Form 10Q 12.31.2011


UNITED STATES
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 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
 
$
—

 
$
—

 
$
24,924

 
$
24,924

Other liabilities of consolidated VIEs
 
—

 
37,010

 
—

 
37,010

Non-Current Liabilities
 
 
 
 
 
 
 
 
Long-term debt of consolidated VIEs
 
—

 
763,374

 
60,367

 
823,741

Total Liabilities Measured at Fair Value
 
$
—

 
$
800,384

 
$
85,291

 
$
885,675



14


(in thousands)
 
Level 1      
 
Level 2      
 
Level 3      
 
Total        
as of September 30, 2011
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
14,700

 
$
73,538

 
$
—

 
$
88,238

Receivables of consolidated VIEs
 
—

 
11,953

 
—

 
11,953

Investment securities, trading
 
579,225

 
279,308

 
31,153

 
889,686

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Sponsored investment products
 
925,711

 
—

 
—

 
925,711

Securities of U.S. states and political subdivisions
 
—

 
41,199

 
—

 
41,199

Securities of the U.S. Treasury and federal agencies
 
—

 
602

 
—

 
602

Other equity securities
 
19,365

 
4,099

 
—

 
23,464

Investments of consolidated VIEs
 
—

 
10,994

 
—

 
10,994

Banking/Finance Assets
 
 
 
 
 
 
 
 
Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Securities of U.S. states and political subdivisions
 
—

 
311

 
—

 
311

Securities of the U.S. Treasury and federal agencies
 
—

 
1,837

 
—

 
1,837

Corporate debt securities
 
—

 
121,634

 
—

 
121,634

Mortgage-backed securities – agency residential
 
—

 
221,611

 
—

 
221,611

Other equity securities
 
—

 
—

 
93

 
93

Non-Current Assets
 
 
 
 
 
 
 
 
Investments of consolidated sponsored investment products
 
7,084

 
92

 
577,432

 
584,608

Investments of consolidated VIEs
 
—

 
809,762

 
1,856

 
811,618

Life settlement contracts
 
—

 
—

 
10,813

 
10,813

Total Assets Measured at Fair Value
 
$
1,546,085

 
$
1,576,940

 
$
621,347

 
$
3,744,372

Current Liabilities
 
 
 
 
 
 
 
 
Current maturities of long-term debt of consolidated VIEs
 
$
—

 
$
—

 
$
24,858

 
$
24,858

Other liabilities of consolidated VIEs
 
—

 
32,315

 
—

 
32,315

Non-Current Liabilities
 
 
 
 
 
 
 
 
Long-term debt of consolidated VIEs
 
—

 
787,301

 
59,068

 
846,369

Total Liabilities Measured at Fair Value
 
$
—

 
$
819,616

 
$
83,926

 
$
903,542

There were no significant transfers between Level 1 and Level 2 during the three months ended December 31, 2011 and 2010. The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
(in thousands)
 
Securities
Held by
Consolidated
Sponsored
Investment
Products
 
Investments of
Consolidated
VIEs
 
Other1
 
Total 
Level 3
Assets
 
Long-term
Debt of
Consolidated
VIEs
for the three months ended December 31, 2011
 
 
 
 
 
Balance at October 1, 2011
 
$
608,585

  
$
1,856

  
$
10,906

  
$
621,347

 
$
(83,926
)
Realized and unrealized gains (losses) included in investment and other income, net
 
(9,948
)
  
40

  
890

  
(9,018
)
 
(2,938
)
Purchases
 
80,808

  
—

  
471

 
81,279

 
—

Sales
 
(3,954
)
 
(1
)
 
(11
)
 
(3,966
)
 
—

Settlements
 
(237
)
 
—

 
(1,051
)
 
(1,288
)
 
—

Transfers into Level 3
 
—

  
1,587

  
—

  
1,587

 
—

Effect of exchange rate changes
 
723

  
—

  
—

  
723

 
1,573

Balance at December 31, 2011
 
$
675,977

  
$
3,482

  
$
11,205

  
$
690,664

 
$
(85,291
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at December 31, 20112
 
$
(9,948
)
 
$
40

 
$
330

 
$
(9,578
)
 
$
(2,938
)
_________________
1    Other primarily consists of life settlement contracts.
2    Included in investment and other income, net.



15


(in thousands)
 
Securities
Held by
Consolidated
Sponsored
Investment
Products
 
Residual
Interests
from
Securitization
Transactions
 
Investments of
Consolidated
VIEs
 
Other1
 
Total
Level 3
Assets
 
Long-term
Debt of
Consolidated
VIEs
for the three months ended December 31, 2010
 
 
 
 
 
 
Balance at October 1, 2010
 
$
3,330

 
$
23,362

 
$
—

 
$
9,365

  
$
36,057

 
$
—

Adjustment for adoption of new consolidation guidance
 
—

 
(23,362
)
 
1,738

 
—

 
(21,624
)
 
(71,382
)
Realized and unrealized gains (losses) included in investment and other income, net
 
154

 
—

 
193

 
703

  
1,050

 
(14,899
)
Purchases, sales and settlements, net
 
1,417

 
—

 
—

 
(522
)
 
895

 
—

Transfers into Level 3
 
35

 
—

 
—

 
—

  
35

 
—

Effect of exchange rate changes
 
—

 
—

 
—

 
—

  
—

 
1,028

Balance at December 31, 2010
 
$
4,936

  
$
—

 
$
1,931

  
$
9,546

  
$
16,413

 
$
(85,253
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at December 31, 20102
 
$
401

 
$
—

 
$
193

 
$
314

 
$
908

 
$
(14,899
)
_________________
1    Other primarily consists of life settlement contracts.
2    Included in investment and other income, net.
The Company’s financial instruments that were not measured at fair value were as follows:
(in thousands)
December 31, 2011
 
September 30, 2011
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,839,542

 
$
4,839,542

 
$
5,110,375

 
$
5,110,375

Other investments
54,220

 
59,511

 
51,259

 
56,908

Loans receivable, net
390,120

 
393,955

 
401,860

 
403,116

Loans receivable of consolidated VIEs, net
124,529

 
126,393

 
149,386

 
153,175

Financial Liabilities
 
 
 
 
 
 
 
Commercial paper
$
25,000

 
$
25,000

 
$
29,997

 
$
29,997

Deposits
1,028,343

 
1,030,496

 
890,189

 
892,719

FHLB advances
69,000

 
73,001

 
69,000

 
72,575

Long-term debt
980,936

 
1,010,180

 
1,034,037

 
1,059,301

Long-term debt of consolidated VIEs
135,652

 
138,148

 
164,176

 
167,877


16


Note 8 – Debt
Outstanding debt consisted of the following:
(dollars in thousands)
 
December 31,
2011
 
Effective
  Interest  Rate  
 
September 30,
2011
 
Effective
    Interest Rate   
Current
 
 
 
 
 
 
 
 
Commercial paper
 
$
25,000

 
0.13
%
 
$
29,997

 
0.16
%
Current maturities of long-term debt of consolidated sponsored investment products
 
6,589

 
2.25
%
 
29,656

 
4.39
%
Current maturities of long-term debt of consolidated VIEs, at fair value
 
24,924

 
8.49
%
 
24,858

 
8.49
%
Total Current
 
56,513

 
 
 
84,511

 
 
Banking/Finance
 
 
 
 
 
 
 
 
Long-term debt of consolidated VIEs, due fiscal years 2014-2016
 
135,652

 
6.61
%
 
164,176

 
5.86
%
FHLB advances
 
69,000

 
3.30
%
 
69,000

 
3.30
%
Total Banking/Finance
 
204,652

 
 
 
233,176

 
 
Non-Current
 
 
 
 
 
 
 
 
Senior notes
 
 
 
 
 
 
 
 
$300 million 2.000% notes due fiscal year 2013
 
299,754

 
2.28
%
 
299,710

 
2.28
%
$250 million 3.125% notes due fiscal year 2015
 
249,814

 
3.32
%
 
249,800

 
3.32
%
$350 million 4.625% notes due fiscal year 2020
 
349,674

 
4.75
%
 
349,664

 
4.75
%
 
 
899,242

 
 
 
899,174

 
 
Long-term debt of consolidated sponsored investment products, due fiscal years 2014-2017
 
75,105

 
5.56
%
 
105,207

 
5.54
%
Long-term debt of consolidated VIEs, at fair value, due fiscal years 2015-2019
 
823,741

 
1.01
%
 
846,369

 
0.88
%
Total Non-Current
 
1,798,088

 
 
 
1,850,750