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GS News Goldman Sachs Reports Record Earnings Per Common Share of $19.69 for 2006; Fourth Quarter Earnings Per Common Share Were $6.59

NEW YORK--(BUSINESS WIRE)--The Goldman Sachs Group, Inc. (NYSE: GS) today reported net revenues of $37.67 billion and net earnings of $9.54 billion for the year ended November 24, 2006. Diluted earnings per common share were $19.69, an increase of 76% compared with $11.21 for the year ended November 25, 2005. Return on average tangible common shareholders’ equity ⁽¹⁾ (ROTE) was 39.8% and return on average common shareholders’ equity (ROE) was 32.8% for 2006.

Fourth quarter net revenues were $9.41 billion and net earnings were $3.15 billion. Diluted earnings per common share were $6.59 compared with $3.35 for the same 2005 quarter and $3.26 for the third quarter of 2006. Annualized ROTE ⁽¹⁾ was 50.0% and annualized ROE was 41.5% for the fourth quarter.

Excluding non-cash expenses of $637 million related to the accounting for certain share-based awards under SFAS No. 123-R ⁽²⁾, net earnings for the year were $9.96 billion ⁽²⁾, diluted earnings per common share were $20.57 ⁽²⁾, ROTE ⁽¹⁾ was 41.8% ⁽²⁾ and ROE was 34.4% ⁽²⁾. Excluding such non-cash expenses of $129 million for the fourth quarter, net earnings were $3.23 billion ⁽²⁾, diluted earnings per common share were $6.77 ⁽²⁾, annualized ROTE ⁽¹⁾ was 51.7% ⁽²⁾ and annualized ROE was 42.8% ⁽²⁾.

                        Annual Business Highlights

• Goldman Sachs achieved record annual results in 2006, generating record net revenues, net earnings, diluted earnings per common share, ROTE ⁽¹⁾ and ROE.
• The firm continued its leadership in investment banking, ranking first in worldwide announced and completed mergers and acquisitions, equity and equity-related offerings and public common stock offerings for the calendar year-to-date. ⁽³⁾
• Investment Banking generated record net revenues of $5.63 billion, 5% higher than the previous record set in 2000.
• Fixed Income, Currency and Commodities (FICC) produced record net revenues of $14.26 billion, 60% higher than the previous record set in 2005.
• Equities generated record net revenues of $8.48 billion, 50% higher than the previous record set in 2005.
• Principal Investments achieved record net revenues of $2.82 billion.
• Asset Management achieved record net revenues of $4.29 billion. Assets under management increased $144 billion or 27% to a record $676 billion, with net asset inflows of $94 billion in 2006.
• Securities Services achieved record net revenues of $2.18 billion.

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“We are very pleased with this year's performance,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer. “The breadth of our franchise, the diversity of our businesses and the performance of our people enabled us to serve our clients around the world.”

                              Net Revenues

Investment Banking
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Full Year
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Net revenues in Investment Banking were $5.63 billion for the year, 53% higher than 2005. Net revenues in Financial Advisory were $2.58 billion, 35% higher than 2005, primarily reflecting strong growth in industry-wide completed mergers and acquisitions. Net revenues in the firm’s Underwriting business were $3.05 billion, 73% higher than 2005. Net revenues were significantly higher in equity underwriting, reflecting increased client activity. Net revenues were also significantly higher in debt underwriting, primarily due to a significant increase in leveraged finance activity and, to a lesser extent, an increase in investment-grade activity. The firm’s investment banking backlog at the end of 2006 was higher than at the end of 2005. ⁽⁴⁾

Fourth Quarter
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Net revenues in Investment Banking were $1.34 billion, 42% higher than the fourth quarter of 2005 and 4% higher than the third quarter of 2006. Net revenues in Financial Advisory were $627 million, 15% higher than the fourth quarter of 2005, reflecting increased client activity. Net revenues in the firm’s Underwriting business were $717 million, 78% higher than the fourth quarter of 2005. Net revenues were significantly higher in debt underwriting, primarily due to an increase in leveraged finance and investment-grade activity, as well as in equity underwriting, primarily reflecting an increase in initial public offerings. The firm’s investment banking backlog increased during the quarter. ⁽⁴⁾

Trading and Principal Investments
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Full Year
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Net revenues in Trading and Principal Investments were $25.56 billion for the year, 52% higher than 2005.

Net revenues in FICC were $14.26 billion for the year, 60% higher than 2005, primarily due to significantly higher net revenues in credit products (which includes distressed investing) and commodities. In addition, net revenues were higher in interest rate products, currencies and mortgages. During 2006, the business operated in an environment characterized by strong customer-driven activity and favorable market opportunities. In addition, corporate credit spreads tightened, the yield curve flattened and volatility levels were generally low in interest rate and currency markets.

Net revenues in Equities were $8.48 billion for the year, 50% higher than 2005, primarily reflecting significantly higher net revenues in derivatives, across all regions, as well as higher net revenues in shares. The increase also reflected the contribution from the firm’s insurance business, which was acquired in 2006. In addition, principal strategies performed well, although net revenues were lower than a particularly strong 2005. During 2006, Equities operated in a favorable environment characterized by strong customer-driven activity, generally higher equity prices and favorable market opportunities, although volatility levels were generally low.

Principal Investments recorded net revenues of $2.82 billion, reflecting a $937 million gain related to the firm's investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC), a $527 million gain related to the firm's investment in the convertible preferred stock of Sumitomo Mitsui Financial Group, Inc. (SMFG) and $1.35 billion in gains and overrides from other principal investments.

Fourth Quarter
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Net revenues in Trading and Principal Investments were $6.63 billion, 57% higher than the fourth quarter of 2005 and 37% higher than the third quarter of 2006.

Net revenues in FICC were $3.10 billion, 58% higher than the fourth quarter of 2005, reflecting higher net revenues in credit products, commodities and, to a lesser extent, interest rate products. These increases were partially offset by significantly lower net revenues in currencies as well as lower net revenues in mortgages. During the quarter, FICC operated in an environment characterized by solid customer-driven activity, tightening corporate credit spreads and generally low volatility levels in interest rate and currency markets.

Net revenues in Equities were $2.13 billion, 52% higher than the fourth quarter of 2005, primarily reflecting higher net revenues in shares and derivatives. The increase also reflected the contribution from the firm’s insurance business, which was acquired in 2006. Net revenues in principal strategies were essentially unchanged compared with the fourth quarter of 2005. During the quarter, Equities operated in a favorable environment characterized by rising equity prices and solid customer-driven activity.

Principal Investments recorded net revenues of $1.40 billion, reflecting a $949 million gain related to the firm's investment in ICBC, $528 million in gains and overrides, primarily from other corporate principal investments, and a $78 million loss related to the firm's investment in SMFG.

Asset Management and Securities Services
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Full Year
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Net revenues in Asset Management and Securities Services were $6.47 billion for the year, 36% higher than 2005.

Asset Management net revenues were $4.29 billion for the year, 45% higher than 2005, reflecting significantly higher management and other fees, principally due to strong growth in assets under management, and significantly higher incentive fees. During the year, assets under management increased $144 billion or 27% to $676 billion, reflecting non-money market net asset inflows of $77 billion, spread across all asset classes, money market net asset inflows of $17 billion ⁽⁵⁾, and market appreciation of $50 billion, primarily in equity and fixed income assets.

Securities Services net revenues were $2.18 billion, 22% higher than 2005, as the firm’s prime brokerage business continued to generate strong results, primarily reflecting significantly higher global customer balances in securities lending and margin lending.

Fourth Quarter
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Net revenues in Asset Management and Securities Services were $1.43 billion, 16% higher than the fourth quarter of 2005 and 2% lower than the third quarter of 2006.

Asset Management net revenues were $933 million, 19% higher than the fourth quarter of 2005. The increase was driven by significantly higher management and other fees, primarily due to growth in assets under management, partially offset by lower incentive fees. During the quarter, assets under management increased $47 billion or 7% to $676 billion, reflecting non-money market net asset inflows of $17 billion, spread across all asset classes, money market net asset inflows of $7 billion and market appreciation of $23 billion in equity and fixed income assets.

Securities Services net revenues were $496 million, 11% higher than the fourth quarter of 2005, as the firm’s prime brokerage business continued to generate strong results, reflecting significantly higher global customer balances in securities lending and margin lending.

                            Expenses

Operating expenses were $23.11 billion for 2006, 36% higher than 2005.

Compensation and Benefits
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Compensation and benefits expenses were $16.46 billion for 2006, 40% higher than 2005, primarily reflecting increased discretionary compensation due to higher net revenues, and increased employment levels. The ratio of compensation and benefits to net revenues for 2006 was 43.7% compared with 46.6% ⁽⁶⁾ for 2005. Employment levels increased 12% compared with the end of 2005, including 3% during the fourth quarter.

In the first quarter of 2006, the firm adopted SFAS No. 123-R, which requires that share-based awards granted to retirement-eligible employees be expensed in the year of grant. In addition to expensing current year awards, prior year awards must continue to be amortized over the relevant service period. Therefore, although there is no incremental economic cost to the firm, compensation and benefits in 2006 included both amortization of prior year awards as well as new awards granted to retirement-eligible employees for services rendered in 2006.

Compensation and benefits expenses in 2006 included $637 million in continued amortization of prior year awards held by employees that were retirement-eligible on the date of adoption of SFAS No. 123-R. This amount represented the majority of the expense to be recognized with respect to these awards. The ratio of compensation and benefits to net revenues, excluding the non-cash expenses of $637 million, was 42.0% ⁽²⁾ for 2006.

Beginning in the fourth quarter of 2006, "Cost of power generation" in the consolidated statements of earnings was reclassified to operating expenses. "Cost of power generation" was previously reported as a reduction to revenues. Prior periods have been reclassified to conform to the current presentation, with no impact to the firm’s reported net earnings ⁽⁶⁾. The effect of this reclassification on the ratio of compensation and benefits to net revenues was to decrease the ratio by approximately 30 basis points and 60 basis points for 2006 and 2005, respectively.

Non-Compensation Expenses
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Full Year
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Non-compensation expenses were $6.65 billion for 2006, 28% higher than 2005. Excluding non-compensation expenses related to consolidated entities held for investment purposes ⁽⁷⁾, non-compensation expenses were 24% higher than 2005, primarily due to higher brokerage, clearing, exchange and distribution fees ⁽⁸⁾ in Equities and FICC, and increased other expenses ⁽⁸⁾, primarily due to costs related to the firm’s insurance business, which was acquired in 2006. In addition, market development costs and professional fees were higher, reflecting increased levels of business activity, and occupancy expenses increased, primarily reflecting new office space and higher facility expenses.

Fourth Quarter
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Non-compensation expenses were $1.92 billion, 31% higher than the fourth quarter of 2005 and 13% higher than the third quarter of 2006. Excluding non-compensation expenses related to consolidated entities held for investment purposes ⁽⁷⁾, the increase in non-compensation expenses compared with the fourth quarter of 2005 was primarily due to higher brokerage, clearing, exchange and distribution fees ⁽⁸⁾ in Equities and FICC, and increased other expenses ⁽⁸⁾, primarily due to costs related to the firm’s insurance business, which was acquired in 2006. In addition, market development costs were higher, reflecting increased levels of business activity, and occupancy expenses increased, primarily due to new office space, higher facility expenses and $18 million of real estate exit costs.

Provision For Taxes
-------------------

The effective income tax rate was 34.5% for 2006, up from 33.3% for the first nine months of 2006 and 32.0% for 2005. The increase in the effective income tax rate for 2006 compared with the first nine months of 2006 was primarily due to higher state and local taxes and a change in the geographic mix of earnings. The increase in the effective income tax rate for 2006 compared with 2005 was primarily related to a reduction in the impact of permanent benefits due to higher levels of earnings in 2006 and audit settlements in 2005.

                             Capital

As of November 24, 2006, total capital was $158.63 billion, consisting of $35.79 billion in total shareholders’ equity (common equity of $32.69 billion and preferred stock of $3.10 billion) and $122.84 billion in unsecured long-term borrowings ⁽⁹⁾. Book value per common share was $72.62 based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 450.1 million at year end. Tangible book value per common share was $61.47. ⁽¹⁾

The firm repurchased 50.2 million shares of its common stock at an average price of $155.64 per share, at a total cost of $7.82 billion during 2006, including 20.8 million shares of its common stock at an average price of $175.82 per share, at a total cost of $3.65 billion in the fourth quarter. The remaining share authorization under the firm’s existing common stock repurchase program is 52.6 million shares.

                             Dividends

The Board of Directors of The Goldman Sachs Group, Inc. (the Board) declared a dividend of $0.35 per common share to be paid on February 22, 2007 to common shareholders of record on January 23, 2007. The Board also declared dividends of $391.28, $387.50, $391.28 and $386.17 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 1/1000th interest in a share of preferred stock), to be paid on February 10, 2007 to preferred shareholders of record on January 26, 2007.

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Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, it is one of the oldest and largest investment banking firms. 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
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This press release contains "forward-looking statements." These statements are not historical facts but instead represent only the firm’s belief 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, see "Risk Factors" in Part I, Item 1A of the firm’s Annual Report on Form 10-K for the fiscal year ended November 25, 2005.

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 that the firm expects to earn 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 in general economic conditions, 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 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 25, 2005.

Conference Call
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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) and 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/our_firm/investor_relations/. 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 4464784, 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.