Goldman Sachs Group Inc. 2010 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2010. The company is a global investment banking, securities and investment management firm and a bank holding and financial holding company. It operated through four segments after reorganizing its prior segment structure in the fourth quarter: Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management. Goldman Sachs had 35,700 staff, offices in more than 30 countries, and generated 45% of net revenues outside the Americas.
The filing also provides unaudited fourth-quarter 2010 results. Fiscal-year comparisons are with the year ended December 31, 2009; 2008 comparisons are affected by the company’s fiscal-year change and include a separate one-month transition period.
Financial performance and key metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net revenues | $39.16 billion | $45.17 billion | Down 13% |
| Pre-tax earnings | $12.89 billion | $19.83 billion | Down 35% |
| Net earnings | $8.35 billion | $13.39 billion | Down 38% |
| Net earnings applicable to common shareholders | $7.71 billion | $12.19 billion | Down 37% |
| Diluted EPS | $13.18 | $22.13 | Down 40% |
| ROE on average common equity | 11.5% | 22.5% | Down 11.0 points |
| Net margin | 21.3% | 29.6% | Down 8.3 points |
| Pre-tax margin | 32.9% | 43.9% | Down 11.0 points |
| Net interest income | $5.50 billion | $7.41 billion | Down 26% |
| Operating expenses | $26.27 billion | $25.34 billion | Up 4% |
| Cash and cash equivalents | $39.79 billion | $38.29 billion | Up $1.50 billion |
Cash flow from operating activities was negative $6.16 billion, compared with positive $48.88 billion in 2009, primarily reflecting increased securities purchased under agreements to resell and higher cash and securities segregated for regulatory purposes. Investing activities used $185 million, while financing activities provided $7.84 billion.
At December 31, 2010, total assets were $911.33 billion, up 7% from 2009, and total shareholders’ equity was $77.36 billion, up from $70.71 billion. The reported leverage ratio was 11.8x, adjusted leverage was 7.6x, and the debt-to-equity ratio was 2.3x.
Liquidity remained a management priority. Global Core Excess liquidity was $174.78 billion at year-end, and the firm maintained $182.34 billion of excess liquidity and other cash in its internal balance-sheet allocation. Customer deposits were $38.57 billion. Unsecured short-term borrowings were $47.84 billion and unsecured long-term borrowings were $174.40 billion.
Capital ratios strengthened under Basel I: Tier 1 capital ratio was 16.0%, total capital ratio was 19.1%, Tier 1 leverage ratio was 8.0%, and Tier 1 common ratio was 13.3%. GS Bank USA reported Tier 1, total capital and Tier 1 leverage ratios of 18.8%, 23.9% and 19.5%, respectively.
Segment results
| Segment | 2010 net revenues | 2010 pre-tax earnings | Change in net revenues vs. 2009 |
|---|---|---|---|
| Investment Banking | $4.81 billion | $1.30 billion | Down 3% |
| Institutional Client Services | $21.80 billion | $7.51 billion | Down 33% |
| Investing & Lending | $7.54 billion | $4.18 billion | Up 163% |
| Investment Management | $5.01 billion | $963 million | Up 9% |
Institutional Client Services was the principal source of deterioration, reflecting lower client activity, tighter bid/offer spreads, reduced results in interest-rate, credit and commodity products, lower equities execution revenue, and tighter securities-lending spreads. Investment Banking advisory revenue increased, but underwriting revenue declined. Investing & Lending benefited from market appreciation and tighter credit spreads, including gains of $747 million from ICBC, $2.69 billion from other equity securities, and $2.60 billion from debt securities and loans. Investment Management benefited from higher alternative-investment incentive fees, although assets under management declined 4% to $840 billion due mainly to money-market outflows.
Fourth-quarter 2010 results
| Metric | Q4 2010 | Q4 2009 |
|---|---|---|
| Net revenues | $8.64 billion | $9.62 billion |
| Operating expenses | $5.17 billion | $2.24 billion |
| Pre-tax earnings | $3.47 billion | $7.38 billion |
| Net earnings | $2.39 billion | $4.95 billion |
| Diluted EPS | $3.79 | $8.20 |
Fourth-quarter 2010 operating expenses included a $305 million impairment of NYSE Designated Market Maker rights. The rights had a $76 million carrying value at year-end after the impairment.
Material changes, outlook and unusual items
- Operating expenses included a $465 million U.K. bank payroll tax, a $550 million SEC settlement provision, and the $305 million NYSE DMM rights impairment. Excluding these items, diluted EPS was $15.22 and ROE was 13.1%.
- The company recorded $682 million of net litigation and regulatory provisions in 2010, compared with $104 million in 2009. Management stated that aggregate litigation outcomes were not expected to materially affect financial condition, but could materially affect results in a particular period.
- The Dodd-Frank Act and anticipated Basel 2.5 and Basel 3 requirements are expected to constrain proprietary trading, hedge fund and private equity activities, derivatives operations, leverage and capital deployment. Goldman Sachs liquidated substantially all Principal Strategies positions in 2010 and began liquidating its global macro proprietary trading positions in early 2011.
- No formal earnings or revenue guidance is provided. Management emphasized that results are unpredictable and depend heavily on global market conditions, volatility, credit spreads, client activity, regulatory developments and asset values.
- The investment banking backlog decreased from year-end 2009, primarily because of lower estimated revenue from potential debt and equity underwriting transactions, partly offset by higher advisory backlog.
- Mortgage-related exposures remained subject to potential repurchase, securities-law, rescission and other claims. The filing states that the firm cannot meaningfully estimate total potential repurchase exposure; the aggregate upper end of reasonably possible losses for specified legal matters was approximately $3.4 billion.
- Reported level 3 assets were $45.38 billion, or 5.0% of total assets, at year-end 2010. Fair-value estimates for these instruments depend partly on unobservable inputs and valuation models.
Most important facts for investors to verify
- Whether the sharp decline in Institutional Client Services revenue and earnings was cyclical or reflects more persistent client-activity, spread and regulatory pressures.
- The sustainability and composition of Investing & Lending gains, particularly the $2.69 billion equity gain and $2.60 billion debt and loan gain recorded in 2010.
- Future capital, leverage, liquidity and business-model effects of Dodd-Frank, the Volcker Rule, derivatives regulation, Basel 2.5 and Basel 3.
- Potential outcomes and reserves for mortgage-related litigation, SEC-related matters, foreclosure investigations, shareholder actions and other regulatory proceedings.
- The quality, liquidity and valuation sensitivity of level 3 assets, private investments, real estate exposures and retained securitization interests.
- Funding and liquidity risks arising from $174.40 billion of unsecured long-term borrowings, $47.84 billion of unsecured short-term borrowings, collateral calls and possible credit-rating downgrades.
- The effect of money-market outflows and market performance on the $840 billion assets under management base and recurring fee revenue.
- The filing’s audited financial statements, notes on commitments and guarantees, and the company’s stated effective internal control over financial reporting.