GOLDMAN SACHS GROUP INC quarterly report, Q3 FY2009

Goldman Sachs Group Inc. — Form 10-Q Summary

Business context and reporting period

The Goldman Sachs Group, Inc. is a global financial services firm providing investment banking, trading and principal-investment, asset-management, securities-services and related financing activities. The filing covers the unaudited fiscal quarter ended September 25, 2009, and the nine months then ended. Comparisons are primarily with the three and nine months ended August 29, 2008, rather than September 26, 2008. Fiscal 2009 began December 27, 2008 and ends December 31, 2009 following the firm’s transition to bank holding company status and related fiscal-year changes.

Financial performance and key metrics

Metric	Q3 2009	Q3 2008	9M 2009	9M 2008
Net revenues	$12.372 billion	$6.043 billion	$35.558 billion	$23.800 billion
Pre-tax earnings	$4.794 billion	$960 million	$12.452 billion	$5.935 billion
Net earnings	$3.188 billion	$845 million	$8.437 billion	$4.443 billion
Net earnings applicable to common shareholders	$3.028 billion	$810 million	$7.405 billion	$4.328 billion
Diluted EPS	$5.25	$1.81	$13.74	$9.62
Annualized common ROE	21.4%	7.7%	19.2%	14.2%

Q3 net revenues increased approximately 105%; nine-month net revenues increased 49%.
Q3 pre-tax margin was approximately 38.7% and net margin approximately 25.8%. The filing does not identify a comparable prior-period margin table.
Compensation and benefits were $5.351 billion in Q3 and $16.712 billion for nine months. Compensation represented 43.3% of Q3 net revenues and 47.0% for nine months, versus 48.0% for the comparable prior-year nine-month period.
Q3 non-interest revenues were $10.682 billion and net interest income was $1.690 billion. Nine-month non-interest revenues were $29.919 billion and net interest income was $5.639 billion.
Investment banking revenue declined to $899 million in Q3 and $3.162 billion for nine months. Trading and principal investments generated $10.027 billion in Q3 and $27.961 billion for nine months. Asset management and securities services generated $1.446 billion in Q3 and $4.435 billion for nine months.

Financial condition, debt and liquidity

September 25, 2009 total assets were $882.185 billion, broadly comparable with $884.547 billion at November 28, 2008. Total liabilities were $816.831 billion and shareholders’ equity was $65.354 billion.
Cash and cash equivalents were $23.015 billion, up from $15.740 billion at November 28, 2008. Cash and securities segregated for regulatory and other purposes were $42.959 billion.
Trading assets were $352.190 billion and trading liabilities were $150.383 billion. Level 3 assets totaled $50.466 billion, or 5.7% of total assets; assets for which the firm bore economic exposure were $46.442 billion.
Total short-term borrowings were $51.96 billion, including $38.555 billion of unsecured short-term borrowings. Long-term borrowings totaled $204.30 billion, including $189.724 billion of unsecured long-term borrowings. Unsecured long-term debt maturities extend through 2043.
Deposits increased to $42.431 billion from $27.643 billion. The firm reported a weighted average maturity of approximately seven years for unsecured long-term borrowings.
The average Global Core Excess, consisting principally of unencumbered government and agency securities and overnight cash, was $167.472 billion in Q3 2009, versus $96.725 billion for 2008. Average Global Core Excess and other unencumbered assets totaled $209.29 billion, intended to cover at least 110% of unsecured obligations maturing or redeemable within 12 months.
Operating activities provided $23.352 billion of cash during the first nine months. Investing activities used $1.300 billion and financing activities used $12.842 billion, resulting in a $9.210 billion increase in cash and cash equivalents.

Capital and equity actions

Basel I Tier 1 capital was $59.461 billion, with a Tier 1 capital ratio of 14.5%, total capital ratio of 17.9% and Tier 1 leverage ratio of 6.9%. The filing cautions that certain market-risk measures were under regulatory review and the ratios could be revised.
Under the firm’s internal risk-based methodology, the Tier 1 capital ratio was 16.0% and total capital ratio was 19.4%.
GS Bank USA reported a Tier 1 capital ratio of 14.0%, total capital ratio of 18.3% and Tier 1 leverage ratio of 13.9%.
The firm issued 46.7 million common shares for $5.75 billion in the second quarter. It repurchased the $10.04 billion TARP Series H preferred stock, including accrued dividends, in June 2009 and repurchased the related Treasury warrant for $1.1 billion in July 2009.
Book value per common share was $110.75 and tangible book value per common share was $101.39 at September 25, 2009, compared with $98.68 and $88.27, respectively, at November 28, 2008.

Material changes versus the prior comparable period

Trading and principal investments drove the improvement. Q3 segment pre-tax earnings were $4.477 billion versus a $761 million loss, while nine-month pre-tax earnings were $11.248 billion versus $2.250 billion.
Fixed Income, Currency and Commodities revenue was $5.991 billion in Q3 and $19.343 billion for nine months, reflecting stronger credit, mortgage and interest-rate results, tighter credit spreads and improved asset values.
Equities revenue increased to $2.775 billion in Q3 and $7.954 billion for nine months, despite lower commissions. Equity markets rose and volatility declined during the quarter.
Principal Investments produced $1.261 billion in Q3 and $664 million for nine months. Q3 included gains of $977 million from corporate investments and $344 million from ICBC, offset by a $66 million real-estate loss. Nine-month results included a $1.14 billion ICBC gain, a $699 million corporate-investment gain and a $1.21 billion real-estate loss.
Investment Banking pre-tax earnings fell to $127 million in Q3 and $518 million for nine months, reflecting lower completed mergers and acquisitions and weaker debt underwriting, partly offset by stronger equity underwriting.
Asset Management and Securities Services pre-tax earnings fell to $226 million in Q3 and $760 million for nine months. Assets under management ended September at $848 billion, supported by $39 billion of Q3 market appreciation but reduced by $10 billion of net outflows.
Total staff was 31,700 at period end, down from 37,600 in the comparable prior period. Nine-month non-compensation expenses decreased 1%, but included approximately $500 million of real-estate impairment charges and a $200 million charitable contribution.

Guidance, outlook, commentary and risks

The filing provides no formal earnings or revenue guidance. Management states that results are inherently unpredictable and materially dependent on global financial-market and economic conditions.
Management described Q3 markets as generally improved, with higher equity prices, lower volatility, tighter credit spreads and stronger client activity. Investment-banking conditions remained weak, although the transaction backlog increased significantly.
Key risks include market volatility, liquidity and funding stress, credit and counterparty concentrations, changes in asset values and credit spreads, valuation uncertainty for Level 3 instruments, and dependence on access to secured and unsecured funding markets.
Gross derivative fair values were $982.887 billion of assets and $848.667 billion of liabilities before netting and collateral. After netting, derivative assets were $88.267 billion and liabilities were $64.040 billion. A one-notch or two-notch downgrade could have required approximately $685 million or $1.70 billion, respectively, of additional collateral or termination payments.
Written credit derivatives had gross notional amounts of $2.813 trillion, offset by $2.950 trillion of purchased credit derivatives, resulting in net purchased protection of approximately $136.8 billion. The net liability after enforceable counterparty netting was $10.17 billion, excluding cash-collateral netting.
Total commitments were $135.454 billion, including $41.639 billion of commitments to extend credit, $60.939 billion of forward-starting resale and securities-borrowing agreements, and $12.846 billion of investment commitments.
Management believes litigation and regulatory proceedings will not have a material adverse effect on financial condition in the aggregate, but acknowledges that individual periods could be materially affected. Nine-month litigation and regulatory provisions were $74 million.
Insurance-related liabilities were $12.323 billion, including reserves for guaranteed minimum death and income benefits. The net amount at risk for those guarantees was $2.16 billion.
The firm’s fair-value estimates depend on models, market data, liquidity assumptions and management judgment. Prolonged market weakness could impair goodwill or identifiable intangible assets; no goodwill impairment was identified in the latest annual test.
SFAS Nos. 166 and 167, affecting transfers of financial assets and variable-interest-entity consolidation, were not yet effective. Management expected adoption not to have a material effect based on its current analysis, but noted that implementation requires complex judgments.

Important facts for investors to verify

Reconcile the unusually strong trading-driven earnings with the sustainability of market conditions, credit-spread gains and principal-investment valuations.
Review the quality, liquidity and valuation sensitivity of the $50.466 billion of Level 3 assets, particularly private equity, real estate, commercial real-estate loans and bank loans.
Assess the maturity profile and refinancing risk of the $189.724 billion of unsecured long-term borrowings and $51.96 billion of short-term borrowings.
Evaluate the effect of the $10.04 billion TARP preferred-stock repurchase, $1.1 billion warrant repurchase, common-stock issuance and remaining share-repurchase authorization on common equity and dilution.
Review derivative netting, collateral requirements and downgrade triggers, including the potential $1.70 billion collateral or termination requirement after a two-notch downgrade.
Examine the $135.454 billion of commitments, $18.632 billion maximum exposure to loss from nonconsolidated VIEs and guarantees whose potential payouts may exceed recorded liabilities.
Confirm the impact of the $500 million real-estate impairment charge, $200 million charitable contribution, $426 million one-time TARP preferred dividend and approximately $1.6 billion commercial-mortgage loss on recurring earnings.
Verify regulatory capital ratios with subsequent filings because the reported Basel I calculations had not yet been reviewed by the Federal Reserve Board.