Form 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

Commission File Number 1-11758

 

 

 

LOGO

(Exact Name of Registrant as specified in its charter)

 

 

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

          1585 Broadway

     New York, NY 10036

(Address of principal executive offices, including zip code)

 

36-3145972

(I.R.S. Employer Identification No.)

    

         (212) 761-4000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer  x

 

Accelerated Filer  ¨

Non-Accelerated Filer  ¨

 

Smaller reporting company  ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 31, 2016, there were 1,872,821,289 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.


Table of Contents

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QUARTERLY REPORT ON FORM 10-Q

For the quarter ended September 30, 2016

 

Table of Contents   Page

Part I—Financial Information

 

Item 1.   Financial Statements (Unaudited)

  1

Consolidated Statements of Income

  1

Consolidated Statements of Comprehensive Income

  2

Consolidated Balance Sheets

  3

Consolidated Statements of Changes in Total Equity

  4

Consolidated Statements of Cash Flows

  5

Notes to Consolidated Financial Statements (Unaudited)

  6

  1. Introduction and Basis of Presentation

  6

  2. Significant Accounting Policies

  7

  3. Fair Values

  8

   4. Derivative Instruments and Hedging Activities

  21

  5. Investment Securities

  28

  6. Collateralized Transactions

  31

  7. Loans and Allowance for Credit Losses

  33

  8. Equity Method Investments

  37

  9. Deposits

  37

10. Long-Term Borrowings and Other Secured Financings

  37

11. Commitments, Guarantees and Contingencies

  38

12. Variable Interest Entities and Securitization Activities

  43

13. Regulatory Requirements

  47

14. Total Equity

  49

15. Earnings per Common Share

  50

16. Interest Income and Interest Expense

  51

17. Employee Benefit Plans

  51

18. Income Taxes

  51

19. Segment and Geographic Information

  52

20. Subsequent Events

  54

   Report of Independent Registered Public Accounting Firm

  55

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

  56

Introduction

  56

Executive Summary

  57

Business Segments

  61

Supplemental Financial Information and Disclosures

  71

Accounting Development Updates

  71

Critical Accounting Policies

  72

Liquidity and Capital Resources

  73

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

  87

Item 4.   Controls and Procedures

  97

Financial Data Supplement (Unaudited)

  98

Part II—Other Information

 

Item 1.   Legal Proceedings

  101

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

  102

Item 5.   Other Information

  102

Item 6.   Exhibits

  102

 

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Table of Contents

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including us) file electronically with the SEC. Our electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov.

Our internet site is www.morganstanley.com. You can access our Investor Relations webpage at www.morganstanley.com/about-us-ir. We make available free of charge, on or through our Investor Relations webpage, our proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available, through our Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

You can access information about our corporate governance at www.morganstanley.com/about-us-governance. Our Corporate Governance webpage includes:

 

   

Amended and Restated Certificate of Incorporation;

   

Amended and Restated Bylaws;

   

Charters for its Audit Committee, Compensation, Management Development and Succession Committee, Nominating and Governance Committee, Operations and Technology Committee, and Risk Committee;

   

Corporate Governance Policies;

   

Policy Regarding Communication with the Board of Directors;

   

Policy Regarding Director Candidates Recommended by Shareholders;

   

Policy Regarding Corporate Political Activities;

   

Policy Regarding Shareholder Rights Plan;

   

Equity Ownership Commitment;

   

Code of Ethics and Business Conduct;

   

Code of Conduct; and

   

Integrity Hotline Information.

Morgan Stanley’s Code of Ethics and Business Conduct applies to all directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. We will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (“NYSE”) on our internet site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036 (212-761-4000). The information on our internet site is not incorporated by reference into this report.

 

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Table of Contents

Part I—Financial Information

Item 1. Financial Statements

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Consolidated Statements of Income

(Unaudited)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
in millions, except per share data         2016                 2015                 2016                 2015        

Revenues

       

Investment banking

  $ 1,225      $ 1,313      $ 3,556      $ 4,284   

Trading

    2,609        2,026        7,420        8,649   

Investments

    87        (119     179        408   

Commissions and fees

    991        1,115        3,066        3,459   

Asset management, distribution and administration fees

    2,686        2,732        7,943        8,155   

Other

    308        (62     631        406   

Total non-interest revenues

    7,906        7,005        22,795        25,361   

Interest income

    1,734        1,451        5,148        4,321   

Interest expense

    731        689        2,333        2,265   

Net interest

    1,003        762        2,815        2,056   

Net revenues

    8,909        7,767        25,610        27,417   

Non-interest expenses

       

Compensation and benefits

    4,097        3,437        11,795        12,366   

Occupancy and equipment

    339        341        997        1,034   

Brokerage, clearing and exchange fees

    491        485        1,440        1,435   

Information processing and communications

    456        447        1,327        1,300   

Marketing and business development

    130        158        418        487   

Professional services

    489        576        1,550        1,660   

Other

    526        849        1,481        2,079   

Total non-interest expenses

    6,528        6,293        19,008        20,361   

Income from continuing operations before income taxes

    2,381        1,474        6,602        7,056   

Provision for income taxes

    749        423        2,160        1,704   

Income from continuing operations

    1,632        1,051        4,442        5,352   

Income (loss) from discontinued operations, net of income taxes

    8        (2     1        (9

Net income

  $ 1,640      $ 1,049      $ 4,443      $ 5,343   

Net income applicable to noncontrolling interests

    43        31        130        124   

Net income applicable to Morgan Stanley

  $ 1,597      $ 1,018      $ 4,313      $ 5,219   

Preferred stock dividends and other

    79        79        314        301   

Earnings applicable to Morgan Stanley common shareholders

  $ 1,518      $ 939      $ 3,999      $ 4,918   

Earnings per basic common share

       

Income from continuing operations

  $ 0.82      $ 0.49      $ 2.15      $ 2.57   

Income (loss) from discontinued operations

    0.01                     

Earnings per basic common share

  $ 0.83      $ 0.49      $ 2.15      $ 2.57   

Earnings per diluted common share

       

Income from continuing operations

  $ 0.80      $ 0.48      $ 2.11      $ 2.52   

Income (loss) from discontinued operations

    0.01                    (0.01

Earnings per diluted common share

  $ 0.81      $ 0.48      $ 2.11      $ 2.51   

Dividends declared per common share

  $ 0.20      $ 0.15      $ 0.50      $ 0.40   

Average common shares outstanding

       

Basic

    1,838        1,904        1,863        1,916   

Diluted

    1,879        1,949        1,898        1,958   

 

See Notes to Consolidated Financial Statements   1   September 2016 Form 10-Q


Table of Contents

Consolidated Statements of Comprehensive Income

(Unaudited)

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Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
$ in millions          2016                 2015                 2016                 2015        

Net income

   $ 1,640      $ 1,049      $ 4,443      $ 5,343   

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments1

   $ 43      $ (61   $ 360      $ (249

Change in net unrealized gains (losses) on available for sale securities2

     (99     100        439        72   

Pension, postretirement and other

     (1     4        (5     3   

Change in net debt valuation adjustments3

     (93           255         

Total other comprehensive income (loss)

   $ (150   $ 43      $ 1,049      $ (174

Comprehensive income

   $ 1,490      $ 1,092      $ 5,492      $ 5,169   

Net income applicable to noncontrolling interests

     43        31        130        124   

Other comprehensive income (loss) applicable to noncontrolling interests

     15        15        151        (3

Comprehensive income applicable to Morgan Stanley

   $ 1,432      $ 1,046      $ 5,211      $ 5,048   

 

1.

Amounts include Provision for (benefit from) income taxes of $(30) million and $30 million in the quarter ended September 30, 2016 (“current quarter”) and the quarter ended September 30, 2015 (“prior year quarter”), respectively, and $(204) million and $150 million in the nine months ended September 30, 2016 (“current year period”) and the nine months ended September 30, 2015 (“prior year period”), respectively.

2.

Amounts include Provision for (benefit from) income taxes of $(58) million and $57 million in the current quarter and prior year quarter, respectively, and $256 million and $41 million in the current year period and prior year period, respectively.

3.

Debt valuation adjustments (“DVA”) represent the change in the fair value resulting from fluctuations in the Firm’s credit spreads and other credit factors related to liabilities carried at fair value, primarily related to certain Long-term and Short-term borrowings. Amounts include Provision for (benefit from) income taxes of $(50) million and $150 million in the current quarter and current year period, respectively. See Notes 2 and 14 for further information.

 

September 2016 Form 10-Q   2   See Notes to Consolidated Financial Statements


Table of Contents
Consolidated Balance Sheets    LOGO

(Unaudited)

 

$ in millions, except share data   

At

September 30,
2016

   

At

December 31,
2015

 

Assets

    

Cash and due from banks

   $ 26,899      $ 19,827   

Interest bearing deposits with banks

     15,653        34,256   

Trading assets, at fair value ($156,351 and $127,627 were pledged to various parties)

     273,151        239,505   

Investment securities (includes $65,732 and $66,759 at fair value)

     78,956        71,983   

Securities purchased under agreements to resell (includes $554 and $806 at fair value)

     90,579        87,657   

Securities borrowed

     126,280        142,416   

Customer and other receivables

     51,411        45,407   

Loans:

 

    

Held for investment (net of allowance of $287 and $225)

     80,400        72,559   

Held for sale

     12,108        13,200   

Goodwill

     6,584        6,584   

Intangible assets (net of accumulated amortization of $2,354 and $2,130)

     2,747        2,984   

Other assets

     49,123        51,087   

Total assets

   $ 813,891      $ 787,465   

Liabilities

    

Deposits (includes $60 and $125 at fair value)

   $ 151,843      $ 156,034   

Short-term borrowings (includes $408 and $1,648 at fair value)

     914        2,173   

Trading liabilities, at fair value

     136,299        128,455   

Securities sold under agreements to repurchase (includes $745 and $683 at fair value)

     46,936        36,692   

Securities loaned

     16,515        19,358   

Other secured financings (includes $3,746 and $2,854 at fair value)

     9,812        9,464   

Customer and other payables

     194,007        186,626   

Other liabilities and accrued expenses

     15,176        18,711   

Long-term borrowings (includes $38,747 and $33,045 at fair value)

     163,927        153,768   

Total liabilities

     735,429        711,281   

Commitments and contingent liabilities (see Note 11)

    

Equity

    

Morgan Stanley shareholders’ equity:

    

Preferred stock (see Note 14)

     7,520        7,520   

Common stock, $0.01 par value:

    

Shares authorized: 3,500,000,000; Shares issued: 2,038,893,979; Shares outstanding: 1,876,466,446 and 1,920,024,027

     20        20   

Additional paid-in capital

     22,995        24,153   

Retained earnings

     52,545        49,204   

Employee stock trusts

     2,839        2,409   

Accumulated other comprehensive income (loss)

     (1,070     (1,656

Common stock held in treasury, at cost, $0.01 par value (162,427,533 and 118,869,952 shares)

     (4,861     (4,059

Common stock issued to employee stock trusts

     (2,839     (2,409

Total Morgan Stanley shareholders’ equity

     77,149        75,182   

Noncontrolling interests

     1,313        1,002   

Total equity

     78,462        76,184   

Total liabilities and equity

   $ 813,891      $ 787,465   

 

See Notes to Consolidated Financial Statements   3   September 2016 Form 10-Q


Table of Contents
Consolidated Statements of Changes in Total Equity    LOGO

Nine Months Ended September 30, 2016 and 2015

(Unaudited)

 

$ in millions  

Preferred

Stock

   

Common

Stock

   

Additional

Paid-in

Capital

   

Retained

Earnings

   

Employee

Stock

Trusts

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Common

Stock

Held in

Treasury

at Cost

   

Common

Stock

Issued to

Employee

Stock

Trusts

   

Non-

controlling

Interests

   

Total

Equity

 

Balance at December 31, 2015

  $ 7,520      $ 20      $ 24,153      $ 49,204      $ 2,409      $ (1,656   $ (4,059   $ (2,409   $ 1,002      $ 76,184   

Cumulative adjustment for accounting change related to DVA1

                      312              (312                        

Net adjustment for accounting change related to consolidation2

                                                    106        106   

Net income applicable to Morgan Stanley

                      4,313                                      4,313   

Net income applicable to noncontrolling interests

                                                    130        130   

Dividends

                      (1,284                                   (1,284

Shares issued under employee plans and related tax effects

                (1,168           430              2,106        (430           938   

Repurchases of common stock and employee tax withholdings

                                        (2,908                 (2,908

Net change in Accumulated other comprehensive income (loss)

                                  898                    151        1,049   

Other net increase (decreases)

                10                                      (76     (66

Balance at September 30, 2016

  $ 7,520      $ 20      $ 22,995      $ 52,545      $ 2,839      $ (1,070   $ (4,861   $ (2,839   $ 1,313      $ 78,462   

Balance at December 31, 2014

  $ 6,020      $ 20      $ 24,249      $ 44,625      $ 2,127      $ (1,248   $ (2,766   $ (2,127   $ 1,204      $ 72,104   

Net income applicable to Morgan Stanley

                      5,219                                      5,219   

Net income applicable to noncontrolling interests

                                                    124        124   

Dividends

                      (1,098                                   (1,098

Shares issued under employee plans and related tax effects

                (356           272              1,445        (272           1,089   

Repurchases of common stock and employee tax withholdings

                                        (2,135                 (2,135

Net change in Accumulated other comprehensive income (loss)

                                  (171                 (3     (174

Issuance of preferred stock

    1,500              (7                                         1,493   

Deconsolidation of certain legal entities associated with a real estate fund

                                                    (191     (191

Other net decreases

                (10                                   (1     (11

Balance at September 30, 2015

  $ 7,520      $ 20      $ 23,876      $ 48,746      $ 2,399      $ (1,419   $       (3,456   $ (2,399   $ 1,133      $       76,420   

 

1.

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities, a cumulative catch up adjustment was recorded as of January 1, 2016 to move the cumulative DVA amount, net of noncontrolling interest and tax, related to outstanding liabilities under the fair value option election from Retained earnings into Accumulated other comprehensive income (loss) (“AOCI”). See Notes 2 and 14 for further information.

2.

In accordance with the accounting update Amendments to the Consolidation Analysis, a net adjustment was recorded as of January 1, 2016 to consolidate or deconsolidate certain entities under the new guidance. See Note 2 for further information.

 

September 2016 Form 10-Q   4   See Notes to Consolidated Financial Statements


Table of Contents
Consolidated Statements of Cash Flows    LOGO

(Unaudited)

 

    

Nine Months Ended

September 30,

 
$ in millions          2016                 2015        

Cash flows from operating activities

    

Net income

   $ 4,443      $ 5,343   

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

    

(Income) loss from equity method investments

     39        (118

Compensation payable in common stock and options

     794        836   

Depreciation and amortization

     1,357        1,023   

Net gain on sale of available for sale securities

     (127     (74

Impairment charges

     102        91   

Provision for credit losses on lending activities

     138        47   

Other operating adjustments

     (36     264   

Changes in assets and liabilities:

    

Trading assets, net of Trading liabilities

     (20,509     39,775   

Securities borrowed

     16,136        (11,537

Securities loaned

     (2,843     (4,575

Customer and other receivables and other assets

     (2,800     5,842   

Customer and other payables and other liabilities

     3,798        10,351   

Securities purchased under agreements to resell

     (2,922     (43,918

Securities sold under agreements to repurchase

     10,244        (11,313

Net cash provided by (used for) operating activities

     7,814        (7,963

Cash flows from investing activities

    

Proceeds from (payments for):

    

Other assets—Premises, equipment and software, net

     (941     (964

Changes in loans, net

     (7,709     (11,313

Investment securities:

    

Purchases

     (41,230     (32,133

Proceeds from sales

     28,960        32,788   

Proceeds from paydowns and maturities

     5,956        4,285   

Other investing activities

     (24     (61

Net cash used for investing activities

     (14,988     (7,398

Cash flows from financing activities

    

Net proceeds from (payments for):

    

Short-term borrowings

     (1,233     (279

Noncontrolling interests

     (47     (70

Other secured financings

     (278     (1,677

Deposits

     (4,191     13,682   

Proceeds from:

    

Excess tax benefits associated with stock-based awards

     51        180   

Derivatives financing activities

           392   

Issuance of preferred stock, net of issuance costs

           1,493   

Issuance of long-term borrowings

     27,528        30,159   

Payments for:

    

Long-term borrowings

     (22,902     (17,615

Derivatives financing activities

     (120     (372

Repurchases of common stock and employee tax withholdings

     (2,908     (2,135

Cash dividends

     (1,311     (1,096

Net cash provided by (used for) financing activities

     (5,411     22,662   

Effect of exchange rate changes on cash and cash equivalents

     1,054        (767

Net increase (decrease) in cash and cash equivalents

     (11,531     6,534   

Cash and cash equivalents, at beginning of period

     54,083        46,984   

Cash and cash equivalents, at end of period

   $ 42,552      $ 53,518   

Cash and cash equivalents include:

    

Cash and due from banks

   $ 26,899      $ 19,244   

Interest bearing deposits with banks

     15,653        34,274   

Cash and cash equivalents, at end of period

   $         42,552      $         53,518   

Supplemental Disclosure of Cash Flow Information

Cash payments for interest were $1,784 million and $1,456 million.

Cash payments for income taxes, net of refunds, were $504 million and $541 million.

 

See Notes to Consolidated Financial Statements   5   September 2016 Form 10-Q


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

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1. Introduction and Basis of Presentation

The Firm

Morgan Stanley, a financial holding company, is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley” or the “Firm” mean Morgan Stanley (the “Parent”) together with its consolidated subsidiaries.

For a description of the clients and principal products and services of each of the Firm’s business segments, see Note 1 to the consolidated financial statements in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).

Basis of Financial Information

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the Firm to make estimates and assumptions regarding the valuations of certain financial instruments, the valuation of goodwill and intangible assets, compensation, deferred tax assets, the outcome of legal and tax matters, allowance for credit losses and other matters that affect its consolidated financial statements and related disclosures. The Firm believes that the estimates utilized in the preparation of its consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated.

The accompanying consolidated financial statements should be read in conjunction with the Firm’s consolidated financial statements and notes thereto included in the 2015 Form 10-K. Certain footnote disclosures included in the 2015 Form 10-K have been condensed or omitted from the consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The consolidated financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of opera-

tions for interim periods are not necessarily indicative of results for the entire year.

Consolidation

The consolidated financial statements include the accounts of the Firm, its wholly owned subsidiaries and other entities in which the Firm has a controlling financial interest, including certain variable interest entities (“VIE”) (see Note 12). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income (loss) applicable to noncontrolling interests in the consolidated statements of income. The portion of shareholders’ equity of such subsidiaries that is attributable to noncontrolling interests for such subsidiaries is presented as noncontrolling interests, a component of total equity, in the consolidated balance sheets.

For a discussion of the Firm’s VIEs and its significant regulated U.S. and international subsidiaries, see Notes 1 and 2 to the consolidated financial statements in the 2015 Form 10-K. See also Note 2 herein.

Consolidated Statements of Cash Flows Presentation

The adoption of the accounting update, Amendments to the Consolidation Analysis (see Note 2) on January 1, 2016, resulted in a net noncash increase in total assets of $126 million. In the prior year period, the Firm deconsolidated approximately $191 million in net assets previously attributable to noncontrolling interests that were related to a real estate fund sponsored by the Firm. The deconsolidation resulted in a non-cash reduction of assets of $169 million.

Global Oil Merchanting Business

As a result of entering into a definitive agreement to sell the global oil merchanting unit of the commodities division to Castleton Commodities International LLC, on May 11, 2015, the Firm recognized an impairment charge of $10 million in the prior year quarter and $69 million in the prior year period in Other revenues to reduce the carrying amount of the unit to its estimated fair value less costs to sell. The Firm closed the transaction on November 1, 2015. The transaction did not meet the criteria for discontinued operations and did not have a material impact on the Firm’s financial results.

 

 

September 2016 Form 10-Q   6  


Table of Contents

Notes to Consolidated Financial Statements

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2. Significant Accounting Policies

For a detailed discussion about the Firm’s significant accounting policies, see Note 2 to the consolidated financial statements in the 2015 Form 10-K.

During the current year period, other than the following, there were no significant updates made to the Firm’s significant accounting policies.

Accounting Standards Adopted

The Firm adopted the following accounting updates as of January 1, 2016.

 

 

Recognition and Measurement of Financial Assets and Financial Liabilities.    In January 2016, the Financial Accounting Standards Board (the “FASB”) issued an accounting update that changes the requirements for the recognition and measurement of certain financial assets and financial liabilities. The Firm early adopted the provision in this guidance relating to liabilities measured at fair value pursuant to a fair value option election that requires presenting unrealized DVA in Other comprehensive income (loss) (“OCI”), a change from the previous requirement to present DVA in net income. Realized DVA amounts will be recycled from AOCI to Trading revenues. DVA amounts from periods prior to adoption remain in

   

Trading revenues as previously reported. A cumulative catch up adjustment, net of noncontrolling interests and tax, of $312 million was recorded as of January 1, 2016 to move the cumulative DVA loss amount from Retained earnings into AOCI.

Other provisions of this rule may not be early adopted and will be effective January 1, 2018, and are not expected to have a material impact on the consolidated financial statements.

 

 

Amendments to the Consolidation Analysis.    In February 2015, the FASB issued an accounting update that provides a new consolidation model for certain entities, such as investment funds and limited partnerships. The adoption on January 1, 2016, increased total assets by $131 million, reflecting consolidations of $206 million net of deconsolidations of $75 million. The consolidations resulted primarily from certain funds in Investment Management where the Firm acts as a general partner.

Goodwill

The Firm completed its annual goodwill impairment testing at July 1, 2016. The Firm’s impairment testing did not indicate any goodwill impairment, as each of the Firm’s reporting units with goodwill had a fair value that was substantially in excess of its carrying value.

 

 

  7   September 2016 Form 10-Q


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3. Fair Values

Fair Value Measurement

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

$ in millions    Level 1     Level 2     Level 3     Counterparty and Cash
Collateral Netting
    At September 30,
2016
 

Assets at Fair Value

          

Trading assets:

          

U.S. government and agency securities:

          

U.S. Treasury securities

   $ 23,199      $     $           $      $ 23,199   

U.S. agency securities

     2,020        25,398        8              27,426   

Total U.S. government and agency securities

     25,219        25,398        8              50,625   

Other sovereign government obligations

     21,437        6,975        12              28,424   

Corporate and other debt:

          

State and municipal securities

           2,247        4              2,251   

Residential mortgage-backed securities

           811        188              999   

Commercial mortgage-backed securities

           1,427        64              1,491   

Asset-backed securities

           115        12              127   

Corporate bonds

           12,896        199              13,095   

Collateralized debt and loan obligations

           403        85              488   

Loans and lending commitments1

           5,057        4,155              9,212   

Other debt

           892        246              1,138   

Total corporate and other debt

           23,848        4,953              28,801   

Corporate equities2

     113,805        338        336              114,479   

Securities received as collateral

     12,535        4        1              12,540   

Derivative and other contracts:

          

Interest rate contracts

     648        417,114        1,116              418,878   

Credit contracts

           14,208        516              14,724   

Foreign exchange contracts

     124        51,072        6              51,202   

Equity contracts

     1,363        40,194        1,864              43,421   

Commodity contracts

     2,225        7,279        4,098              13,602   

Other

           25                    25   

Netting3

     (3,758     (444,890     (2,172     (57,947     (508,767

Total derivative and other contracts

     602        85,002        5,428        (57,947     33,085   

Investments4:

          

Principal investments

     33        19        726              778   

Other

     609        276        210              1,095   

Total investments

     642        295        936              1,873   

Physical commodities

           179                    179   

Total trading assets4

     174,240        142,039        11,674        (57,947     270,006   

Investment securities—AFS securities

     28,997        36,735                    65,732   

Securities purchased under agreements to resell

           554                    554   

Intangible assets

           3                    3   

Total assets measured at fair value

   $             203,237      $             179,331      $               11,674            $ (57,947   $                     336,295   

Liabilities at Fair Value

          

Deposits

   $     $ 29      $ 31            $     $ 60   

Short-term borrowings

           406        2              408   

Trading liabilities:

          

U.S. government and agency securities:

          

U.S. Treasury securities

     9,500                          9,500   

U.S. agency securities

     786        96                    882   

Total U.S. government and agency securities

     10,286        96                    10,382   

Other sovereign government obligations

     18,685        2,110                    20,795   

Corporate and other debt:

          

State and municipal securities

           230                    230   

Asset-backed securities

           477                    477   

Corporate bonds

           5,873        13              5,886   

Other debt

           17        3              20   

Total corporate and other debt

           6,597        16              6,613   

Corporate equities2

     44,980        50        19              45,049   

Obligation to return securities received as collateral

     20,929        5        1              20,935   

Derivative and other contracts:

          

Interest rate contracts

     690        396,224        1,075              397,989   

Credit contracts

           14,765        1,399              16,164   

Foreign exchange contracts

     22        56,108        113              56,243   

Equity contracts

     1,305        43,623        1,724              46,652   

Commodity contracts

     2,002        5,860        2,804              10,666   

Other

           76                    76   

Netting3

     (3,758     (444,890     (2,172     (44,449     (495,269

Total derivative and other contracts

     261        71,766        4,943        (44,449     32,521   

Physical commodities

           4                    4   

Total trading liabilities

     95,141        80,628        4,979        (44,449     136,299   

Securities sold under agreements to repurchase

           596        149              745   

Other secured financings

           3,296        450              3,746   

Long-term borrowings

     43        36,662        2,042              38,747   

Total liabilities measured at fair value

   $ 95,184      $ 121,617      $ 7,653            $ (44,449   $ 180,005   

 

September 2016 Form 10-Q   8  


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Notes to Consolidated Financial Statements

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$ in millions   Level 1     Level 2     Level 3     Counterparty and Cash
Collateral Netting
    At December 31,
2015
 

Assets at Fair Value

         

Trading assets:

         

U.S. government and agency securities:

         

U.S. Treasury securities

  $ 17,658      $     $           $     $ 17,658   

U.S. agency securities

    797        17,886                    18,683   

Total U.S. government and agency securities

    18,455        17,886                    36,341   

Other sovereign government obligations

    13,559        7,400        4              20,963   

Corporate and other debt:

         

State and municipal securities

          1,651        19              1,670   

Residential mortgage-backed securities

          1,456        341              1,797   

Commercial mortgage-backed securities

          1,520        72              1,592   

Asset-backed securities

          494        25              519   

Corporate bonds

          9,959        267              10,226   

Collateralized debt and loan obligations

          284        430              714   

Loans and lending commitments1

          4,682        5,936              10,618   

Other debt

          2,263        448              2,711   

Total corporate and other debt

          22,309        7,538              29,847   

Corporate equities2

    106,296        379        433              107,108   

Securities received as collateral

    11,221        3        1              11,225   

Derivative and other contracts:

         

Interest rate contracts

    406        323,586        2,052              326,044   

Credit contracts

          22,258        661              22,919   

Foreign exchange contracts

    55        64,608        292              64,955   

Equity contracts

    653        38,552        1,084              40,289   

Commodity contracts

    3,140        10,654        3,358              17,152   

Other

          219                    219   

Netting3

    (3,840     (380,443     (3,120     (55,562     (442,965

Total derivative and other contracts

    414        79,434        4,327        (55,562     28,613   

Investments4:

         

Principal investments

    20        44        486              550   

Other

    163        310        221              694   

Total investments

    183        354        707              1,244   

Physical commodities

          321                    321   

Total trading assets4

    150,128        128,086        13,010        (55,562     235,662   

Investment securities—AFS securities

    34,351        32,408                    66,759   

Securities purchased under agreements to resell

          806                    806   

Intangible assets

                5              5   

Total assets measured at fair value

  $             184,479      $             161,300      $               13,015            $ (55,562   $                     303,232   

Liabilities at Fair Value

         

Deposits

  $     $ 106      $ 19            $     $ 125   

Short-term borrowings

          1,647        1              1,648   

Trading liabilities:

         

U.S. government and agency securities:

         

U.S. Treasury securities

    12,932                          12,932   

U.S. agency securities

    854        127                    981   

Total U.S. government and agency securities

    13,786        127                    13,913   

Other sovereign government obligations

    10,970        2,558                    13,528   

Corporate and other debt:

         

Commercial mortgage-backed securities

          2                    2   

Corporate bonds

          5,035                    5,035   

Lending commitments

          3                    3   

Other debt

          5        4              9   

Total corporate and other debt

          5,045        4              5,049   

Corporate equities2

    47,123        35        17              47,175   

Obligation to return securities received as collateral

    19,312        3        1              19,316   

Derivative and other contracts:

         

Interest rate contracts

    466        305,151        1,792              307,409   

Credit contracts

          22,160        1,505              23,665   

Foreign exchange contracts

    22        65,177        151              65,350   

Equity contracts

    570        42,447        3,115              46,132   

Commodity contracts

    3,012        9,431        2,308              14,751   

Other

          43                    43   

Netting3

    (3,840     (380,443     (3,120     (40,473     (427,876

Total derivative and other contracts

    230        63,966        5,751        (40,473     29,474   

Total trading liabilities

    91,421        71,734        5,773        (40,473     128,455   

Securities sold under agreements to repurchase

          532        151              683   

Other secured financings

          2,393        461              2,854   

Long-term borrowings

          31,058        1,987              33,045   

Total liabilities measured at fair value

  $ 91,421      $ 107,470      $ 8,392      $ (40,473   $ 166,810   

AFS—Availablefor sale

         
1.

At September 30, 2016, loans held at fair value consisted of $7,038 million of corporate loans, $1,338 million of residential real estate loans and $836 million of wholesale real estate loans. At December 31, 2015, loans held at fair value consisted of $7,286 million of corporate loans, $1,885 million of residential real estate loans and $1,447 million of wholesale real estate loans.

2.

For trading purposes, the Firm holds or sells short equity securities issued by entities in diverse industries and of varying sizes.

3.

For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that shared level. For further information on derivative instruments and hedging activities, see Note 4.

4.

Amounts exclude certain investments that are measured at fair value using the net asset value (“NAV”) per share, which are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Fair Value of Investments Measured at Net Asset Value” herein.

 

  9   September 2016 Form 10-Q


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Notes to Consolidated Financial Statements

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For a description of the valuation techniques applied to the Firm’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 3 to the consolidated financial statements in the 2015 Form 10-K. During the current quarter and current year period, there were no significant updates made to the Firm’s valuation techniques.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for all periods presented. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the following tables do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Firm within the Level 1 and/or Level 2 categories.

Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the Firm has classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the following tables herein may include changes in fair value during the period that were attributable to both observable and unobservable inputs.

Roll-forward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

$ in millions   Beginning
Balance at
June 30,
2016
    Realized
and
Unrealized
Gains
(Losses)
    Purchases1     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
September 30,
2016
    Unrealized
Gains
(Losses) at
September 30,
2016
 

Assets at Fair Value

                 

Trading assets:

                 

U.S. agency securities

  $                   20      $               —      $               —      $ (18   $             —      $             —      $             6      $             8      $             —   

Other sovereign government obligations

    2              6        (1                 5        12         

Corporate and other debt:

                 

State and municipal securities

    10        1              (7                       4         

Residential mortgage-backed securities

    216        1        56        (76                 (9     188        (12

Commercial mortgage-backed securities

    51        (5     12        (1                 7        64        (3

Asset-backed securities

    88        (3     6        (79                       12         

Corporate bonds

    276        (55     20        (23                 (19     199        (55

Collateralized debt and loan obligations

    109        6        9        (38                 (1     85        10   

Loans and lending commitments

    5,418        (12     501        (206           (733     (813     4,155        (12

Other debt

    528              191        (212                 (261     246         

Total corporate and other debt

    6,696        (67     795        (642           (733     (1,096     4,953        (72

Corporate equities

    572        (28     42        (36                 (214     336        (26

Securities received as collateral

                1                —                         1         

Net derivative and other contracts2:

                 

Interest rate contracts

    (235     (60     3              (15     11        337        41        (45

Credit contracts

    (1,114     147                          2        82        (883     147   

Foreign exchange contracts

    (1     (27                       (42     (37     (107     (27

Equity contracts

    (1,473     220        31        (2     (37     567        834        140        239   

Commodity contracts

    1,298        269                    (14     (170     (89     1,294        104   

Other

    (11                                   11               

Total net derivative and other contracts

    (1,536     549        34        (2     (66     368        1,138        485        418   

Investments:

                 

Principal investments

    769        (29     2        (8           (27     19        726        (30

Other

    205        (12                             17        210        (6

Total investments

    974        (41     2        (8           (27     36        936        (36

Liabilities at Fair Value

                 

Deposits

  $ 30      $ 1      $      $     $ 5      $     $ (3   $ 31      $ 1   

Short-term borrowings

                                        2        2         

Trading liabilities:

                 

Corporate and other debt:

                 

Corporate bonds

    6        (1     (3     2                    7        13        (1

Other debt

    3                                            3         

Total corporate and other debt

    9        (1     (3     2                    7        16        (1

Corporate equities

    26        2        (2     2                    (5     19         

Obligation to return securities received as collateral

                      1                          1         

Securities sold under agreements to repurchase

    150        1                                      149        2   

Other secured financings

    441        (11                       (2           450        (11

Long-term borrowings

    1,929        (88                 193        (147     (21     2,042        (87

 

September 2016 Form 10-Q   10  


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

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$ in millions   Beginning
Balance at
December 31,
2015
    Realized
and
Unrealized
Gains
(Losses)
    Purchases1     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
September 30,
2016
    Unrealized
Gains
(Losses) at
September 30,
2016
 

Assets at Fair Value

                 

Trading assets:

                 

U.S. agency securities

  $     $               —     $             3      $ (37   $             —     $             —     $             42      $             8      $                 —  

Other sovereign government obligations

                      4              10        (6                 4        12         

Corporate and other debt:

                 

State and municipal securities

    19                    (16                 1        4         

Residential mortgage-backed securities

    341        (14     64        (201                 (2     188        (13

Commercial mortgage-backed securities

    72        (17     19        (18                 8        64        (15

Asset-backed securities

    25        (4     5        (95                 81        12        (3

Corporate bonds

    267        (4     146        (276                 66        199        (17

Collateralized debt and loan obligations

    430        9        13        (295                 (72     85        16   

Loans and lending commitments

    5,936        (65     921        (860           (986     (791     4,155        (51

Other debt

    448        1        92        (35                 (260     246        65   

Total corporate and other debt

    7,538        (94     1,260        (1,796           (986     (969     4,953        (18

Corporate equities

    433        (57     62        (324                 222        336        (80

Securities received as collateral

    1                                            1         

Net derivative and other contracts2:

                 

Interest rate contracts

    260        257        3              (15     (59     (405     41        (156

Credit contracts

    (844     (255     1                    155        60        (883     (277

Foreign exchange contracts

    141        (104                       (224     80        (107     (102

Equity contracts

    (2,031     334        816        (2     (166     1,083        106        140        172   

Commodity contracts

    1,050        377        33              (20     (312     166        1,294        162   

Total net derivative and other contracts

    (1,424     609        853        (2     (201     643        7        485        (201

Investments:

                 

Principal investments

    486        (57     374        (29           (67     19        726        (58

Other

    221        (3           (8                       210        (5

Total investments

    707        (60     374        (37           (67     19        936        (63

Intangible assets

    5                                      (5            

Liabilities at Fair Value

                 

Deposits

  $ 19      $ (1   $     $     $ 15      $     $ (4   $ 31      $ (1

Short-term borrowings

    1                                (1     2        2         

Trading liabilities:

                 

Corporate and other debt:

                 

Corporate bonds

          (3     (7     32                    (15     13        (3

Other debt

    4              (1                              3         

Total corporate and other debt

    4        (3     (8     32                    (15     16        (3

Corporate equities

    17        4        (37     14                    29        19        32  

Obligation to return securities received as collateral

    1                                            1         

Securities sold under agreements to repurchase

    151        2                                      149        3   

Other secured financings

    461        (42                 69        (44     (78     450        (42

Long-term borrowings

    1,987        (103                 366        (262     (152     2,042        91   

 

  11   September 2016 Form 10-Q


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

  LOGO

 

$ in millions   Beginning
Balance at
June 30,
2015
    Realized
and
Unrealized
Gains
(Losses)
    Purchases1     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
September 30,
2015
    Unrealized
Gains
(Losses) at
September 30,
2015
 

Assets at Fair Value

                 

Trading assets:

                 

U.S. agency securities

  $ 3      $               —     $               —     $             —     $                 —     $                 —     $ (3   $                 —     $             —  

Other sovereign government obligations

                    12              5        (4                 (2     11         

Corporate and other debt:

                 

State and municipal securities

    7        5        12        (5                 14        33        5   

Residential mortgage-backed securities

    378        3        59        (55                 19        404        4   

Commercial mortgage-backed securities

    84        (12     17        (6                 (4     79        (12

Asset-backed securities

    19              13        (7                 6        31         

Corporate bonds

    479        (25     78        (228           (50     (28     226        (6

Collateralized debt and loan obligations

    660        (7     80        (188                       545        (11

Loans and lending commitments

    5,512        (78     939        (156           (1,229     176        5,164        (53

Other debt

    564        (22     9        (4           (1     (16     530        (23

Total corporate and other debt

    7,703        (136     1,207        (649           (1,280     167        7,012        (96

Corporate equities

    486        10        150        (80                 9        575        4   

Securities received as collateral

    3                    (2                       1         

Net derivative and other contracts2:

                 

Interest rate contracts

    (236     (137     12              (7     74        383        89        (66

Credit contracts

    (989     210                    (74     86        (38     (805     219   

Foreign exchange contracts

    446        42        3                    (327     (98     66        45   

Equity contracts

    (2,102     309        16              (50     (187     (27     (2,041     296   

Commodity contracts

    1,205        238                          (11           1,432        179   

Total net derivative and other contracts

    (1,676     662        31              (131     (365     220        (1,259     673   

Investments:

                 

Principal investments

    581        26        8        (50                 (24     541        26   

Other

    300        11        1                                312        11   

Total investments

    881        37        9        (50                 (24     853        37   

Intangible assets

    6        (1                                   5        (1

Liabilities at Fair Value

                 

Short-term borrowings

  $     $ (2   $     $     $ 4      $     $ 63      $ 69      $ (2

Trading liabilities:

                 

Corporate and other debt:

                 

Corporate bonds

    15        9        (10     23                          19        7   

Other debt

    4                                            4         

Total corporate and other debt

    19        9        (10     23                          23        7   

Corporate equities

    112        72        (50     99                    8        97        73   

Obligation to return securities received as collateral

    3              (2                             1         

Securities sold under agreements to repurchase

    154                                            154         

Other secured financings

    168        2                    187        (12           341        2   

Long-term borrowings

    2,221        61                    237        (81     146        2,462        64   

 

September 2016 Form 10-Q   12  


Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

  LOGO

 

$ in millions   Beginning
Balance at
December 31,
2014
    Realized
and
Unrealized
Gains
(Losses)
    Purchases1     Sales     Issuances     Settlements     Net
Transfers
    Ending
Balance at
September 30,
2015
    Unrealized
Gains
(Losses) at
September 30,
2015
 

Assets at Fair Value

                 

Trading assets:

                 

Other sovereign government obligations

  $ 41      $ (1   $ 7      $ (31   $     $     $ (5   $ 11      $  

Corporate and other debt:

                 

State and municipal securities

          5        14        (1                 15        33        5   

Residential mortgage-backed securities

    175        28        172        (57                 86        404        19   

Commercial mortgage-backed securities

    96        (17     23        (23                       79        (19

Asset-backed securities

    76        (1     22        (31                 (35     31        4   

Corporate bonds

    386        (19     155        (218           (53     (25     226        (16

Collateralized debt and loan obligations

    1,152        141        320        (709           (331     (28     545        (7

Loans and lending commitments

    5,874        (34     1,860        (95           (2,461     20        5,164        (62

Other debt

    285        (13     30        (14           (25     267        530         

Total corporate and other debt

    8,044        90        2,596        (1,148           (2,870     300        7,012        (76

Corporate equities

    272        57        437        (199                 8        575        67   

Securities received as collateral

                1                                1         

Net derivative and other contracts2:

                 

Interest rate contracts

    (173     (37     16              (22     277        28        89        20   

Credit contracts

    (743     (69     6              (94     86        9        (805     (89

Foreign exchange contracts

    151        133        4              (1     (197     (24     66        133   

Equity contracts

    (2,165     (76     115              (279     252        112        (2,041     (237

Commodity contracts

    1,146        345        2              (112     111        (60     1,432        420   

Total net derivative and other contracts

    (1,784     296        143              (508     529        65        (1,259     247   

Investments:

                 

Principal investments

    835        22        20        (109           (187     (40     541         

Other

    323        (5     2        (6                 (2     312         

Total investments

    1,158        17        22        (115           (187     (42     853         

Intangible assets

    6                                (1           5         

Liabilities at Fair Value

                 

Short-term borrowings

  $     $ (2   $     $     $ 60      $     $ 7      $ 69      $ (2

Trading liabilities:

                 

Corporate and other debt:

                 

Corporate bonds

    78        6        (25     37                    (65     19        6   

Lending commitments

    5        5                                            5   

Other debt

    38              (1     7              (39     (1     4         

Total corporate and other debt

    121        11        (26     44              (39     (66     23        11   

Corporate equities

    45        90        (88     128