Goldman Sachs Reports Second Quarter Earnings Per Common Share of $4.93

The Goldman Sachs Group, Inc. (NYSE: GS) today reported net revenues of $13.76 billion and net earnings of $3.44 billion for its second quarter ended June 26, 2009. Diluted earnings per common share were $4.93 compared with $4.58 for the second quarter ended May 30, 2008 and $3.39 for the first quarter ended March 27, 2009. Annualized return on average common shareholders’ equity (ROE) ⁽¹⁾ was 23.0% for the second quarter of 2009 and 18.3% for the first half of 2009.

Excluding a one-time preferred dividend of $426 million related to the repurchase of the firm’s TARP preferred stock, diluted earnings per common share were $5.71 ⁽²⁾ for the second quarter of 2009 and annualized ROE was 23.8% ⁽²⁾ for the second quarter of 2009 and 19.2% ⁽²⁾ for the first half of 2009.

Business Highlights

• Goldman Sachs ranked first in worldwide announced mergers and acquisitions for the calendar year-to-date. ⁽³⁾
• Equity underwriting produced record quarterly net revenues of $736 million, surpassing the previous record set in the second quarter of 2000.
• Fixed Income, Currency and Commodities (FICC) generated record quarterly net revenues of $6.80 billion, reflecting strength across most businesses, including record results in credit products.
• Equities generated record quarterly net revenues of $3.18 billion, reflecting strong results across the client franchise businesses.
• On June 17, 2009, the firm repurchased the preferred stock that was issued to the U.S. Treasury pursuant to its TARP Capital Purchase Program. In addition, the firm completed a public offering of common stock for proceeds of $5.75 billion during the quarter.
• Book value per common share increased approximately 8% during the quarter to $106.41 and tangible book value per common share ⁽⁴⁾ increased approximately 10% during the quarter to $96.94.

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"While markets remain fragile and we recognize the challenges the broader economy faces, our second quarter results reflected the combination of improving financial market conditions and a deep and diverse client franchise,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer. "Our role as an intermediary focused on making markets for buyers and sellers helped drive our performance. We were also active as an underwriter of many significant debt and equity offerings for clients.”

Net Revenues

Investment Banking

Net revenues in Investment Banking were $1.44 billion, 15% lower than the second quarter of 2008 and 75% higher than the first quarter of 2009.

Net revenues in Financial Advisory were $368 million, 54% lower than the second quarter of 2008, primarily reflecting a significant decline in industry-wide completed mergers and acquisitions. Net revenues in the firm’s Underwriting business were $1.07 billion, 21% higher than the second quarter of 2008, due to significantly higher net revenues in equity underwriting, as well as higher net revenues in debt underwriting. The increase in equity underwriting reflected very strong client activity. The increase in debt underwriting primarily reflected higher net revenues from investment-grade and municipal activity. The firm’s investment banking transaction backlog decreased during the quarter. ⁽⁵⁾

Trading and Principal Investments

Net revenues in Trading and Principal Investments were $10.78 billion, 93% higher than the second quarter of 2008 and 51% higher than the first quarter of 2009.

Net revenues in FICC were $6.80 billion, significantly higher than the second quarter of 2008. These results reflected particularly strong performances in credit products, interest rate products and currencies, reflecting strength in the client franchise. In addition, net revenues in both mortgages and commodities were higher compared with the second quarter of 2008. Results in mortgages included a loss of approximately $700 million on commercial mortgage loans. During the quarter, FICC operated in an environment characterized by strong client-driven activity, particularly in more liquid products, favorable market opportunities and tighter corporate credit spreads.

Net revenues in Equities were $3.18 billion, 28% higher than the second quarter of 2008, reflecting significantly higher net revenues in derivatives and, to a lesser extent, principal strategies. In addition, net revenues in shares were solid, but essentially unchanged compared with the second quarter of 2008. Commissions declined compared with the second quarter of 2008. During the quarter, Equities operated in an environment characterized by solid client-driven activity, favorable market opportunities, a significant increase in global equity prices and a decline in volatility levels.

Principal Investments recorded net revenues of $811 million for the second quarter of 2009. These results included a gain of $948 million related to the firm’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC), a gain of $343 million from corporate principal investments and a loss of $499 million from real estate principal investments.

Asset Management and Securities Services

Net revenues in Asset Management and Securities Services were $1.54 billion, 28% lower than the second quarter of 2008 and 6% higher than the first quarter of 2009.

Asset Management net revenues were $922 million, 21% lower than the second quarter of 2008, reflecting lower assets under management, principally due to market depreciation since the end of the second quarter of 2008. During the second quarter of 2009, assets under management increased $48 billion to $819 billion ⁽⁶⁾, due to $42 billion of market appreciation, primarily in equity and fixed income assets, and $6 billion of net inflows.

Securities Services net revenues were $615 million, 38% lower than the second quarter of 2008. The decrease in net revenues primarily reflected the impact of lower customer balances compared with the second quarter of 2008.

Expenses

Operating expenses were $8.73 billion, 33% higher than the second quarter of 2008 and 28% higher than the first quarter of 2009.

Compensation and Benefits

Compensation and benefits expenses (including salaries, estimated year-end discretionary compensation, amortization of equity awards and other items such as payroll taxes, severance costs and benefits) were $6.65 billion, which was higher than the second quarter of 2008, primarily due to higher net revenues. The ratio of compensation and benefits to net revenues was 49.0% for the first half of 2009. Total staff decreased 1% during the quarter.

Non-Compensation Expenses

Non-compensation expenses, excluding consolidated entities held for investment purposes ⁽⁷⁾, were $1.80 billion, 8% lower than the second quarter of 2008 and 11% higher than the first quarter of 2009. The decrease compared with the second quarter of 2008 was attributable to lower brokerage, clearing, exchange and distribution fees, principally reflecting lower transaction volumes in Equities. In addition, non-compensation expenses during the second quarter of 2009 were generally lower than the second quarter of 2008 principally due to the impact of reduced staff levels and the effect of expense reduction initiatives. These decreases were partially offset by the impact of higher FDIC fees on bank deposits, including the impact of a special assessment of approximately $50 million, and net provisions for litigation and regulatory proceedings of $25 million. The increase in non-compensation expenses related to consolidated entities held for investment purposes reflected real estate impairment charges of approximately $170 million during the second quarter of 2009. Including consolidated investment entities held for investment purposes, non-compensation expenses were $2.08 billion, essentially unchanged from the second quarter of 2008 and the first quarter of 2009.

Provision for Taxes

The effective income tax rate for the first half of 2009 was 31.5%, up slightly from 31.0% for the first quarter of 2009.

Capital

As of June 26, 2009, total capital was $254.05 billion, consisting of $62.81 billion in total shareholders’ equity (common shareholders’ equity of $55.86 billion and preferred stock of $6.96 billion) and $191.24 billion in unsecured long-term borrowings. Book value per common share was $106.41 and tangible book value per common share ⁽⁴⁾ was $96.94, an increase of approximately 8% and 10%, respectively, during the quarter. Book value and tangible book value per common share are based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 524.9 million at period end.

During the quarter, The Goldman Sachs Group, Inc. (Group Inc.) completed a public offering of 46.7 million common shares at $123.00 per share for total proceeds of $5.75 billion.

On June 17, 2009, Group Inc. repurchased from the U.S. Treasury the 10.0 million shares of the firm’s Fixed Rate Cumulative Perpetual Preferred Stock, Series H, that were issued to the U.S. Treasury pursuant to the U.S. Treasury’s TARP Capital Purchase Program. The aggregate purchase price paid by Group Inc. to the U.S. Treasury for the Preferred Stock was $10.04 billion (including accrued dividends). The repurchase included a one-time preferred dividend of $426 million, which is included in our results for the second quarter of 2009.

Under the regulatory capital guidelines currently applicable to bank holding companies, the firm’s Tier 1 capital ratio under Basel I ⁽⁸⁾ was 13.8% as of June 26, 2009, up from 13.7% as of March 27, 2009. Under the capital guidelines applicable to the firm when it was regulated by the SEC as a Consolidated Supervised Entity, the firm’s Tier 1 capital ratio under Basel II ⁽⁸⁾ was 16.1% as of June 26, 2009, up from 16.0% as of March 27, 2009.

Other Balance Sheet and Liquidity Metrics

• Total assets ⁽⁹⁾ were $890 billion as of June 26, 2009, down 4% from March 27, 2009.
• Level 3 assets ⁽¹⁰⁾ were approximately $54 billion as of June 26, 2009 (down from $59 billion as of March 27, 2009) and represented 6.1% of total assets.
• Average global core excess ⁽¹¹⁾ liquidity was $170.95 billion for the second quarter of 2009, up from $163.74 billion for the first quarter of 2009.

Dividends

The Board of Directors of Group Inc. (the Board) declared a dividend of $0.35 per common share to be paid on September 24, 2009 to common shareholders of record on August 25, 2009. The Board also declared dividends of $236.98, $387.50, $252.78 and $252.78 per share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively (represented by depositary shares, each representing a 1/1,000th interest in a share of preferred stock), to be paid on August 10, 2009 to preferred shareholders of record on July 26, 2009. In addition, the Board declared a dividend of $2,500 per share of Series G Preferred Stock to be paid on August 10, 2009 to preferred shareholders of record on July 26, 2009.

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The Goldman Sachs Group, Inc. is a leading global financial services firm providing investment banking, securities and investment management services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

Cautionary Note Regarding Forward-Looking Statements

This press release contains "forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only the firm’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of the firm’s control. It is possible that the firm’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. For a discussion of some of the risks and important factors that could affect the firm’s future results and financial condition, see "Risk Factors” in Part I, Item 1A of the firm’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008 and "Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the firm’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008.

Certain of the information regarding the firm’s Tier 1 capital ratios, risk-weighted assets, total assets, level 3 assets and average global core excess liquidity consist of preliminary estimates; these estimates are forward-looking statements and are subject to change, possibly materially, as the firm completes its quarterly financial statements.

Statements about the firm’s investment banking transaction backlog also may constitute forward-looking statements. Such statements are subject to the risk that the terms of these transactions may be modified or that they may not be completed at all; therefore, the net revenues, if any, that the firm actually earns from these transactions may differ, possibly materially, from those currently expected. Important factors that could result in a modification of the terms of a transaction or a transaction not being completed include, in the case of underwriting transactions, a decline or continued weakness in general economic conditions, outbreak of hostilities, volatility in the securities markets generally or an adverse development with respect to the issuer of the securities and, in the case of financial advisory transactions, a decline in the securities markets, an inability to obtain adequate financing, an adverse development with respect to a party to the transaction or a failure to obtain a required regulatory approval. For a discussion of other important factors that could adversely affect the firm’s investment banking transactions, see "Risk Factors” in Part I, Item 1A of the firm’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008 and "Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the firm’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008.

Conference Call

A conference call to discuss the firm’s results, outlook and related matters will be held at 11:00 am (ET). The call will be open to the public. Members of the public who would like to listen to the conference call should dial 1-888-281-7154 (U.S. domestic) or 1-706-679-5627 (international). The number should be dialed at least 10 minutes prior to the start of the conference call. The conference call will also be accessible as an audio webcast through the Investor Relations section of the firm’s web site, www.gs.com/shareholders. There is no charge to access the call. For those unable to listen to the live broadcast, a replay will be available on the firm’s web site or by dialing 1-800-642-1687 (U.S. domestic) or 1-706-645-9291 (international) passcode number 17367491, beginning approximately two hours after the event. Please direct any questions regarding obtaining access to the conference call to Goldman Sachs Investor Relations, via e-mail, at gs-investor-relations@gs.com.

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Footnotes