QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2011
OR
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 Number: 001-09318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware
13-2670991
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
One Franklin Parkway, San Mateo, CA
94403
(Address of principal executive offices)
(Zip Code)
(650) 312-2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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. x YES o NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES o NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x NO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding: 215,942,632 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of January 25, 2012.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Income
Unaudited
Three Months Ended December 31,
(in thousands, except per share data)
2011
2010
Operating Revenues
Investment management fees
$
1,075,137
$
1,066,507
Sales and distribution fees
524,304
552,203
Shareholder servicing fees
75,405
72,055
Other, net
27,030
9,548
Total operating revenues
1,701,876
1,700,313
Operating Expenses
Sales, distribution and marketing
630,618
647,153
Compensation and benefits
300,412
292,394
Information systems and technology
41,434
40,367
Occupancy
31,842
30,868
General, administrative and other
65,190
30,297
Total operating expenses
1,069,496
1,041,079
Operating Income
632,380
659,234
Other Income (Expenses)
Investment and other income, net
71,176
46,328
Interest expense
(8,565
)
(7,895
)
Other income, net
62,611
38,433
Income before taxes
694,991
697,667
Taxes on income
201,265
207,550
Net income
493,726
490,117
Less: Net income (loss) attributable to
Nonredeemable noncontrolling interests
10,147
(11,877
)
Redeemable noncontrolling interests
2,794
837
Net Income Attributable to Franklin Resources, Inc.
$
480,785
$
501,157
Earnings per Share
Basic
$
2.21
$
2.24
Diluted
2.20
2.23
Dividends per Share
$
2.27
$
0.25
See Notes to Condensed Consolidated Financial Statements.
2
FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
(in thousands)
December 31, 2011
September 30, 2011
Assets
Current Assets
Cash and cash equivalents
$
4,248,837
$
4,699,994
Cash and cash equivalents of consolidated variable interest entities
72,316
88,238
Receivables
781,645
772,475
Investment securities, trading
1,056,668
889,686
Investment securities, available-for-sale
756,165
990,976
Investments of consolidated variable interest entities, at fair value
10,561
10,994
Investments in equity method investees and other
20,693
21,861
Deferred taxes
106,648
107,898
Prepaid expenses and other
30,523
34,646
Total current assets
7,084,056
7,616,768
Banking/Finance Assets
Cash and cash equivalents
590,705
410,381
Investment securities, available-for-sale
331,621
345,486
Loans receivable, net
390,120
401,860
Loans receivable of consolidated variable interest entities, net
124,529
149,386
Other
38,299
51,010
Total banking/finance assets
1,475,274
1,358,123
Non-Current Assets
Investments of consolidated sponsored investment products
623,326
584,608
Investments of consolidated variable interest entities, at fair value
826,632
811,618
Investments in equity method investees and other
558,620
535,509
Property and equipment, net
594,668
589,748
Goodwill
1,535,602
1,536,212
Other intangible assets, net
606,625
611,979
Other
100,684
131,278
Total non-current assets
4,846,157
4,800,952
Total Assets
$
13,405,487
$
13,775,843
[Table continued on next page]
See Notes to Condensed Consolidated Financial Statements.
3
FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
[Table continued from previous page]
(dollars in thousands, except per share data)
December 31, 2011
September 30, 2011
Liabilities and Stockholders’ Equity
Current Liabilities
Compensation and benefits
$
228,043
$
400,885
Commercial paper
25,000
29,997
Current maturities of long-term debt
6,589
29,656
Current maturities of long-term debt of consolidated variable interest entities, at fair value
24,924
24,858
Accounts payable, accrued expenses and other
206,684
328,303
Commissions
343,911
369,539
Income taxes
205,773
128,826
Total current liabilities
1,040,924
1,312,064
Banking/Finance Liabilities
Deposits
1,028,343
890,189
Long-term debt of consolidated variable interest entities
135,652
164,176
Federal Home Loan Bank advances
69,000
69,000
Other
957
970
Total banking/finance liabilities
1,233,952
1,124,335
Non-Current Liabilities
Long-term debt
974,347
1,004,381
Long-term debt of consolidated variable interest entities, at fair value
823,741
846,369
Deferred taxes
278,772
274,435
Other
93,850
91,789
Total non-current liabilities
2,170,710
2,216,974
Total liabilities
4,445,586
4,653,373
Commitments and Contingencies (Note 9)
Redeemable Noncontrolling Interests
26,509
18,611
Stockholders’ Equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued
—
—
Common stock, $0.10 par value, 1,000,000,000 shares authorized; 215,948,381 and 217,693,435 shares issued and outstanding, at December 31, 2011 and September 30, 2011
21,595
21,769
Retained earnings
8,198,497
8,443,531
Appropriated retained earnings of consolidated variable interest entities
40,619
18,969
Accumulated other comprehensive income
12,932
40,462
Total Franklin Resources, Inc. stockholders’ equity
8,273,643
8,524,731
Nonredeemable noncontrolling interests
659,749
579,128
Total stockholders’ equity
8,933,392
9,103,859
Total Liabilities and Stockholders’ Equity
$
13,405,487
$
13,775,843
See Notes to Condensed Consolidated Financial Statements.
4
FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
Three Months Ended December 31,
(in thousands)
2011
2010
Net Income
$
493,726
$
490,117
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
52,624
62,478
Stock-based compensation
25,660
21,775
Excess tax benefit from stock-based compensation
(17,374
)
(12,047
)
Net gains on sale of assets
(13,245
)
(26,968
)
Net losses on non-current investments of consolidated sponsored investment products
10,077
—
Net (gains) losses of consolidated variable interest entities
(22,328
)
11,458
Equity in net income of affiliated companies
(22,472
)
(23,892
)
Other-than-temporary impairment of investments
—
13,156
Provision for loan losses
(266
)
2,845
Deferred income taxes
7,049
5,957
Changes in operating assets and liabilities:
Increase in receivables, prepaid expenses and other
(27,820
)
(135,780
)
Increase in trading securities, net
(147,097
)
(182,115
)
Increase in income taxes payable
98,357
118,828
(Decrease) increase in commissions payable
(25,628
)
26,277
(Decrease) increase in other liabilities
(70,512
)
9,130
Decrease in accrued compensation and benefits
(173,011
)
(135,443
)
Net cash provided by operating activities
167,740
245,776
Purchase of investments
(95,640
)
(43,512
)
Purchase of investments by consolidated variable interest entities
(73,193
)
(176,137
)
Liquidation of investments
285,573
190,477
Liquidation of investments by consolidated variable interest entities
95,849
251,815
Liquidation of banking/finance investments
12,847
13,690
Decrease (increase) in loans receivable, net
13,150
(28,049
)
Decrease in loans receivable held by consolidated variable interest entities, net
24,586
43,980
Additions of property and equipment, net
(26,768
)
(54,003
)
Cash and cash equivalents recognized due to adoption of new consolidation guidance
—
45,841
Net cash provided by investing activities
236,404
244,102
Increase in deposits
138,154
21,610
Issuance of common stock
12,788
13,061
Dividends paid on common stock
(546,899
)
(49,763
)
Repurchase of common stock
(290,856
)
(198,536
)
Excess tax benefit from stock-based compensation
17,374
12,047
Decrease in commercial paper, net
(5,007
)
(2,767
)
Proceeds from issuance of debt
6,589
—
Payments on debt
(61,778
)
—
Payments on debt by consolidated variable interest entities
(54,119
)
(89,721
)
Noncontrolling interests
102,326
1,357
Net cash used in financing activities
$
(681,428
)
$
(292,712
)
[Table continued on next page]
See Notes to Condensed Consolidated Financial Statements.
5
FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
[Table continued from previous page]
Three Months Ended December 31,
(in thousands)
2011
2010
Effect of exchange rate changes on cash and cash equivalents
$
(9,471
)
$
148
(Decrease) increase in cash and cash equivalents
(286,755
)
197,314
Cash and cash equivalents, beginning of period
5,198,613
4,123,716
Cash and Cash Equivalents, End of Period
$
4,911,858
$
4,321,030
Components of Cash and Cash Equivalents
Cash and cash equivalents, beginning of period
Current assets
$
4,699,994
$
3,985,312
Current assets of consolidated variable interest entities
88,238
—
Banking/finance assets
410,381
138,404
Total
$
5,198,613
$
4,123,716
Cash and cash equivalents, end of period
Current assets
$
4,248,837
$
4,101,724
Current assets of consolidated variable interest entities
72,316
73,236
Banking/finance assets
590,705
146,070
Total
$
4,911,858
$
4,321,030
Supplemental Disclosure of Non-Cash Information
Decrease in noncontrolling interests due to net deconsolidation of certain sponsored investment products
$
(5,098
)
$
(1,503
)
Increase in assets, net of liabilities, related to consolidation of variable interest entities
—
60,760
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes
$
94,633
$
82,917
Cash paid for interest
18,190
16,935
Cash paid for interest by consolidated variable interest entities
11,473
9,679
See Notes to Condensed Consolidated Financial Statements.
6
FRANKLIN RESOURCES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2011
(Unaudited)
Note 1 – Basis of Presentation
The unaudited interim financial statements of Franklin Resources, Inc. (“Franklin”) and its consolidated subsidiaries (collectively, the “Company”) included herein have been prepared by the Company in accordance with the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Under these rules and regulations, some information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States of America have been shortened or omitted. Management believes that all adjustments necessary for a fair statement of the financial position and the results of operations for the periods shown have been made. All adjustments are normal and recurring. These financial statements should be read together with the Company’s audited financial statements included in its Form 10-K for the fiscal year ended September 30, 2011 (“fiscal year 2011”). Certain amounts for the comparative prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended December 31, 2011.
In the quarter ended September 30, 2011, the Company discontinued the classification of a portion of the investment management fees earned by certain of its non-U.S. subsidiaries as sales and distribution fees. Amounts for the comparative prior fiscal year period have been reclassified to conform to the current year presentation. This reclassification had no impact on previously reported net income or financial position and does not represent a restatement of any previously published financial results. See Note 1 – Significant Accounting Policies in the Company's Form 10-K for fiscal year 2011.
The following table presents the effects of the changes in the presentation of operating revenues to the Company’s previously-reported condensed consolidated statement of income:
(in thousands)
Three Months Ended December 31, 2010
As Reported
Adjustments
As Amended
Operating Revenues
Investment management fees
$
1,040,878
$
25,629
$
1,066,507
Sales and distribution fees
577,832
(25,629
)
552,203
Shareholder servicing fees
72,055
—
72,055
Other, net
9,548
—
9,548
Total operating revenues
$
1,700,313
$
—
$
1,700,313
Note 2 – New Accounting Guidance
On October 1, 2011, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance that requires separate disclosures about purchases, sales, issuances and other settlements in the rollforward of activity in Level 3 fair value measurements. See Note 7 - Fair Value Measurements for the expanded disclosures.
There were no significant updates to new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for fiscal year 2011.
7
Note 3 – Stockholders' Equity, Redeemable Noncontrolling Interests and Comprehensive Income
The changes in total stockholders’ equity and redeemable noncontrolling interests were as follows:
(in thousands)
Franklin
Resources, Inc.
Stockholders’
Equity
Nonredeemable
Noncontrolling
Interests
Total
Stockholders’
Equity
Redeemable
Noncontrolling
Interests
for the three months ended December 31, 2011
Balance at October 1, 2011
$
8,524,731
$
579,128
$
9,103,859
$
18,611
Net income
480,785
10,147
490,932
2,794
Net income reclassified to appropriated retained earnings
21,650
(21,650
)
—
Other comprehensive income
Net unrealized losses on investments, net of tax
(4,797
)
(4,797
)
Currency translation adjustments
(22,558
)
(22,558
)
Net unrealized losses on defined benefit plans, net of tax
(175
)
(175
)
Cash dividends on common stock
(493,332
)
(493,332
)
Repurchase of common stock
(290,856
)
(290,856
)
Noncontrolling interests
Net subscriptions
92,124
92,124
10,202
Net deconsolidation of certain sponsored investment products
—
—
(5,098
)
Other 1
58,195
58,195
Balance at December 31, 2011
$
8,273,643
$
659,749
$
8,933,392
$
26,509
________________
1
Primarily relates to stock-based compensation plans.
(in thousands)
Franklin
Resources, Inc.
Stockholders’
Equity
Nonredeemable
Noncontrolling
Interests
Total
Stockholders’
Equity
Redeemable
Noncontrolling
Interests
for the three months ended December 31, 2010
Balance at October 1, 2010
$
7,726,994
$
3,452
$
7,730,446
$
19,533
Adjustment for adoption of new consolidation guidance
106,601
106,601
Net income (loss)
501,157
(11,877
)
489,280
837
Net loss reclassified to appropriated retained earnings
(11,996
)
11,996
—
Other comprehensive income
Net unrealized gains on investments, net of tax
849
849
Currency translation adjustments
12,667
12,667
Net unrealized gains on defined benefit plans, net of tax
13
13
Cash dividends on common stock
(56,012
)
(56,012
)
Repurchase of common stock
(198,536
)
(198,536
)
Noncontrolling interests
Net deconsolidation of certain sponsored investment products
—
—
(1,503
)
Net subscriptions (redemptions)
(733
)
(733
)
2,090
Other 1
47,991
47,991
Balance at December 31, 2010
$
8,129,728
$
2,838
$
8,132,566
$
20,957
________________
1
Primarily relates to stock-based compensation plans.
8
The components of comprehensive income, including amounts attributable to noncontrolling interests, were as follows:
(in thousands)
Three Months Ended December 31,
2011
2010
Net income
$
493,726
$
490,117
Net unrealized gains (losses) on investments, net of tax
(4,797
)
849
Currency translation adjustments
(22,558
)
12,667
Net unrealized gains (losses) on defined benefit plans, net of tax
(175
)
13
Total comprehensive income
466,196
503,646
Less: comprehensive income (loss) attributable to
Nonredeemable noncontrolling interests
10,147
(11,877
)
Redeemable noncontrolling interests
2,794
837
Total Comprehensive Income Attributable to Franklin Resources, Inc.
$
453,255
$
514,686
During the three months ended December 31, 2011 and 2010, the Company repurchased 3.0 million and 1.7 million shares of its common stock at a cost of $290.9 million and $198.5 million under its stock repurchase program. In December 2011, the Company’s Board of Directors authorized the repurchase of up to 10.0 million additional shares of its common stock under the stock repurchase program. At December 31, 2011, approximately 11.8 million shares of common stock remained available for repurchase under the stock repurchase program. The stock repurchase program is not subject to an expiration date.
Note 4 – Earnings per Share
The components of basic and diluted earnings per share were as follows:
(in thousands, except per share data)
Three Months Ended December 31,
2011
2010
Net Income Attributable to Franklin Resources, Inc.
$
480,785
$
501,157
Less: Allocation of earnings to participating nonvested stock and stock unit awards
3,342
2,126
Net Income Available to Common Stockholders
$
477,443
$
499,031
Weighted-average shares outstanding – basic
216,143
223,169
Effect of dilutive common stock options and non-participating nonvested stock unit awards
584
1,084
Weighted-Average Shares Outstanding – Diluted
216,727
224,253
Earnings per Share
Basic
$
2.21
$
2.24
Diluted
2.20
2.23
Non-participating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive were 0.5 million and 0.2 million for the three months ended December 31, 2011 and 2010.
Note 5 – Variable Interest Entities
The Company has interests in various types of variable interest entities (“VIEs”). It is the primary beneficiary of collateralized loan obligations (“CLOs”) and auto loan securitization trusts (“securitization trusts”) and therefore consolidates these VIEs. Other VIEs, for which the Company is not the primary beneficiary, primarily consist of certain sponsored and other investment products (collectively “other investment products”) from which the Company earns investment management and related services fees and/or has an equity ownership interest in the VIE.
Collateralized Loan Obligations
The Company provides collateral management services to the CLOs, which are asset-backed financing entities collateralized by a pool of assets.
During the three months ended December 31, 2011, the changes in fair values of the underlying assets and liabilities of the CLOs resulted in a $27.7 million net gain and $5.0 million net loss, for a combined net gain of $22.7 million. During the three months ended December 31, 2010, the changes in fair values of the underlying assets and liabilities resulted in a $34.2 million
9
net gain and $43.3 million net loss, for a combined net loss of $9.1 million.
The following tables present the unpaid principal balance and fair value of investments, including investments 90 days or more past due, and long-term debt of the CLOs:
(in thousands)
Total Investments
Investments
90 Days or More
Past Due
Long-term Debt
as of December 31, 2011
Unpaid principal balance
$
883,718
$
17,697
$
1,040,484
Excess unpaid principal over fair value
(46,525
)
(6,036
)
(191,819
)
Fair value
$
837,193
$
11,661
$
848,665
(in thousands)
Total Investments
Investments
90 Days or More
Past Due
Long-term Debt
as of September 30, 2011
Unpaid principal balance
$
887,838
$
21,577
$
1,044,863
Excess unpaid principal over fair value
(65,226
)
(10,178
)
(173,636
)
Fair value
$
822,612
$
11,399
$
871,227
Automobile Loan Securitization Trusts
The Company retained certain interests in and servicing responsibilities for automobile loan securitization trusts, which originated from securitization transactions between the Company and the securitization trusts in previous years.
The following table provides details of the loans serviced by the Company that were held by the securitization trusts and the loans that were managed together with them:
(in thousands)
December 31, 2011
September 30, 2011
Principal amount of loans
Loans receivable of consolidated VIEs
$
128,901
$
155,071
Loans receivable
75,337
83,791
Total
$
204,238
$
238,862
Principal amount of loans 30 days or more past due
Loans receivable of consolidated VIEs
$
3,322
$
3,651
Loans receivable
1,507
1,721
Total
$
4,829
$
5,372
The Company has provided guarantees to cover shortfalls for the securitization trusts in amounts due to the holders of the asset-backed securities if the shortfall exceeds cash on deposit. The maximum potential amount of future payments related to these guarantees was $3.8 million at December 31, 2011 and September 30, 2011. The Company did not provide any additional financial or other support to the securitization trusts or the holders of the asset-backed securities during fiscal year 2011 or the three months ended December 31, 2011.
The original amount of loans serviced for the securitization trusts that were still in existence at December 31, 2011 and September 30, 2011 totaled $1.2 billion. At December 31, 2011 and September 30, 2011, the securitization trusts had approximately 17,200 and 19,100 loans outstanding, with weighted-average annualized interest rates of 10.56% and 10.55%.
Other Investment Products
The carrying values of the Company’s investment management and related service fees receivable from and the equity ownership interests in the other investment product VIEs as recorded in the Company’s condensed consolidated balance sheets are set forth below. These amounts represent the Company’s maximum exposure to loss from these investment products.
10
(in thousands)
December 31, 2011
September 30, 2011
Current Assets
Receivables
$
41,710
$
42,218
Investment securities, available-for-sale
130,807
139,981
Investments in equity method investees and other
160
154
Total Current
172,677
182,353
Non-Current Assets
Investments in equity method investees and other
40,237
36,584
Total
$
212,914
$
218,937
The Company's total assets under management (“AUM”) of the other investment products was $31.3 billion at December 31, 2011 and $36.1 billion at September 30, 2011.
While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored investment products. The Company also may voluntarily elect to provide its sponsored investment products with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its investment products during fiscal year 2011 or the three months ended December 31, 2011.
Note 6 – Investments
Investments consisted of the following:
(in thousands)
December 31, 2011
September 30, 2011
Current
Investment securities, trading
$
1,056,668
$
889,686
Investment securities, available-for-sale
Sponsored investment products
701,572
925,711
Securities of U.S. states and political subdivisions
35,926
41,199
Securities of the U.S. Treasury and federal agencies
600
602
Other equity securities
18,067
23,464
Total investment securities, available-for-sale
756,165
990,976
Investments of consolidated VIEs, at fair value
10,561
10,994
Investments in equity method investees and other
20,693
21,861
Total Current
$
1,844,087
$
1,913,517
Banking/Finance
Investment securities, available-for-sale
Securities of U.S. states and political subdivisions
$
308
$
311
Securities of the U.S. Treasury and federal agencies
1,820
1,837
Corporate debt securities1
121,231
121,634
Mortgage-backed securities – agency residential2
208,180
221,611
Other equity securities
82
93
Total investment securities, available-for-sale
331,621
345,486
Total Banking/Finance
$
331,621
$
345,486
Non-Current
Investments of consolidated sponsored investment products
$
623,326
$
584,608
Investments of consolidated VIEs, at fair value
826,632
811,618
Investments in equity method investees and other
558,620
535,509
Total Non-Current
$
2,008,578
$
1,931,735
________________
1
Corporate debt securities are insured by the Federal Deposit Insurance Corporation or non-U.S. government agencies.
2
Consists of U.S. government-sponsored enterprise obligations.
11
At December 31, 2011 and September 30, 2011, current investment securities, trading included $443.2 million and $361.1 million of investments held by sponsored investment products that were consolidated in the Company’s condensed consolidated financial statements.
At December 31, 2011 and September 30, 2011, banking/finance segment investment securities with aggregate carrying amounts of $147.0 million and $156.4 million were pledged as collateral for the ability to borrow from the Federal Reserve Bank, and $57.0 million and $60.8 million were pledged as collateral for outstanding Federal Home Loan Bank (“FHLB”) borrowings and amounts available in secured FHLB short-term borrowing capacity (see Note 8 – Debt). In addition, investment management and related services segment securities with an aggregate carrying value of $6.9 million were pledged as collateral primarily for financing arrangements at December 31, 2011 and September 30, 2011.
A summary of the gross unrealized gains and losses relating to investment securities, available-for-sale is as follows:
(in thousands)
Gross Unrealized
as of December 31, 2011
Cost Basis
Gains
Losses
Fair Value
Sponsored investment products
$
656,542
$
72,115
$
(27,085
)
$
701,572
Securities of U.S. states and political subdivisions
34,854
1,380
—
36,234
Securities of the U.S. Treasury and federal agencies
2,397
25
(2
)
2,420
Corporate debt securities
120,012
1,219
—
121,231
Mortgage-backed securities – agency residential
203,945
4,239
(4
)
208,180
Other equity securities
17,651
587
(89
)
18,149
Total
$
1,035,401
$
79,565
$
(27,180
)
$
1,087,786
(in thousands)
Gross Unrealized
as of September 30, 2011
Cost Basis
Gains
Losses
Fair Value
Sponsored investment products
$
877,632
$
78,013
$
(29,934
)
$
925,711
Securities of U.S. states and political subdivisions
39,950
1,560
—
41,510
Securities of the U.S. Treasury and federal agencies
2,423
16
—
2,439
Corporate debt securities
120,041
1,593
—
121,634
Mortgage-backed securities – agency residential
216,736
4,905
(30
)
221,611
Other equity securities
23,061
703
(207
)
23,557
Total
$
1,279,843
$
86,790
$
(30,171
)
$
1,336,462
The net unrealized holding gains on investment securities, available-for-sale included in accumulated other comprehensive income were $7.8 million and $15.3 million for the three months ended December 31, 2011 and 2010.
The following tables show the gross unrealized losses and fair values of investment securities, available-for-sale with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
Less Than 12 Months
12 Months or Greater
Total
(in thousands)
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
as of December 31, 2011
Sponsored investment products
$
184,370
$
(26,298
)
$
6,202
$
(787
)
$
190,572
$
(27,085
)
Securities of the U.S. Treasury and federal agencies
560
(2
)
—
—
560
(2
)
Mortgage-backed securities – agency residential
16,844
(4
)
—
—
16,844
(4
)
Other equity securities
—
—
4,269
(89
)
4,269
(89
)
Total
$
201,774
$
(26,304
)
$
10,471
$
(876
)
$
212,245
$
(27,180
)
12
Less Than 12 Months
12 Months or Greater
Total
(in thousands)
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
as of September 30, 2011
Sponsored investment products
$
228,926
$
(29,731
)
$
4,658
$
(203
)
$
233,584
$
(29,934
)
Mortgage-backed securities – agency residential
18,305
(30
)
—
—
18,305
(30
)
Other equity securities
8
(1
)
4,116
(206
)
4,124
(207
)
Total
$
247,239
$
(29,762
)
$
8,774
$
(409
)
$
256,013
$
(30,171
)
The Company did not recognize any other-than-temporary impairment of investments for the three months ended December 31, 2011. For the three months ended December 31, 2010, the Company recognized $13.2 million of other-than-temporary impairment of investments, of which $7.3 million related to available-for-sale equity securities and none related to available-for-sale debt securities.
At December 31, 2011, contractual maturities of available-for-sale debt securities were as follows:
(in thousands)
Cost Basis
Fair Value
Due in one year or less
$
109,500
$
110,653
Due after one year through five years
38,055
39,024
Due after five years through ten years
25,161
26,927
Due after ten years
188,492
191,461
Total
$
361,208
$
368,065
13
Note 7 – Fair Value Measurements
The Company records the majority of its investments at fair value or amounts that approximate fair value. The tables below present the balances of assets and liabilities measured at fair value on a recurring basis.
(in thousands)
Level 1
Level 2
Level 3
Total
as of December 31, 2011
Current Assets
Cash and cash equivalents of consolidated VIEs
$
14,415
$
57,901
$
—
$
72,316
Receivables of consolidated VIEs
—
16,970
—
16,970
Investment securities, trading
747,065
250,466
59,137
1,056,668
Investment securities, available-for-sale
Sponsored investment products
701,572
—
—
701,572
Securities of U.S. states and political subdivisions
—
35,926
—
35,926
Securities of the U.S. Treasury and federal agencies
—
600
—
600
Other equity securities
13,815
4,252
—
18,067
Investments of consolidated VIEs
—
10,561
—
10,561
Banking/Finance Assets
Investment securities, available-for-sale
Securities of U.S. states and political subdivisions
—
308
—
308
Securities of the U.S. Treasury and federal agencies
—
1,820
—
1,820
Corporate debt securities
—
121,231
—
121,231
Mortgage-backed securities – agency residential
—
208,180
—
208,180
Other equity securities
—
—
82
82
Non-Current Assets
Investments of consolidated sponsored investment products
6,295
191
616,840
623,326
Investments of consolidated VIEs
—
823,150
3,482
826,632
Life settlement contracts
—
—
11,123
11,123
Total Assets Measured at Fair Value
$
1,483,162
$
1,531,556
$
690,664
$
3,705,382
Current Liabilities
Current maturities of long-term debt of consolidated VIEs
