of $14.4 million and $60.8 million, respectively, resulting from a reduction of $1.5 billion in average borrowings, and a 285 basis point decrease in interest rates to 1.79 percent for the first nine months ended September 30, 2002. Long-term debt interest expense for the third quarter and first nine months of 2002 decreased by $20.5 million and $48.3 million to zero and $16.1 million, respectively, compared to the same periods in 2001, due to the retirement of $1.5 billion of debt in May 2002. Mortgage servicing fees, which are included in "other operating expenses", for the third quarter and first nine months of 2002 decreased by $4.8 million and $11.8 million, respectively, resulting from a reduction of $5.2 billion in the average loan portfolio and a 38 basis point decrease in interest rates to 6.70 percent for the first nine months ended September 30, 2002. Main Place made no provision for credit losses in the nine months of 2002 and 2001 due to the decline in the average balance of the loan portfolio throughout both periods, as well as a $4.5 million decrease in nonperforming loans to $19.0 million at September 30, 2002 from $23.5 million at December 31, 2001. Future economic conditions and changes in the loan portfolio may increase nonperforming loans and, accordingly, the level of the allowance for credit losses. The nature of the process by which Main Place determines the appropriate allowance for credit losses requires the exercise of considerable judgment. After a review of all relevant matters affecting loan collectibility, management believes that the allowance for credit losses is appropriate given its analysis of estimated incurred credit losses at September 30, 2002. 10 ITEM 4. CONTROLS AND PROCEDURES. Within the 90 days prior to the filing date of this report, Main Place carried out an evaluation, under the supervision and with the participation of Main Place's management, including Main Place's president and chief financial officer, of the effectiveness of the design and operation of Main Place's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, Main Place's president and chief financial officer concluded that Main Place's disclosure controls and procedures are effective in timely alerting them to material information relating to Main Place required to be included in Main Place's periodic SEC filings. Since the date of the evaluation, there have been no significant changes in Main Place's internal controls or in other factors that could significantly affect these controls. 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Nothing to report. ITEM 5. OTHER EVENTS On October 21, 2002, Main Place Funding, LLC adopted an Amended and Restated Limited Liability Company Agreement, filed under cover of Form 8-K dated as of October 21, 2002, which removed certain restrictions on the business activities of Main Place Funding, LLC, permitting it to engage in any activity and to exercise any powers permitted to limited liability companies under the laws of the State of Delaware. On October 29, 2002, Main Place Funding, LLC entered into a financial warranty agreement with Pioneer Investment Management, Inc., Pioneer Principal Protection Trust on behalf of its series, Pioneer Protected Principal Plus Fund, filed under cover of Form 8-K dated as of October 21, 2002. The trust is an open-ended diversified, management investment company registered under the Investment Company Act of 1940, as amended. Under the terms of the agreement, Main Place Funding, LLC provided a financial warranty in the amount of up to $900 million in order to ensure that the fund is able to redeem all of its outstanding shares on the fund's maturity date for an amount equal to the aggregate protected amount, as defined by the agreement. On or about November 13, 2002, Main Place Funding, LLC entered into a financial warranty agreement with Bank of America, N.A., filed herewith as Exhibit 10.1. Under the terms of this agreement, Bank of America, N.A. provided a financial warranty in favor of Main Place in the amount of up to $900 million, corresponding to Main Place's obligations under the financial warranty agreement in favor of the Pioneer Investment Management, Inc., Pioneer Principal Protection Trust on behalf of its series, Pioneer Protected Principal Plus Fund. On November 1, 2002, Main Place Funding, LLC entered into a financial warranty agreement with Merrill Lynch Principal Protected Trust, on behalf of its series Merrill Lynch Fundamental Growth Principal Protected Fund and Merrill Lynch Investment Managers, L.P., filed under cover of Form 8-K dated as of October 21, 2002. The trust is an open-ended diversified, management investment company registered under the Investment Company Act of 1940, as amended. Under the terms of the agreement, Main Place Funding, LLC provided a financial warranty in the amount of up to $500 million in order to ensure that the fund is able to redeem all of its outstanding shares on the fund's maturity date for an amount equal to the aggregate protected amount, as defined by the agreement. On or about November 13, 2002, Main Place Funding, LLC entered into a financial warranty agreement with Bank of America, N.A., filed herewith as Exhibit 10.2. Under the terms of this agreement, Bank of America, N.A. provided a financial warranty in favor of Main Place in the amount of up to $500 million, corresponding to Main Place's obligations under the financial warranty agreement in favor of Merrill Lynch Principal Protected Trust, on behalf of its series Merrill Lynch Fundamental Growth Principal Protected Fund and Merrill Lynch Investment Managers, L.P. On November 1, 2002, Main Place Funding, LLC entered into a financial warranty agreement with Merrill Lynch Principal Protected Trust, on behalf of its series Merrill Lynch Basic Value Principal Protected Fund and Fund Asset Management, L.P., filed under cover of Form 8-K dated as of October 21, 2002. The trust is an open-ended diversified, management investment company registered under the Investment Company Act of 1940, as amended. Under the terms of the agreement, Main Place Funding, LLC provided a financial warranty in the amount of up to $500 million in order to ensure that the fund is able to redeem all of its outstanding shares on the fund's maturity date for an amount equal to the aggregate protected amount, as defined by the agreement. On or about November 13, 2002, Main Place Funding, LLC entered into a financial warranty agreement with Bank of America, N.A., filed herewith as Exhibit 10.3. Under the terms of this agreement, Bank of America, 12 N.A. provided a financial warranty in favor of Main Place in the amount of up to $500 million, corresponding to Main Place's obligations under the financial warranty agreement in favor of Merrill Lynch Principal Protected Trust, on behalf of its series Merrill Lynch Basic Value Principal Protected Fund and Fund Asset Management, L.P. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 Financial warranty agreement with Bank of America, N.A. 10.2 Financial warranty agreement with Bank of America, N.A 10.3 Financial warranty agreement with Bank of America, N.A 12 Ratio of Earnings to Fixed Charges. 99.1 Certification of President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (b) Reports on Form 8-K: None. 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Main Place Funding, LLC Date: November 14, 2002 /s/ Susan R. Faulkner ------------------------------------------ Susan R. Faulkner Treasurer and Senior Vice President/ Principal Financial and Accounting Officer (Principal Financial and Duly Authorized Officer) 14 MAIN PLACE FUNDING, LLC Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 I, Susan Carr, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Main Place Funding, LLC; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Susan C. Carr ------------------ Susan C. Carr President 15 MAIN PLACE FUNDING, LLC Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 I, Susan Faulkner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Main Place Funding, LLC; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Susan Faulkner ------------------------- Susan Faulkner Chief Financial Officer 16 MAIN PLACE FUNDING, LLC FORM 10-Q INDEX TO EXHIBITS Exhibit Description ------- ----------- 10.1 Financial warranty agreement with Bank of America, N.A. 10.2 Financial warranty agreement with Bank of America, N.A 10.3 Financial warranty agreement with Bank of America, N.A 12 Ratio of Earnings to Fixed Charges. 99.1 Certification of President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 17

MAIN PLACE FUNDING LLC 10-Q