Goldman Sachs Group Inc. — Fiscal 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone quarterly filing; fourth-quarter results are included in the supplemental financial information. Goldman Sachs operates through Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net revenues | $28.81 billion | $39.16 billion | Down 26% |
| Pre-tax earnings | $6.17 billion | $12.89 billion | Down 52% |
| Net earnings | $4.44 billion | $8.35 billion | Down 47% |
| Net earnings applicable to common shareholders | $2.51 billion | $7.71 billion | Down 67% |
| Diluted EPS | $4.51 | $13.18 | Down 66% |
| Return on average common equity | 3.7% | 11.5% | Down 7.8 points |
| Net interest income | $5.19 billion | $5.50 billion | Down 6% |
| Operating expenses | $22.64 billion | $26.27 billion | Down 14% |
| Effective tax rate | 28.0% | 35.2% | Down 7.2 points |
Calculated margins were approximately 21.4% pre-tax and 15.4% net in 2011, compared with approximately 32.9% and 21.3%, respectively, in 2010.
Fourth-quarter 2011
- Net revenues were $6.05 billion, compared with $8.64 billion in fourth-quarter 2010.
- Pre-tax earnings were $1.25 billion, compared with $3.47 billion.
- Net earnings were $1.01 billion, compared with $2.39 billion.
- Net earnings applicable to common shareholders were $978 million, or diluted EPS of $1.84, compared with $2.23 billion and $3.79 per diluted share.
- Fourth-quarter 2011 included a $234 million tax provision and $35 million of preferred dividends; fourth-quarter 2010 included $1.09 billion of tax expense and $160 million of preferred dividends.
Segment performance and material changes
| Segment | 2011 net revenues | 2011 pre-tax earnings | Change versus 2010 |
|---|---|---|---|
| Investment Banking | $4.36 billion | $1.39 billion | Revenue down 9%; earnings up 7% |
| Institutional Client Services | $17.28 billion | $4.58 billion | Revenue down 21%; earnings down 39% |
| Investing & Lending | $2.14 billion | $(531) million | Revenue down 72%; shifted to a pre-tax loss |
| Investment Management | $5.03 billion | $1.02 billion | Revenue essentially unchanged; earnings up 6% |
- Market-making revenue declined 32% to $9.29 billion as European sovereign-debt concerns, wider credit spreads, volatile markets and reduced risk-taking pressured trading conditions.
- Investing & Lending results included a $517 million loss on ICBC shares, approximately $1 billion of unrealized losses from relationship lending activities including hedges, and $1.12 billion of gains on other equity investments.
- Assets under management declined to $828 billion from $840 billion, reflecting $17 billion of net outflows partly offset by $5 billion of market appreciation.
- Operating expenses declined primarily through lower compensation and benefits expense, which fell to $12.22 billion from $15.38 billion. The compensation-to-net-revenue ratio increased to 42.4% from 39.3%, excluding the 2010 U.K. bank payroll tax.
- Total staff declined to 33,300 from 35,700, and management targeted approximately $1.4 billion of annualized compensation and non-compensation cost reductions.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents increased $16.22 billion to $56.01 billion at December 31, 2011.
- Net cash provided by operating activities was $21.65 billion; investing activities provided $1.49 billion; financing activities used $6.91 billion.
- Total assets were $923.23 billion, up from $911.33 billion. Total liabilities were $852.85 billion, up from $833.98 billion.
- Unsecured long-term borrowings were $173.55 billion; unsecured short-term borrowings were $49.04 billion; total long-term borrowings, including long-term secured financings, were $181.72 billion.
- Customer deposits were $46.11 billion. The firm also had $8.53 billion of FDIC-guaranteed short-term debt maturing on or before June 15, 2012.
- Global Core Excess liquidity was $171.58 billion at year-end, versus $174.78 billion in 2010. Average Global Core Excess was $165.96 billion.
- Total shareholders’ equity was $70.38 billion, down from $77.36 billion. The leverage ratio was 13.1x, adjusted leverage was 8.6x, and debt to equity was 2.5x.
- Basel 1 Tier 1 capital was $63.26 billion, with a Tier 1 capital ratio of 13.8%, total capital ratio of 16.9%, Tier 1 leverage ratio of 7.0%, and Tier 1 common ratio of 12.1%.
Capital actions and unusual items
- Goldman Sachs redeemed Berkshire Hathaway’s Series G preferred stock for $5.50 billion plus accrued dividends and recorded a $1.64 billion preferred dividend related to the redemption. Excluding that item, 2011 diluted EPS was $7.46 and adjusted ROE was 5.9%; these are non-GAAP measures.
- The firm repurchased 47.0 million common shares for $6.04 billion during 2011. Approximately 63.5 million additional shares remained authorized for repurchase at year-end, subject to Federal Reserve approval.
- 2011 operating expenses included approximately $440 million of impairment charges, primarily involving consolidated investments and Litton Loan Servicing. Goodwill was tested in the fourth quarter and was not impaired.
- Litigation and regulatory provisions were $175 million in 2011, compared with $682 million in 2010. Charitable contributions were $163 million in 2011.
Outlook, contingencies and principal risks
- The filing provides no formal numerical earnings or revenue guidance. Management stated that continued market uncertainty, declining asset prices, wider credit spreads or lower client activity could further pressure investment banking, market-making, investing and lending, and investment-management revenues.
- The Dodd-Frank Act, Volcker Rule, Basel 2.5 and Basel 3 were expected to increase capital, liquidity, compliance and operational requirements. Goldman had liquidated substantially all identified Principal Strategies and global macro proprietary trading positions and planned to redeem certain hedge-fund interests over ten quarters beginning in March 2012.
- Credit-rating pressure was material: Moody’s and Standard & Poor’s had negative outlooks at year-end. A one-notch or two-notch downgrade could have required approximately $1.30 billion or $2.18 billion, respectively, of additional collateral or termination payments.
- Contractual commitments totaled $154.04 billion, including $65.75 billion of commitments to extend credit, $54.52 billion of contingent or forward-starting resale and securities-borrowing agreements, and $17.96 billion of forward-starting repurchase and secured-lending agreements.
- Derivative guarantees had aggregate maximum payout or notional amounts of $796.42 billion, although notional amounts do not represent expected losses. Mortgage-related legal and regulatory matters remained significant; management estimated aggregate reasonably possible losses for certain proceedings at approximately $2.4 billion, while noting that many matters could not be reasonably estimated.
- Residential mortgage representations and warranties remained difficult to quantify. The filing states that the firm was not able to make a meaningful estimate of potential future exposure.
Investor verification checklist
- Verify the reconciliation of reported 2011 common earnings and EPS to the $1.64 billion Series G preferred-stock redemption charge and assess the relevance of the $7.46 adjusted EPS figure.
- Review the sustainability of the $171.58 billion Global Core Excess liquidity pool, including its location at regulated subsidiaries and restrictions on upstreaming funds.
- Assess leverage, debt maturities, rating-sensitive collateral requirements and the $8.53 billion of FDIC-guaranteed short-term debt maturing by June 2012.
- Evaluate market-making and Investing & Lending exposures, including ICBC, relationship lending, private equity, Level 3 assets and European sovereign-credit exposure.
- Track implementation of the Volcker Rule, Basel capital changes, OTC-derivatives reforms and related effects on business mix and returns.
- Review outstanding mortgage-related litigation, representations and warranties, foreclosure-servicing matters, regulatory investigations and the estimated $2.4 billion reasonably possible loss range.
- Confirm whether the targeted $1.4 billion of annualized expense reductions were achieved and whether lower staffing and compensation can offset weaker revenues without impairing franchise capacity.